In the video on Hindsight Insight #5, we talked about how the financial system takes advantage of retirees. Let’s expand on this insight even more and discuss the relationship between our tax system and the life events that most retirees have to plan to protect their financial stability.
One thing that is important to understand is that if we were saving into retirement accounts for our entire working lives, most of those years we probably had big deductions on our taxes. Some of the most prominent examples include dependents and mortgage interest. However, once our kids are fully out on their own, they are no longer deductions on our tax return. Furthermore, if we’ve followed everyone else’s advice, our mortgage has been paid off. At first, this might seem like only a good thing, but we must remember that it means we’ve lost our biggest and probably only deduction to use against the nest egg that we’ve put into a pre-tax account.
Similarly, we’d like to think that as a married couple, the end of our lives will be peaceful and around the same time for each partner. Unfortunately, more often is the case where one partner lives for an extended period of time as a widow. Statistics show that the average widow age in America is only around 56 years old.
What does a widow have to deal with that a married person does not have to deal with? One difference is the transition from married filing joint tax rates to single filing tax rates. The single tax rates are the highest on the books. So when putting all of our retirement savings into pre-tax accounts, what could remain is a very big tax problem for the surviving spouse who now has to take all of that money out as a single taxpayer at the higher rates.
These are the kinds of insights and considerations that neither the government nor most financial institutions tell you about. It is our goal Hindsight Financial to arm you with the tools to keep more of what’s rightfully yours and use it to earn even more.