Tax Tips – August/September 2020
How to prepare for an emergency
Q: As a self-employed trucker, I worry about a lack of emergency savings to cover medical and other emergencies that may come up. How do I prepare?
A: Take away the debate you have with yourself and commit to an automatic deposit into an emergency account each month from the income you receive. That takes away the decision process of adding to the account each month.
Q: How much should I take?
A: Set a goal of having at least six months of take-home pay in the account. Once you achieve that goal, you can then turn to retirement planning.
Q: How much money do I need to have for retirement?
A: Unfortunately, there are no concrete answers. It seems if we were to ask five financial planners we would get five different answers. Some will say in order for you to retire you will need 80% of your current earnings per year to live on. Others will say you need 100%, and still others say you will need 120% of your current earnings annually to provide for your retirement because you will have more time to spend. But all this is complex and subjective.
Q: What’s the best way to start the process to determine how much I need to save before I can retire?
A: The first thing you should do is figure out all your essential expenses, such as your mortgage or rent, food, utilities, insurance (including health), and auto (including gas and repairs). Then total your discretionary expenses, such as travel, gifts and entertainment. Then total your essential and discretionary expenses to arrive at a starting point of how much you will spend per year in retirement.
Once you determine your annual expenses, the next step is to make sure you have enough saved by the time you retire to provide for your annual living costs. It’s important to know your life expectancy after you retire so you can plan the number of years of savings you will need.
Q: How do I determine that?
A: We recommend that you have a fee-only certified financial planner guide you. However, we recently ran across a study that says accumulate at least 10 times your annual earnings in savings upon retirement and come up with a proper investment plan. To determine this, add all your cash in checking and savings accounts, stock and mutual funds, and IRA and 401(k) accounts to see how close or far you are from the goal of 10 times your annual living costs. Obviously, the younger you are the longer you have to save to achieve that goal. Your certified financial planner needs to evaluate this plan and adjust it as necessary.
Q: When should I start putting money away for retirement?
A: As early as possible. For example, if you are age 25 and you save $1,000 a year for 10 years ($10,000) and earn 8% per year until you are age 65, you will have $169,000. That’s just from putting aside $1,000 per year for 10 years. But if you don’t start till age 35 and invest $1,000 per year for 30 years ($30,000) you will have $125,000 at age 65. By investing $10,000 over 10 years starting at age 25 you will have more money at age 65 than by investing $30,000 over 30 years starting at age 35.
Tip – No matter what age, start saving now.
Note: Keep in mind, don’t raid your retirement plan. Your 401(k) is a long-term retirement savings plan and should not be used to fund your lifestyle. Using retirement money will greatly reduce the amount you have for retirement even if you do pay it back. LL
This article has been presented by PBS Tax and Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact them at 800-697-5153. Visit their website at PBSTax.com.
Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.