A traditional grantor retained annuity trust (GRAT) or a traditional qualified personal residence trust (QPRT) can be used to obtain a valuation discount for federal gift tax purposes while removing the trust property from your estate for federal estate tax purposes (if you survive the trust term). By modifying a few trust provisions, a step-up GRAT or QPRT can be used instead to obtain a stepped-up income tax basis for appreciated property, regardless of whether you or your spouse dies first. If you are considering a GRAT or a QPRT, you should consult an estate planning attorney.

 

What is income tax basis?

 

Income tax basis is the base figure used to determine whether capital gain or loss is recognized on the sale of property for income tax purposes. Initially, basis is typically equal to the amount you paid for property, but adjustments may be made. If the property is sold for more than its adjusted basis, there is a gain. If the property is sold for less than its adjusted basis, there is a loss.

 

What is a stepped-up basis for inherited property?

 

When your heirs receive property from you at your death, they generally receive an initial basis in property equal to its fair market value (FMV). The FMV is established on the date of your death, or sometimes on an alternate valuation date six months after your death. This is often referred to as a “stepped-up basis” because basis is typically stepped up to FMV. However, basis can also be “stepped down” to FMV.

 

There is no step-up (or step-down) in basis for income in respect of a decedent (IRD). IRD is certain income that was not properly includable in taxable income for the year of the decedent’s death or in a prior year. In other words, it is income that has not yet been taxed. Examples of IRD include installment payments and retirement accounts.

 

A step-up in basis is not available if you give appreciated property to anyone within one year of that person’s death and the property then passes to you (or your spouse).

 

Both spouses’ shares of community property qualify for a step-up (or step-down) in basis upon the death of the first spouse to die.

 

So how can you and your spouse be fairly certain of a step-up in basis for appreciated property (excluding IRD, which cannot be stepped up), regardless of who dies first? Except for community property, whether there is a step-up in basis when the first spouse dies generally depends on that spouse owning the appreciated property at death. A couple of step-up trusts may help provide for a step-up in basis for appreciated property no matter which of you dies first.

 

What is a traditional GRAT or QPRT?

 

In a traditional GRAT, you transfer property to the trust and retain a right to a stream of payments from the trust for a term of years. After the trust term ends, the remaining trust property passes to your beneficiaries (such as your children). The gift of the remainder interest is discounted (possibly to zero) because it will be received in the future.

 

With a traditional QPRT, you transfer your personal residence (it can be a vacation home or a second residence) to the trust, while retaining the right to live in the residence for a term of years. After the trust term ends, the personal residence passes to your beneficiaries (such as your children). The gift of the remainder interest is discounted because it will be received in the future. If you wish to live in the residence after the trust term ends, you need to pay rent at fair market value.

 

How do you turn a traditional GRAT or QPRT into a step-up GRAT or QPRT?

 

In order to turn a traditional GRAT or QPRT into a step-up GRAT or QPRT, a few trust provisions must be changed when the trust is created. First, the trust should terminate upon the earlier of the death of you or your spouse (rather than at the end of a term of years). Second, the trust should provide that when that death occurs, the trust property would pass to your spouse, or to your spouse’s estate if your spouse predeceases you (rather than to other beneficiaries). Your spouse provides in a will that the property in his or her estate passes back to you if your spouse predeceases you.

 

The initial transfer of a remainder interest in the trust to your spouse generally qualifies for the marital deduction for gift tax purposes.

 

If you die first, all or a substantial portion of the property in the step-up GRAT or QPRT will generally be included in your estate and receive a step-up in basis. If your spouse dies first, all of the property in the step-up GRAT or QPRT will be included in your spouse’s estate and will generally receive a step-up in basis. In either case, the property passes to the surviving spouse and should generally qualify for the marital deduction and avoid estate tax.

 

Caution: If your spouse dies first and within one year of your transfer to the trust, a step-up in basis is not available because the property passes back to you.

 

If you are married, a step-up GRAT or QPRT can be used to obtain a stepped-up income tax basis for appreciated property, regardless of which spouse dies first. A higher basis can reduce or eliminate the amount of gain recognized for income tax purposes on a subsequent sale of the property.

 

Note: Appreciation and gains are not guaranteed; depreciation and losses are possible. Payments from trusts are not guaranteed. There are fees and expenses associated with the creation of trusts.

Life insurance can serve many valuable purposes during your life. However, once you’ve retired, you may no longer feel the need to keep your life insurance, or the cost of maintaining the policy may have become too expensive. In these cases, you might be tempted to abandon the policy or surrender your life insurance coverage. But there are other alternatives to consider as well.

 

Lapse or surrender

 

If you have term life insurance, you generally will receive nothing in return if you surrender the policy or let it lapse by not paying premiums. On the other hand, if you own permanent life insurance, the policy may have a cash surrender value (CSV), which you can receive upon surrendering the insurance. If you surrender your cash value life insurance policy, any gain (generally, the excess of your CSV over the cumulative amount of premium paid) resulting from the surrender will be subject to federal (and possibly state) income tax. Also, surrendering your policy prematurely may result in surrender charges, which can reduce your CSV.

 

Exchange the old policy

 

Another option is to exchange your existing life insurance policy for either a new life insurance policy or another type of insurance product. The federal tax code allows you to exchange one life insurance policy for another life insurance policy, an endowment policy, an annuity, or a qualified long-term care policy without triggering current tax liability. This is known as an IRC Section 1035 exchange. You must follow IRS rules when making the exchange, particularly the requirement that the exchange must be made directly between the insurance company that issued the old policy and the company issuing the new policy or contract. Also, the rules governing 1035 exchanges are complex, and you may incur surrender charges from your current life insurance policy. In addition, you may be subject to new sales, mortality, expense, and surrender charges for the new policy, which can be very substantial and may last for many years afterward.

 

Lower the premium

 

If the premium cost of your current life insurance policy is an issue, you may be able to reduce the death benefit, lowering the premium cost in the process. Or you can try to exchange your current policy for a policy with a lower premium cost. But you may not qualify for a new policy because of your age, health problems, or other reasons.

 

Stream of income

 

You may be able to exchange the CSV of a permanent life insurance policy for an immediate annuity, which can provide a stream of income for a predetermined period of time or for the rest of your life. Each annuity payment will be apportioned between taxable gain and nontaxable return of capital. You should be aware that by exchanging the CSV for an annuity, you will be giving up the death benefit, and annuity contracts generally have fees and expenses, limitations, exclusions, and termination provisions. Also, any annuity guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company.

 

Long-term care

 

Another potential option is to exchange your life insurance policy for a tax-qualified long-term care insurance (LTCI) policy, provided that the exchange meets IRC Section 1035 requirements. Any taxable gain in the CSV is deferred in the long-term care policy, and benefits paid from the tax-qualified LTCI policy are received tax free. But you may not be able to find a LTCI policy that accepts lump-sum premium payments, in which case you’d have to make several partial exchanges from the CSV of your existing life insurance policy to the long-term care policy provider to cover the annual premium cost.

 

A complete statement of coverage, including exclusions, exceptions, and limitations, is found only in the policy. It should be noted that carriers have the discretion to raise their rates and remove their products from the marketplace.

You understand the basic financial concepts of budgeting, saving, and monitoring your money. But this doesn’t necessarily mean that you’re in control of your spending. The following reasons might help explain why you sometimes break your budget.

 

1. Failing to think about the future

 

It can be difficult to adequately predict future expenses, but thinking about the future is a key component of financial responsibility. If you have a tendency to focus on the “here and now” without taking the future into account, then you might find that this leads you to overspend.

 

Maybe you feel that you’re acting responsibly simply because you’ve started an emergency savings account. You might feel that it will help you cover future expenses, but in reality it may create a false sense of security that leads you to spend more than you can afford at a given moment in time.

 

Remember that the purpose of your emergency savings account is to be a safety net in times of financial crisis. If you’re constantly tapping it for unnecessary purchases, you aren’t using it correctly.

 

Change this behavior by keeping the big picture in perspective. Create room in your budget that allows you to spend discretionary money and use your emergency savings only for true emergencies. By having a carefully thought-out plan in place, you’ll be less likely to overspend without realizing it.

 

2. Rewarding yourself

 

Are you a savvy shopper who rarely splurges, or do you spend too frequently because you want to reward yourself? If you fall in the latter category, your sense of willpower may be to blame. People who see willpower as a limited resource often trick themselves into thinking that they deserve a reward when they are able to demonstrate a degree of willpower. As a result, they may develop the unhealthy habit of overspending on random, unnecessary purchases in order to fulfill the desire for a reward.

 

This doesn’t mean that you’re never allowed to reward yourself–you just might need to think of other ways that won’t lead to spending too much money. Develop healthier habits by rewarding yourself in ways that don’t cost money, such as spending time outdoors, reading, or meditating. Both your body and your wallet will thank you.

 

If you do decide to splurge on a reward from time to time, do yourself a favor and plan your purchase. Figure out how much it will cost ahead of time so you can save accordingly instead of tapping your savings. Make sure that your reward, whether it’s small or big, has a purpose and is meaningful to you. Try scaling back. For example, instead of dining out every weekend, limit this expense to once or twice a month. Chances are that you’ll enjoy going out more than you did before, and you’ll feel good about the money you save from dining out less frequently.

 

3. Mixing mood with money

 

Your emotional state can be an integral part of your ability to make sensible financial decisions. When you’re unhappy, you might not be thinking clearly, and saving is probably not your first priority. Boredom or stress also makes it easy to overspend because shopping serves as a fast and easy distraction from your feelings. This narrow focus on short-term happiness might be a reason why you’re spending more than normal. Waiting to spend when you’re happy and thinking more positively could help shift your focus back to your long-term financial goals. Avoid temptations and stay clear of stores if you feel that you’ll spend needlessly after having an emotionally challenging day. Staying on track financially (and emotionally) will benefit you in the long run.

 

4. Getting caught up in home equity habits

 

Do you tend to spend more money when the value of your assets–particularly your property–increases? You might think that appreciating assets add to your spending power, thus making you feel both wealthier and more financially secure. You may be tempted to tap into your home equity, but make sure you’re using it wisely.

 

Instead of thinking of your home as a piggy bank, remember it’s where you live. Be smart with your home equity loan or line of credit–don’t borrow more than what is absolutely necessary. For example, you may need to borrow to pay for emergency home repairs or health expenses, but you want to avoid borrowing to pay for gratuitous luxuries that could put you and your family’s financial security at risk. After all, the lender could foreclose if you fail to repay the debt, and there may be closing costs and other charges associated with the loan.

 

You may be more likely to overspend on a particular purchase compared to other possible expenditures. According to research conducted by the Consumer Reports National Research Center, adults in the United States reported that they would spend money on the following throughout the year:

  • 54%–electronics
  • 33%–appliances
  • 27%–a car
  • 23%–home remodeling

Source: Consumer Reports, November 2014

Buying considerations Leasing considerations
Ownership When the vehicle is paid for, it’s
yours. You can keep it as long as you
want, and any retained value (equity)
is yours to keep.
You don’t own the car–the leasing
company does. You must return the
vehicle at the end of the lease or
choose to buy it at a predetermined
residual value; you have no equity.
Monthly payments You will have a monthly payment if
you finance it; the payment will vary
based on the amount financed, the
interest rate, and the loan term.
When comparing similar vehicles
with equal costs, the monthly
payment for a lease is typically
significantly lower than a loan
payment. This may enable you to
drive a more expensive vehicle.
Mileage Drive as many miles as you want; a
vehicle with higher mileage, though,
may be worth less when you trade in
or sell your vehicle.
Your lease will spell out how many
miles you can drive before excess
mileage charges apply (typical
mileage limits range from 12,000 to
15,000).
Maintenance When you sell your vehicle, condition
matters, so you may receive less if it
hasn’t been well maintained. As your
vehicle ages, repair bills may be
greater, something you generally
won’t encounter if you lease.
You generally have to service the
vehicle according to the
manufacturer’s recommendations.
You’ll also need to return your
vehicle with normal wear and tear
(according to the leasing company’s
definition), so you may be charged
for dents and scratches that seem
insignificant.
Up-front costs These may include the total
negotiated cost of the vehicle (or a
down payment on that cost), taxes,
title, and insurance.
Inception fees may include an
acquisition fee, a capitalized cost
reduction amount (down payment),
security deposit, first month’s
payment, taxes, and title fees.
Value You’ll need to consider resale value.
All vehicles depreciate, but some
depreciate faster than others. If you
decide to trade in or sell the vehicle,
any value left will be money in your
pocket, so it may pay off to choose a
vehicle that holds its value.
A vehicle that holds its value is
generally less expensive to lease
because your payment is based on
the predicted depreciation. And
because you’re returning it at the end
of the lease, you don’t need to worry
about owning a depreciating asset.
Insurance If your vehicle is financed, the lien
holder may require you to carry a
certain amount of insurance;
otherwise, the amount of insurance
you’ll need will depend on personal
factors and state insurance
requirements.
You’ll be required to carry a certain
amount of insurance, sometimes
more than if you bought the vehicle.
Many leases require GAP insurance
that covers the difference between
an insurance payout and the
vehicle’s value if your vehicle is
stolen or totaled. GAP insurance may
be included in the lease.
The end of the
road
You may want to sell or trade in the
vehicle, but the timing is up to you. If
you want, you can keep the vehicle
for many years, or sell it whenever
you need the cash.
At the end of the lease, you must
return the vehicle or opt to buy it
according to the lease terms.
Returning the vehicle early may be
an option, but it’s likely you’ll pay a
hefty fee to do so. If you still need a
vehicle, you’ll need to start the
leasing (or buying) process all over.

 

After declining dramatically a few years ago, auto sales are up, leasing offers are back, and incentives and deals abound. So if you’re in the market for a new vehicle, should you buy it or lease it? To decide, you’ll need to consider how each option fits into your lifestyle and your budget. This chart shows some points to compare.

 

Buying or leasing tips

 

  • Shop wisely. Advertised deals may be too good to be true once you read the fine print. To qualify for the deal, you may need to meet certain requirements, or pay more money up front.
  • To get the best deal, be prepared to negotiate the price of the vehicle and the terms of any loan or lease offer.
  • Read any contract you’re asked to sign, and make sure you understand any terms or conditions.
  • Calculate both the short-term and long-term costs associated with each option

A 2015 study found that 41% of households headed by someone aged 55 to 64 had no retirement savings, and only about a third of them had a traditional pension. Among households in this age group with savings, the median amount was just $104,000.1

 

Your own savings may be more substantial, but in general Americans struggle to meet their savings goals. Even a healthy savings account may not provide as much income as you would like over a long retirement.

 

Despite the challenges, about 56% of current retirees say they are very satisfied with retirement, and 34% say they are moderately satisfied. Only 9% are dissatisfied.2

 

Develop a realistic picture

 

How can you transition into a happy retirement even if your savings fall short of your goals? The answer may lie in developing a realistic picture of what your retirement will look like, based on your expected resources and expenses. As a starting point, create a simple retirement planning worksheet. You might add details once you get the basics down on paper.

 

Estimate income and expenses

 

You can estimate your monthly Social Security benefit at ssa.gov. The longer you wait to claim your benefits, from age 62 up to age 70, the higher your monthly benefit will be. If you expect a pension, estimate that monthly amount as well. Add other sources of income, such as a part-time job, if that is in your plans. Be realistic. Part-time work often pays low wages.

 

It’s more difficult to estimate the amount of income you can expect from your savings; this may depend on unpredictable market returns and the length of time you need your savings to last. One simple rule of thumb is to withdraw 4% of your savings each year. At that rate, the $104,000 median savings described earlier would generate $4,160 per year or $347 per month (assuming no market gains or losses). Keep in mind that some experts believe a 4% withdrawal rate may be too high to maintain funds over a long retirement. You might use 3% or 3.5% in your calculations.

 

Now estimate your monthly expenses. If you’ve paid off your mortgage and other debt, you may be in a stronger position. Don’t forget to factor in a reserve for medical expenses. One study suggests that a 65-year-old couple who retired in 2015 would need $259,000 over their lifetimes to cover Medicare premiums and out-of-pocket health-care expenses, assuming they had only median drug expenses.3

 

Take strategic steps

 

Your projected income and expenses should provide a rough picture of your financial situation in retirement. If retirement is approaching soon, try living for six months or more on your anticipated income to determine whether it is realistic. If it’s not, or your anticipated expenses exceed your income even without a trial run, you may have to reduce expenses or work longer, or both.

 

Even if the numbers look good, it would be wise to keep building your savings. You might take advantage of catch-up contributions to IRAs and 401(k) plans, which are available to those who reach age 50 or older by the end of the calendar year. In 2016, the IRA catch-up amount is $1,000, for a total contribution limit of $6,500. The 401(k) catch-up amount is $6,000, for a total employee contribution limit of $24,000.

 

Preparing for retirement is not easy, but if you enter your new life phase with eyes wide open, you’re more likely to enjoy a long and happy retirement.

 

  1.  U.S. Government Accountability Office, “Retirement Security,” May 2015
  2.  The Wall Street Journal, “Why Retirees Are Happier Than You May Think,” December 1, 2015
  3.  Employee Benefit Research Institute, Notes, October 2015

Yes, if you qualify. The law authorizing qualified charitable distributions, or QCDs, has recently been made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015.

 

You simply instruct your IRA trustee to make a distribution directly from your IRA (other than a SEP or SIMPLE) to a qualified charity. You must be 70½ or older, and the distribution must be one that would otherwise be taxable to you. You can exclude up to $100,000 of QCDs from your gross income in 2016. And if you file a joint return, your spouse (if 70½ or older) can exclude an additional $100,000 of QCDs. But you can’t also deduct these QCDs as a charitable contribution on your federal income tax return–that would be double dipping.

 

QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to take from your IRA in 2016, just as if you had received an actual distribution from the plan. However, distributions (including RMDs) that you actually receive from your IRA and subsequently transfer to a charity cannot qualify as QCDs.

 

For example, assume that your RMD for 2016 is $25,000. In June 2016, you make a $15,000 QCD to Qualified Charity A. You exclude the $15,000 QCD from your 2016 gross income. Your $15,000 QCD satisfies $15,000 of your $25,000 RMD. You’ll need to withdraw another $10,000 (or make an additional QCD) by December 31, 2016, to avoid a penalty.

 

You could instead take a distribution from your IRA and then donate the proceeds to a charity yourself, but this would be a bit more cumbersome and possibly more expensive. You’d include the distribution in gross income and then take a corresponding income tax deduction for the charitable contribution. But the additional tax from the distribution may be more than the charitable deduction due to IRS limits. QCDs avoid all this by providing an exclusion from income for the amount paid directly from your IRA to the charity–you don’t report the IRA distribution in your gross income, and you don’t take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don’t itemize deductions to make charitable contributions.

 

 

 

Yes, you can name a charity as beneficiary of your IRA, but be sure to understand the advantages and disadvantages.

 

Generally, a spouse, child, or other individual you designate as beneficiary of a traditional IRA must pay federal income tax on any distribution received from the IRA after your death. By contrast, if you name a charity as beneficiary, the charity will not have to pay any income tax on distributions from the IRA after your death (provided that the charity qualifies as a tax-exempt charitable organization under federal law), a significant tax advantage.

 

After your death, distributions of your assets to a charity generally qualify for an estate tax charitable deduction. In other words, if a charity is your sole IRA beneficiary, the full value of your IRA will be deducted from your taxable estate for purposes of determining the federal estate tax (if any) that may be due. This can also be a significant advantage if you expect the value of your taxable estate to be at or above the federal estate tax exclusion amount ($5,450,000 for 2016).

 

Of course, there are also nontax implications. If you name a charity as sole beneficiary of your IRA, your family members and other loved ones will obviously not receive any benefit from those IRA assets when you die . If you would like to leave some of your assets to your loved ones and some assets to charity, consider leaving your taxable retirement funds to charity and other assets to your loved ones. This may offer the most tax-efficient solution, because the charity will not have to pay any tax on the retirement funds.

 

If retirement funds are a major portion of your assets, another option to consider is a charitable remainder trust (CRT). A CRT can be structured to receive the funds free of income tax at your death, and then pay a (taxable) lifetime income to individuals of your choice. When those individuals die, the remaining trust assets pass to the charity. Finally, another option is to name the charity and one or more individuals as co-beneficiaries. (Note: There are fees and expenses associated with the creation of trusts.)

 

The legal and tax issues discussed here can be quite complex. Be sure to consult an estate planning attorney for further guidance.

Organizing your financial records is a cyclical process rather than a one-time event. You’ll need to set up a system that helps you organize incoming documents and maintain existing files so that you can easily find what you need. Here are a few tips.

 

Create your system: Where you should keep your records and documents depends on how quickly you want to be able to access them, how long you plan to keep them, and the number and type of records you have. A simple set of labeled folders in a file cabinet may be fine, but electronic storage is another option for certain records if space is tight or if you generally choose to receive and view records online. No matter which storage option(s) you choose, try to keep your records in a central location.

 

File away: If you receive financial statements through the mail, set up a collection point such as a folder or a basket. Open and read what you receive, and decide whether you can file it or discard it. If you receive statements electronically, pay attention to any notifications you receive. Once you get in a routine, you may find that keeping your records organized takes only a few minutes each week.

 

Purge routinely: Keeping your financial records in order can be even more challenging than organizing them in the first place. Let the phrase “out with the old, in with the new” be your guide. For example, when you get this year’s auto policy, discard last year’s. When you receive an annual investment statement, discard the monthly or quarterly statements you’ve been keeping. It’s a good idea to do a sweep of your files at least once a year to keep your filing system on track (doing this at the same time each year may be helpful).

 

Think safety: Don’t just throw hard copies of financial paperwork in the trash. To protect sensitive information, invest in a good quality shredder and destroy any document that contains account numbers, Social Security numbers, or other personal information. If you’re storing your records online, make sure your data is encrypted. Use strong passwords, and back up any records that you store on your computer.

There’s a fine line between keeping financial records for a reasonable period of time and becoming a pack rat. A general rule of thumb is to keep financial records only as long as necessary. For example, you may want to keep ATM receipts only temporarily, until you’ve reconciled them with your bank statement. But if a document provides legal support and/or is hard to replace, you’ll want to keep it for a longer period or even indefinitely. It’s ultimately up to you to determine which records you should keep on hand and for how long, but here’s a suggested timetable for some common documents.

 

 

One year or less More than one year Birth, death, and marriage certificates
Bank or credit union
statements
Tax returns and
documentation*
Birth, death, and marriage
certificates
Credit card statements Mortgage contracts and
documentation
Adoption papers
Utility bills Property appraisals Citizenship papers
Annual insurance policies Annual retirement and
investment statements
Military discharge papers
Paycheck stubs Receipts for major purchases
and home improvements
Social Security card

 

*The IRS requires taxpayers to keep records that support income, deductions, and credits shown on their income tax returns until the period of limitations for that return runs out–generally three to seven years, depending on the circumstances. Visit irs.gov or consult your tax professional for information related to your specific situation.

If you’re within 10 years of retirement, you’ve probably spent some time thinking about this major life change. The transition to retirement can seem a bit daunting, even overwhelming. If you find yourself wondering where to begin, the following points may help you focus.

 

Reassess your living expenses

 

A step you will probably take several times between now and retirement–and maybe several more times thereafter–is thinking about how your living expenses could or should change. For example, while commuting and dry cleaning costs may decrease, other budget items such as travel and health care may rise. Try to estimate what your monthly expense budget will look like in the first few years after you stop working. And then continue to reassess this budget as your vision of retirement becomes reality.

 

Consider all your income sources

 

Next, review all your possible sources of income. Chances are you have an employer-sponsored retirement plan and maybe an IRA or two. Try to estimate how much they could provide on a monthly basis. If you are married, be sure to include your spouse’s retirement accounts as well. If your employer provides a traditional pension plan, contact the plan administrator for an estimate of your monthly benefit amount.

 

Do you have rental income? Be sure to include that in your calculations. Is there a chance you may continue working in some capacity? Often retirees find that they are able to consult, turn a hobby into an income source, or work part-time. Such income can provide a valuable cushion that helps retirees postpone tapping their investment accounts, giving them more time to potentially grow.

 

Finally, don’t forget Social Security. You can get an estimate of your retirement benefit at the Social Security Administration’s website, ssa.gov. You can also sign up for a my Social Security account to view your online Social Security Statement, which contains a detailed record of your earnings and estimates of retirement, survivor, and disability benefits.

 

Manage taxes

 

As you think about your income strategy, also consider ways to help minimize taxes in retirement. Would it be better to tap taxable or tax-deferred accounts first? Would part-time work result in taxable Social Security benefits? What about state and local taxes? A qualified tax professional can help you develop an appropriate strategy.

 

Pay off debt, power up your savings

 

Once you have an idea of what your possible expenses and income look like, it’s time to bring your attention back to the here and now. Draw up a plan to pay off debt and power up your retirement savings before you retire.

 

  • Why pay off debt? Entering retirement debt-free–including paying off your mortgage–will put you in a position to modify your monthly expenses in retirement if the need arises. On the other hand, entering retirement with mortgage, loan, and credit card balances will put you at the mercy of those monthly payments. You’ll have less of an opportunity to scale back your spending if necessary.
  • Why power up your savings? In these final few years before retirement, you’re likely to be earning the highest salary of your career. Why not save and invest as much as you can in your employer-sponsored retirement savings plan and/or your IRAs? Aim for the maximum allowable contributions. And remember, if you’re 50 or older, you can take advantage of catch-up contributions, which allow you to contribute an additional $6,000 to your employer-sponsored plan and an extra $1,000 to your IRA in 2016.

 

Account for health care

 

Finally, health care should get special attention as you plan the transition to retirement. As you age, the portion of your budget consumed by health-related costs will likely increase. Although Medicare will cover a portion of your medical costs, you’ll still have deductibles, copayments, and coinsurance. Unless you’re prepared to pay for these costs out of pocket, you may want to purchase a supplemental insurance policy.

 

In 2015, the Employee Benefit Research Institute reported that the average 65-year-old married couple would need $213,000 in savings to have at least a 75% chance of meeting their insurance premiums and out-of-pocket health care costs in retirement. And that doesn’t include the cost of long-term care, which Medicare does not cover and can vary substantially depending on where you live. For this reason, you might consider a long-term care insurance policy.

 

These are just some of the factors to consider as your prepare to transition into retirement. Breaking the bigger picture into smaller categories may help the process seem a little less daunting.

 

A financial professional can help you estimate how much your retirement accounts may provide on a monthly basis. Your employer may also offer tools to help. Keep in mind, however, that neither working with a financial professional nor using employer-sponsored tools can guarantee financial success.