The age at which we retire has traditionally been linked to cultural norms and external factors such as the availability of a company pension, health care and Social Security retirement benefits. Pensions were designed to incentivize long-service with a single employer while also establishing formulas that would provide reliable incentives for employees to eventually retire. While there has been a dramatic shift from a manufacturing economy to one based on the delivery of goods and services, the decision to retire based on attaining a set age remains stubbornly persistent. As the self-funded and self-managed retirement replaces traditional lifetime pensions, fresh thinking has emerged on how to manage the risk of outliving one’s assets. Rethinking retirement as a ratio of working years to leisure years is beginning to gain acceptance as a more thoughtful way of addressing this and other retirement risks.
Retirement income planning has seen a dramatic shift in focus in recent years from an accumulation of assets approach to one focused on how best to create income streams in retirement. Shifts in demography and an emphasis on employee-directed savings programs will result in an increasing number of retirees bearing the responsibility of developing and managing their own retirement income plans. With this in mind, it is important for workers to accurately identify the sources of income available to them in retirement.
The Fiscal Times
You’ve worked hard over many years and finally your retirement finish line is 3-to-6 months away.
But don’t start exhaling just yet – there’s still plenty of race left to run. Before you take one of the biggest steps of your life, make sure you read this list to understand what you need to do and why:
1. Do the math.
When you first thought of retirement years back, you probably had a vague idea of what your spending would amount to by the time you actually took this step. But at this point, you should have a much clearer picture of your monthly budget. Be sure to laser in on your fixed expenses as well as on your lifestyle expenses to determine your financial needs.
Look at your anticipated income to clearly identify how much you’ll be taking in and from what sources. As part of this step, develop a Social Security strategy. Determining when to start taking Social Security is a pivotal decision that will impact all your other retirement income sources.
While you can start taking Social Security benefits at age 62, your payments will be reduced based on the number of months you take those benefits before you reach full retirement age. And if you take a part-time job in retirement, that could reduce your Social Security payments, says Katie Libbe, vice president of consumer insights at Allianz Life.
For example, if you’re under 66, you can only earn up to $15,120 in 2013 without it impacting your Social Security. Once you exceed that, you’ll lose $1 in benefits for every $2 in wages you earn (which doesn’t include investment income like dividends or capital gains), according to Jonathan Gassman, CPA with The Gassman Financial Group. But if you wait until full retirement age, you can earn as much as you want and your benefit won’t be affected.
Either way, meet with a representative at your local Social Security office as well as your financial planner to discuss your options.
If the numbers don’t add up in your favor when you’re doing your budget – you may need to delay retirement by a year or two in order to ramp up savings.
2. Tell your employer.
There’s no set rule for when it’s best to tell your employer you plan to retire.
Some employers have the advance notice time you must give written into your contract, so read over company policies carefully. If you’re high up on the corporate ladder or occupy a critical role in the company, it’s typically recommended to give your boss at least six months notice, according to Joyce Goila a management consultant with The Herman Group. But for most people, one to three months will suffice. “It’s important to look at what others have done [in your company] when giving notice for retirement,” she says.
3. Meet with your human resources department.
If you’re lucky enough to have a pension in 2013, understand it. What is it going to pay you? Are there any advantages to waiting to take your money? While most employers offer a lump sum option, for many people an annuity might be better if it is coordinated with overall retirement income. Furthermore, consider any possible rollover options to IRAs or Roth IRAs, depending on your retirement income goals, advises Jamie Patrick Hopkins, a professor of taxation at American College.
If you have a 401(k), what are your distribution options? What benefits may be portable or convertible, such as health, life, or long-term care insurance? Look through all of your benefits and compensation information – some employees find they have deferred compensation they never knew about. Verify everything to prevent any surprises.
4. Get a handle on health care costs.
Health care is a wild card in retirement. A recent Fidelity Investments survey estimates that a couple retiring at age 65 this year will need $220,000 to cover health care expenses – and that’s with traditional Medicare coverage.
Well before you leave your job, research Medicare and look at all your health care options. Are you and your spouse eligible for Medicare, and what supplemental insurance might be best for you? You might need to continue private insurance if you aren’t eligible for Medicare yet. Or perhaps your spouse is under 65 and separate decisions will need to be made, says Roy Laux, president of Synergy Financial Services.
Do a thorough analysis of your current health care needs as well as potential future needs based on your health history and your family’s history. Look into long-term health care insurance and see if it’s right for you. This will help you determine how much of your savings to set aside for potential medical expenses. Schedule your dental, vision and annual visits while you still have employer-sponsored health care.
5. Eliminate as much debt as possible.
The fewer debts you have going into retirement, the better. If possible, it’s a good idea to pay off any lingering debt, says Rita Cheng, a certified financial planner with Ameriprise Financial. But you also don’t want to drain your retirement savings just to enter your golden years debt-free.
Start by paying off any credit card debt, since you’re likely paying a higher interest rate on the balance (the national average is 13 percent for fixed-rate credit card). Your mortgage is the last type of debt you should pay off. If you don’t have the luxury of paying it off before you retire, consider refinancing. It’s easier to qualify for a refinance while you’re still employed, and though mortgage rates are currently low, they’re likely to rise soon. Today’s 30-year fixed-rate mortgage is 3.77 percent, but they’ve been inching higher and are likely to continue doing so. By 2014, the rate is expected to be 4.5 percent, according to the Mortgage Bankers Association.
6. Review your investments.
“This close to the [retirement] finish line, you don’t want to leave your savings to chance. Moving investments out of volatile stocks and mutual funds into more stable options [like annuities] is a smart move when you don’t have time to recoup losses,” says Dan White, a certified financial planner with Daniel A. White & Associates.
Not only should you check to see if your asset allocation is appropriate as you enter this next life stage, you also want to take a good look at all fees associated with your investments. White recommends moving some funds into low or no-fee CDs. “While [interest rates] are low today, we’ll see them start to rise on these accounts sooner rather than later,” he says.
7. Develop a strategy for withdrawals.
Drawing down retirement savings can be incredibly complex – it requires a thorough analysis of all sources of income to ensure assets are utilized in the correct order, taking into account Social Security and tax implications, says Libbe at Allianz Life.
The trick is knowing how to turn those assets into income. “There’s a rule that says you can safely withdraw 4 percent of your assets annually, adjusting the amount upward for inflation each year,” says James Poe, founder of Texas Retirement Specialists. But that’s not engraved in stone, he says. Speak to your financial advisor to determine how much you’ll need to begin withdrawing from your portfolio to meet your needs, then set up a monthly disbursement.
Of course, as much as you can prepare, sometimes even the best-laid plans need to be changed. Be ready to make big adjustments or small tweaks if there are developments in your life or the economy that warrant those changes. Six months or so into retirement, many people realize their financial needs are different than they expected. “While it’s never too late to start preparing, the sooner you start, the more choices you’ll have,” says White.
If you’re closer to retirement, there are certain decisions that will be required for you to make as it relates to your employer sponsored retirement plan such as a 401K or 403 B plan. For the most part, these monies have accumulated as tax-deferred in these types of accounts. Tax-deferred accumulation means that when you withdraw the money in retirement:
1. The withdrawn money will count as income
2. The withdrawn money will be subjected to income tax (federal and state)
In order to avoid paying income taxes, you generally have two options:
1. Leave the money in the plan
2. Roll the money over into an individual retirement account (IRA)
In order to determine which option makes the most sense for you, you will need to explore the pros and the cons that accompany each of these choices.
Option 1: Leave your money in a 401K or 403B account
Pros & Cons:
The benefit of leaving the money in the 401k or 403b account is that you aren’t required to do anything until you need to withdraw the funds from the accounts. However, you also will not be able to add any money or deposit additional funds into the accounts once you have retired/are no longer working.
Even if you are retired, a benefit of leaving your money in your employer’s plan is that you can continue to manage your money by the plan administrator just as you did when you were an employee.
In order to determine whether or not to leave your money in the account, you will need to check your options as it relates to your withdrawal options. Some companies will limit both the minimum amount you can withdraw at any given time as well as how frequently you can make withdrawals. It is important to make sure that the regulations around frequency of withdrawals and withdrawal amounts matches your future needs. In other words: you need to read the fine print.
It is also important to ensure that you know when you are required to begin taking distributions from your employer-sponsored retirement plans.
Another important factor to consider is, in the event of death, what plan distribution options are available to your beneficiaries.
Lastly, consider the investment options for your employer-sponsored plan. Typical 401ks and 403b plans have a limited number of investment options to the employee.
Option 2: Rollover your money to an IRA
Pros & Cons:
Typically, rolling over employer-sponsored retirement accounts to an individual retirement account will provide you with the greatest amount of control and flexibility. It will enable you to access your money at any point, as frequently as you wish.
Most financial institutions will provide a plethora of options from which IRA holders may choose. In contrast to an employer-sponsored plan, you won’t be limited to a small number of investment options.
You will want to analyze or examine the costs and fees associated with an IRA such as mutual fund internal expense ratios, money management fees, fees for maintaining an IRA and any fees incurred for rolling your money over.
However, remember that once you reach age 70.5 you must begin withdrawing funds in accordance with the IRS tables and can no longer defer taking contributions.
Lastly, be sure to check your state statutes to understand whether your money will be protected from creditors.
To rollover or not rollover? It all comes down to determining your goals and objectives.