April 15, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Sam in Green Township: I’m 64 and hoping to retire soon. I’m thankfully in good health, but I’m still concerned about rising healthcare costs in retirement. Do you have any suggestions for how to handle these costs?
Answer: According to our research at Simply Money Advisors, you have a valid reason to be concerned: healthcare will cost a 65-year-old couple an average of $352,000 in retirement (this number includes inflation and assumes lifespans into the early 90s). You would be very fortunate if you had that whole lump sum of money set aside for retirement, however; most people don’t have that luxury.
For someone still working, Simply Money Advisors recommends opening a Health Savings Account (HSA), if you’re eligible. This is an account that allows you to save for future healthcare costs in a tax-advantaged manner. Benefits include the ability to deduct contributions from your taxable income, tax-free investment earnings, and the fact that all amounts you withdrawal for qualified medical expenses will not be included in your taxable income.
Another option to consider is long-term care insurance. An extended stay in an assisted living facility or nursing home can easily drain your retirement savings, so a policy could help absorb some of the cost. Keep in mind, if you’re just purchasing a plan now, the premiums could be a bit high due to your age and health.
You may also want to consider working longer, especially if you’re healthy. This way, you can stay on your healthcare plan at work, plus you’ll potentially increase your future Social Security benefit. Social Security benefits are calculated using your top 35 income earning years. Most likely, your later years in life are your highest earning income years, so they’ll replace some of the years you earned less. This can be a very reasonable solution to subsidizing some of your health care costs in retirement.
The Simply Money Point is that working with a trusted financial planner (we recommend a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant®) can help you create the best strategy in order to address your healthcare needs in retirement.
Greg from Loveland: How can I reduce my odds of having my tax return audited?
Answer: Here’s something you might not know: less than one percent of taxpayers’ returns are flagged for future inspection.
With such limited resources, the IRS cannot investigate every tax return they may feel needs audited. They must pick and choose those tax returns with glaring errors or omissions.
However, if you make more money, you have a better chance to get audited: in 2016, the IRS audited 5.8 percent of returns that claimed $1 million or more in income.
But you need to keep in mind that even if you’re an ‘average’ earner, you’re not exempt from an IRS audit. So, in order to limit your risk of being audited, make sure to report all earned income accurately. The IRS gets copies of your W-2s and 1099s, so if their records don’t match your return, this will be a red flag.
You also want to be careful when claiming deductions. It’s one thing to claim $10,000 of charitable contributions if you make $200,000, but it’s another to do so if you make $40,000. This could draw some attention.
Lastly, file your returns electronically. When you send paper returns, it’s more likely there will be errors. The IRS reports a 21 percent error rate on paper returns versus a one percent error rate on electronic ones.
If you do by chance get audited, don’t panic. Most audits are conducted via mail and they rarely end up in an in-person audit. And when the IRS requests documentation, simply give what they request and nothing more. No need to overshare.
The Simply Money Point is that, statistically speaking, chances are already very low you’ll get audited. But just to be safe, make sure you complete your return as accurately as possible. If you’re unsure how to do so, work with a tax professional for guidance.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.