Living In Retirement

Hello,

You have finally taken the big step, and you are officially a retired person. In the kind of financial environment we are facing, retirement is something  that has been pushed to some future date. Reason being that the economic situation we are facing globally, has left a lot of uncertainty about the future. But retirement doesn’t have to be a scary period of your life, in fact it should be the most enjoyable, since you’ll finally enjoying the fruits of your labor after all those years of active employment or otherwise. But before you make the big leap, it s always advisable to look at your situation first before you hand in your resignation letter. The following article by CNNMoney.com illustrates some of the questions that you are bound to ask yourself in retirement.

Can I afford to retire?

To step off the corporate treadmill in your 50s or early 60s and maintain anything close to your standard of living, you need a seriously big retirement kitty.

How serious? You’ll likely need assets worth 10 to 16 times your salary by the time you leave your job. A 45-year-old making $120,000 who hopes to retire at age 60, say, should already have nearly $700,000 set aside. (See the Retire Early calculator.)

You can get by with less if you’ll have other sources of income. If that same 45-year-old has a typical old-fashioned check-a-month pension, for example, he might need only $432,000 in savings to be on track. If you expect to hold down a scaled-back job for your first decade of retirement, you can also get by with less.

If the combination of Social Security, pensions and prudent draws from your savings is enough to cover the expenses on your retirement budget, then you’re pretty much home free. Let your retirement adventures begin!

I’m retired. Now what?

Congratulations! Hopefully you’ve done enough planning in your working years, and by this point you’ve got it all figured out. But if not, you’ve got quite a few decisions to make.

Start by figuring out what type of lifestyle you want in retirement, and how much money you think it might cost you. Create a retirement budget that includes everything from essentials like food, utilities and housing costs to the nonessentials that make life more enjoyable, such as travel and entertainment. And don’t forget that you’ll undoubtedly run into unexpected expenses – medical bills that aren’t covered by Medicare, a roof that needs fixing or a car that’s got to be replaced – and that your living costs are likely to rise along with inflation over the years.

From here, you’ll need to figure out how much money you should be withdrawing, and which accounts to tap first. You’ll also want to look into collecting social security payments. You’ve also got some decisions to make about your home. Do you plan to relocate? Downsize to a smaller home?

If you don’t think you’ll have enough to sustain the lifestyle you want, you may have to consider other options like scaling back your retirement plans, taping your home equity for income, working in retirement, or even delaying your retirement by a few years.

When can I start withdrawing my money?

Now that you’re not working, you’ll probably want to start tapping your retirement money. But you can make the most of your nest egg by withdrawing from taxable accounts first, and leaving any money you have in tax-sheltered retirement accounts for last. For more see When should I start withdrawing from retirement accounts? and Working in retirement

When can I start withdrawing from retirement accounts?

Well, clearly you need to start tapping those accounts when you need the money to live on. But let’s say you have some of your retirement stash in tax-sheltered accounts like 401(k)s and IRAs, and some of it in regular investment accounts.

Your best strategy in that case is to tap the regular investment accounts first. That way, your money in the tax-sheltered accounts will keep right on growing without Uncle Sam taking his cut. If you spent the money in your IRA or 401(k) first, you’d keep getting taxed on the amount in your regular investment account, eroding its value.

How much should I withdraw from retirement accounts?

Most people also have to dip into savings to bridge the gap between what Social Security and pensions, if any, provide and what’s needed to cover retirement expenses. At that point, the issue comes down to how much you can reasonably draw from your nest egg each year to close that gap. Generally, to avoid going through your savings too soon you’ll want to limit your initial draw to about 4% of your savings and then increase that dollar amount for inflation each year (although, this 4% rule is a guideline, not a carved-in-stone commandment).

How long can I leave money in my retirement accounts?

It depends on what kind of account you have.

If you have a traditional IRA, when you turn 70 ½ years old you must begin making a required minimum withdrawal from it each year. The amount of the distribution depends on how much you have saved in the account and your life expectancy, according to tables published by the IRS.

With a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older.

The rules are similar for traditional 401(k)s and Roth 401(k)s. After you turn 70 ½, you must make required minimum withdrawals from a traditional 401(k). Not so with Roths.

Should I work in retirement?

If you’re worried about making your money last your lifetime, then continuing to bring in some cash through a job, even if it is part-time, can be a huge help. Let’s say you take on some work that gives you enough income so you’re able to reduce your IRA withdrawals by $15,000 a year for 10 years. (As we mentioned, if you are over 70 ½ years old you must make a required minimum withdrawal each year. But we’re talking about reducing your non-required withdrawals that exceed that minimum.)

Okay, so you delay making that $15,000 IRA withdrawal for 10 years and thus keep the money growing tax deferred at an 8% annualized rate. At the end of that 10-year stretch, your IRA will have nearly $220,000 more in it than it would if you had been withdrawing $15,000 a year instead.

Will working affect my Social Security payments?

It depends on when you retire. The Social Security Administration determines your so-called “full retirement age,” which is somewhere between 65 and 67 depending on when you were born. (Your Social Security annual statement includes your lucky date. Visit the ssa.gov Web site for more details.)

If you take early Social Security benefits (anytime between age 62 and your full retirement age), your payment is reduced by $1 for every $2 you earn above the annual limit.

For 2010, that limit is $14,160. The rules are more lenient starting in the year in which you reach full retirement age. Your payment is reduced by $1 in benefits for every $3 you earn above a different limit, but only for earnings before the month you reach your full retirement age. For example, if you reach full retirement age in 2010, the limit on your earnings for the months before is $37,680. (If you were born in 1944 or 1945, full retirement age is 66 years.)

Now the good news: Once you have passed full retirement age you can earn as much as you want with no impact on your Social Security payout.

When can I start collecting Social Security?

Assuming you qualify for Social Security, you can begin collecting “early retirement” payments at age 62. (Widows, widowers and disabled persons can sometimes collect sooner.)

But you will receive a much larger benefit if you can afford to delay until you reach “full retirement age” (somewhere between 65 and 67, depending on when you were born) or later – and working in retirement might allow you to do just that. For more, see What’s the best age to start getting Social Security payouts?

Where do I get my health insurance?

Once you turn 65 you are automatically eligible for Medicare coverage. That provides a base level of health insurance that will take care of a lot of your medical expenses, but probably not all. You will be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn’t.

For more see How do I afford health care in retirement?

Should I delay my retirement?

Maybe. Lots of people should seriously consider it. Hanging on at work for even one more year can be a great boost to your long-term security, especially if you are about to retire when the markets are inconveniently in a swoon.

Say you have $1 million in a tax-deferred account, split evenly between stocks and bonds, when you retire at age 65. If you withdraw 4% plus an inflation adjustment every year, in 30 years you will likely still have $636,200 left after taxes. But if the market happens to tank early in that withdrawal period, the outlook gets riskier – there’s a one-in-four chance that you’ll run out of money before year 30.

If you work just one year longer, though, the projections are far better. And by working three years longer you’d typically end up with $1.2 million after 30 years – and have just a 1-in-20 chance of running out of money.

Every year that you are able to earn enough money to live on allows you to leave your retirement egg untouched for another year – leaving you more money when you finally do stop working.

It depends on what kind of account you have.

If you have a traditional IRA, when you turn 70 ½ years old you must begin making a required minimum withdrawal from it each year. The amount of the distribution depends on how much you have saved in the account and your life expectancy, according to tables published by the IRS.

With a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older.

The rules are similar for traditional 401(k)s and Roth 401(k)s. After you turn 70 ½, you must make required minimum withdrawals from a traditional 401(k). Not so with Roths.

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About kenndungu

Live a few years of you life like most people won't, so that you can spend the rest of your life like most people can't. Anonymous View all posts by kenndungu

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