Monthly Archives: April 2012

The 10 Most Difficult Retirement Decisions


Retirement isn’t only about quitting your job. It’s an opportunity to have complete control over how you spend your time, and thus will affect a few aspects of your life apart from commuting to and from work. Twenty or thirty years ago, retirement meant a totally different ball game from the way we view today, and probably in the future, it will even be more complicated. For example, our grandparents didn’t have to think of where to live once they retired, but nowadays that’s one of the most important questions you have to ask yourself before calling it quits. Therefore, before stepping foot in the world of retirement, be sure to ask yourself a number of questions concerning areas of your life that you better have an answer. The following article by Emily Brandon explains the 10 most important retirement decisions for a person who is about to retire.

The decision to retire can be sparked by a number of factors: reaching a specific age, hitting a savings goal, or being laid off in a tumultuous job market. To support yourself without income from a job, you’ll have to make a series of choices about Social Security, health coverage, and your investments. Here are 10 of the toughest decisions you will make before you retire.

When to retire.

For some people, it’s a financial calculation. You know you’re financially ready when the combination of your Social Security, traditional pension, and investment income produces enough cash flow to cover all of your anticipated expenses for the rest of your life. “Working two or three more years can make an incredible difference to your long-term plan if you continue to save in your 401(k) or 403(b) and continue to pay into Social Security,” says Mary Alpers, a certified financial planner and founder of Alpers and Associates in Colorado Springs, Colo. But retirement also often involves an identity shift from your former job title to a free agent. Sometimes this decision is made for you because of a layoff or buyout. Many people also like to coordinate their retirement with a spouse.

When to claim Social Security.

You can sign up for Social Security beginning at age 62, but payouts increase for each year you delay claiming until age 70. “Wait as long as you possibly can, because the additional percentages that are added on are enormous,” says Jane Nowak, a certified financial planner for Kring Financial Management in Smyrna, Ga. “Since we are living longer, you certainly want your paycheck from Social Security to be as fat as possible.”

Health coverage.

It’s essential to find affordable health insurance if you want to retire before age 65. “If you are not entitled to retiree medical benefits or if they are deferred to a later date, make absolutely certain you have access to and can qualify for individual coverage,” says Robert Henderson, president of Lansdowne Wealth Management in Mystic, Conn. “Also verify the costs. Health insurance can be prohibitively expensive in some cases.” Even after you qualify for Medicare, the decisions don’t end. You have to choose whether to purchase a supplemental policy and shop around for the Medicare Part D plan that best meets your prescription drug needs each year in retirement.

How much you can safely spend each year.

If your nest egg isn’t sizeable enough to finance your retirement completely, you’ll need to calculate how much you can safely spend each year without depleting your savings too quickly. “Three to 4 percent is my comfort zone, and I hope less,” says Alpers. An annual draw-down rate of 4 percent on an investment portfolio with 35 percent in U.S. stocks and 65 percent in corporate bonds has an 89 percent likelihood of lasting 35 years or more, according to Congressional Research Service estimates.

How much investment risk.

Retirees need to balance their investment needs for safety and continued growth. “Hold as little equities and higher-risk assets as possible, while still enough to meet your long-term goals,” says Henderson. “Most retirees need no more than 50 to 60 percent in equity and equity-like investments.” You’ll also need an emergency fund and several years’ worth of living expenses set aside in a safe place. “Always make sure that you have your first three to five years of withdrawals invested in very conservative investments. Good choices are CDs, money market accounts, short-term treasuries or mutual funds that invest in them, and fixed-immediate annuities,” says Henderson. “This way, regardless of what the stock market is doing today, you don’t have to worry about withdrawing assets that have dropped in value.”

When to pay taxes.

After decades of deferring taxes on your retirement savings using 401(k)s and IRAs, the tax bill becomes due upon withdrawal in retirement. The timing of these withdrawals could affect how much you pay in taxes. “Try to balance out your withdrawals from taxable and nontaxable accounts each year so you are not kicking yourself into a higher tax bracket at some point,” says Henderson. Taking a large IRA withdrawal in a single year could result in an oversized tax bill. Withdrawals from traditional retirement accounts become required after age 70½.

Where to live.

Once you are no longer tethered to a job, you can live anywhere that suits your tastes and budget. Moving to a place that costs less than where you live now can boost your standard of living and help stretch your nest egg. You could also test out a place with better weather, more opportunities for recreation, or move closer to family.

Whether your home should help finance retirement.

A paid-off mortgage can help finance your retirement because it eliminates one of your biggest monthly expenses. In some cases, downsizing to a smaller home or moving to a place where the cost of living is significantly lower can even give a significant boost to your nest egg. “Especially if you live on the East or West coast, where housing can be extremely expensive, you may have an opportunity to downsize and realize quite a bit of the appreciation you had in your real estate,” says Henderson.

Whether to keep working.

A part-time job is increasingly becoming common in the retirement years. Many people downshift to a job with shorter hours and less responsibility before retiring completely, while other people return to work after a break. The income, and sometimes benefits, a part-time job provides allows you to withdraw less of your retirement savings each year. Some people also find jobs they enjoy that allow them to interact with former colleagues, consult on the occasional project, or learn a new skill.

What you will do.

Retirement isn’t only about quitting your job. It’s an opportunity to have complete control over how you spend your time. Make sure you have a few ideas about how you will fill the eight or more hours per day you previously spent working and commuting. Some people miss the sense of purpose and friends that their job provided for them, while others finally have the time for hobbies and projects they have been waiting years to tackle.

How to Finance Life Until 100


Ok, you have saved what you think you’ll need for the rest of your retirement life, now the big question is to make sure that the funds will last as long as you. You have heard and read stories of people who made millions during their life time, only to squander the entire retirement fund in a few years, and left dejected feeling and asking themselves what was the point of saving all that cash in the first place. Managing of your retirement portfolio some times is not about only making money, but also managing your money through minimizing your expenses. Minimizing expenses while in retirement may involve strategies that will ensure that your retirement portfolio incurs the least expenses, as Emily Brandon explains in the following article, there are strategies that will ensure that you nest egg will last in the long-term.

It sounds wonderful to live to 100—until you start thinking about how to pay for it. If you retire at age 65 and live until 100, that’s 35 years of retirement you’ll need to finance. Here are some ways to build a nest egg that will last you until age 100.

Claim retirement saving tax breaks.

Your savings will grow faster without the drag of taxes. In 2012, retirement savers can defer paying income tax on up to $17,000 in a 401(k), 403(b), or the federal government’s Thrift Savings Plan, and $5,000 in an IRA. For investors age 50 and older, those limits jump to $22,500 in a 401(k) and $6,000 in an IRA. Low-income workers whose modified adjusted gross incomes are up to $28,750 for singles, $43,125 for heads of households, and $57,500 for couples can additionally claim a tax credit worth up to $1,000 for individuals and $2,000 for couples when they save for retirement in a 401(k) or IRA.

Add tax diversification.

While traditional retirement accounts give you a tax break in the year you make contributions, income tax will be due on each withdrawal. Roth IRAs and Roth 401(k)s allow you to tuck away after-tax dollars for retirement, which means withdrawals after age 59½ from accounts that are at least five years old are tax-free. To decide which type of retirement account is better for you, compare your current tax rate to your expected tax rate in retirement. Those who expect to be in a higher tax bracket in retirement have the most to gain by paying taxes upfront using a Roth account. Roth accounts also give you easier access to your money before retirement and greater flexibility to time your withdrawals in retirement. “Having some money in a pre-tax IRA can give you some options to lower your tax rate later in life,” says John Ameriks, head of the investment counseling and research group at Vanguard. Traditional IRA and 401(k) account balances can be converted to Roth accounts if you pay income tax on the amount rolled over. The IRS removed a $100,000 income limit in 2010 that previously prohibited high earners from making the switch.

Avoid fees.

The costs and fees associated with your investments add up significantly over the course of your career and retirement. An investor paying 1 percent a year in fees who holds an investment for more than 25 years will pay 25 percent of what he or she would have earned to a service provider, according to Vanguard calculations. “The lower you can get that fee, the more money you are going to have in retirement,” says Ameriks, who advises choosing funds with expense ratios of 20 basis points or less. Sometimes you can also negotiate lower fees by consolidating the bulk of your investments with a single financial institution.

Maximize Social Security.

Social Security is your first line of defense against outliving your savings because the payments will continue for the rest of your life and are adjusted for inflation each year. “One of the most effective things you can do to protect yourself against both inflation and longevity is to postpone taking Social Security until age 70,” says Zvi Bodie, a Boston University professor and co-author of Risk Less and Prosper. Social Security payouts increase for each year you postpone claiming between ages 62 and 70. Delaying claiming increases the amount you will receive in your later years, when you are most likely to need the money

Consider an annuity.

Traditional pensions generally provide annuity payments that last the rest of your life. Those without a pension can create their own by turning over a portion of their savings to an insurance company in exchange for a promise of lifelong steady payments. “If you buy a solid annuity from an insurance company, it doesn’t matter how long you live because you have transferred that risk to the insurance company,” says Bodie. When deciding how much of your wealth to annuitize, consider the proportion of your annual expenses that are covered by other sources of income. “You want to make sure that between Social Security and any defined-benefit plan you have and any annuities you purchase that all your basic expenses are covered for the rest of your life,” says Jack VanDerhei, research director at the Employee Benefit Research Institute.

Protect yourself from healthcare costs.

Medicare will protect you from many, but not all of the healthcare expenses you will incur in retirement. Consider purchasing a supplemental policy to Medicare that fills in some of the gaps that Medicare doesn’t cover. Middle-income retirees may also want to purchase long-term care insurance in case they require assisted living or nursing home care, which Medicare alone generally doesn’t cover. “Assisted living can be horribly expensive,” says Frank Armstrong, a certified financial planner and founder of Investor Solutions. “The very poor are going to be covered by Medicaid and the very rich can afford it, but the middle class needs to insure against long-term care costs.”

Draw down smart.

Once you accumulate a large nest egg, you need a plan to spend it at a reasonable rate. Armstrong recommends spending 4 percent or less of your savings each year to help ensure that it will last the rest of your life. “If you can’t make it with the amount of money that a 4 percent withdrawal rate provides, then maybe you ought not retire,” he says. Remember that you will be required to take annual withdrawals from traditional retirement accounts after age 70½ and pay income tax on the amount withdrawn. “The million dollars you think you own in a 401(k) is actually only $750,000 after taxes,” says Armstrong.

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