The Phases of Retirement (part 2)

The Phases of Retirement (part 2)

Dec 19, 2012

The Phases of Retirement (part 2) Updating your finances for your changing lifestyle Compiled by Morgan Shepard   Although many Americans now plan for a retirement up to 20 years, your retirement may last much longer. Rather than thinking of retirement as the final stage of life, a more realistic approach may be to view it as a progression of phases, such as early, middle and late. This involves taking a fresh look at retiree expenses and income. Last month we covered the early years.   Middle Years: Distributions and Lifestyle Realities By April 1 of the year after you reach age 70-and-one-half, you’ll generally be required to begin making annual withdrawals from traditional IRAs and employer-sponsored retirement plans. (This excludes assets in a current employer’s retirement plan if you’re still working and do not own more than 5% of the business you work for.) The penalty for not taking your required minimum distribution (RMD) can be steep: like 50% of what you should have withdrawn. Withdrawals from Roth IRAs, however, are not required during the owner’s lifetime. If money is not needed for income and efficient wealth transfer is a goal, a Roth IRA may be an attractive option. Also, consider reviewing the asset allocation of your investment portfolio. Does it have enough growth potential to keep up with inflation? Is it adequately diversified among different types of stocks and income-generating securities?   Later years: Your legacy Review your financial documents to make sure they are true to your wishes and that beneficiaries are consistent. Usually these documents include a will and paperwork governing brokerage accounts, IRAs, annuities, pensions, and in some cases, trusts. Many people will draft a durable power of attorney (someone who will manage your finances if you’re not able) and a living will, which names a person to make medical decisions on your behalf if you are incapacitated. You’ll still need to stay on top of your investments. For example, an annual portfolio and asset allocation review are important. Keep in mind that a financial advisor may be able to set up an automatic rebalancing program for you. And finally, be aware that some financial companies require that you begin taking distributions...

The Phases of Retirement (Part 1)

The Phases of Retirement (Part 1)

Dec 11, 2012

Financial Faith     Compiled by Morgan Shepard   Although many Americans now plan for a retirement up to 20 years, your retirement may last much longer. Rather than thinking of retirement as the final stage of life, a more realistic approach may be to view it as a progression of phases, such as early, middle and late. This involves taking a fresh look at retiree expenses and income. Need for flexible planning Traditionally, retirees were advised to project income needs over the length of time of retirement, add on an annual adjustment for inflation, and then identify any potential income shortfall. But the planning required might not be that linear. Some retirees’ expenses (other than healthcare) may slowly decrease over time. So, many retirees may need more income early in their retirement than later. That’s why it’s critical not just to determine a sustainable withdrawal rate at the outset of retirement, but also to periodically evaluate that withdrawal rate. Or consider another trend. The desire to remain active means many people are continuing to work part-time or starting new businesses in retirement. Some psychologists and gerontologists believe that many people don’t really want to retire, but instead want to reinvent themselves through a mixture of work and leisure. As a result, more older men and women may be inclined to jump back into the workforce, and possibly enjoy the most productive years of their lives. Early years: Income and tax decisions Adding employment earnings to your retirement “paycheck” requires careful planning, because it may impact other sources of retirement income or bump you into a higher tax bracket. For example, retirees who collect Social Security before the year of their full retirement age will see their benefits cut $1 for every $2 earned above $14,640. Also, depending on adjusted gross income, you might have to pay taxes on up to 85% of benefits, according to the Social Security Administration. The need to potentially stretch out income over a longer period than previous generations also means that some people may not want to tap Social Security when they’re first eligible. Consider that for each year you delay taking Social Security beyond your full retirement age...