February 28, 2013
The IRA Tax Deduction Beckons
At tax time, many Americans think, often fleetingly, about spending less and socking away more for retirement.
Until April 15, the IRS permits people who do not have a pension plan at work to deduct up to $6,000 for money placed in an IRA; taxpayers who do have an employer pension can also receive the IRA deduction if their earnings fall under the IRS’ income limits.
The tough question that trips people up is: How much will I need?
The easy way to think about this is in terms of the income necessary to maintain your current standard of living after the paychecks stop coming in. Click here for a tool that estimates both how much you’ll need and how much you’ll have if you continue on your current path.
The calculator, created by the Center for Retirement Research, which supports this blog, was designed for people over 50 and on the retirement runway. Younger people can also get a ballpark idea of how they’re doing using the calculator. Or click here for the percent of your wages to put into a tax-deferred retirement fund.
This is a beta website with a few kinks, and it works smoothly only on the Safari and Google Chrome browsers. But the results are sound and backed by academic research. Here’s how to read the results:
The first screen shows the targeted income you’ll need in retirement to maintain your lifestyle – about 75 percent of your current income. It then adds up the income you can anticipate from various sources once you retire: your pension plan at work, your 401(k) savings, and your Social Security benefit. This is based on the retirement age you select.
The second screen will tell you whether you’ll have a surplus or shortfall if you keep doing what you’re doing. The third screen quantifies how much you can improve your prospects by working longer, spending less to ease into retirement, or downsizing your house.
So, are you doing enough? If not, try the calculator.