Module 8
Retirement
a. Why Retirement Planning?
A recent research report from the Insured Retirement Institute (IRI) 1 found that
only 24 percent of baby boomers are confident that they will have enough savings to last
throughout their retirement years. The same IRI study offers helpful tips for future
generations, including GenXers and millennials. “As 79 million Baby Boomers near and
enter their retirement years, they will encounter a unique set of challenges unlike those
any previous generation has faced,” said Cathy Weatherford, Insured Retirement Institute
president and chief executive officer. “These challenges—including changes in employee
benefits, longer life spans, uncertainty with Social Security and Medicare, as well as
rising cost of health care—have made preparing for retirement more difficult and could
put their future financial security at risk. As a result, many Boomers lack confidence in
their ability to meet their retirement goals.”
Retirement can be a rewarding phase of your life. However, a successful, happy
retirement doesn’t just happen; it takes planning and continual evaluation. Thinking about
retirement in advance can help you anticipate future changes and gain a sense of control
over the future. According to the Securities and Exchange Commission, the easiest ways
to boost your retirement savings are to take advantage of your employer’s matching some
or all of your contributions to the retirement plan, focus on low fees and expenses, and
save by regular, automatic deductions from your paycheck.
It is vital to engage in basic retirement planning activities throughout your
working years and to update your retirement plans periodically. While it is never too late
to begin sound financial planning, you can avoid many unnecessary and serious
difficulties by starting this planning early. Saving now for the future requires tackling the
trade-offs between spending and saving.
Although exceptions exist, the old adage “You can’t have your cake and eat it
too” is particularly true in planning for retirement. For example, if you buy state-of-the-
art home entertainment systems, drive expensive cars, and take extravagant vacations
now, don’t expect to retire with plenty of money. Only by saving now and curtailing
current spending can you ensure a comfortable retirement later. Yet saving money
doesn’t come naturally to many young people. Ironically, although the time to begin
saving is when you are young, the people who are in the best position to save are middle-
aged. Seventy-five percent of workers expect to live as well as, if not better than, they do
now when they retire, but only 20 percent of those surveyed have begun to save seriously
for retirement.
Consider this: If from age 25 to 65 you invest $300 per month and earn an
average of 9 percent return a year, you’ll have $1.4 million in your retirement fund.
Waiting just 10 years until age 35 to begin your $300-a-month investing will yield about
$550,000, while if you wait 20 years to begin this investment, you will have only
$201,000 at age 65. $2,000 annual investment earning just 4 percent will grow. For 40
years, your life, and probably your family’s life, revolves around your job. One day you
retire, and practically every aspect of your life changes. There’s less money, more time,
and no daily structure.
You can expect to spend about 16 to 30 years in retirement—too many years to be
bored, lonely, and broke. You want your retirement years to be rewarding, active, and
rich in new experiences. It’s never too early to begin planning for retirement; some
experts even suggest starting while you are in school. Be certain you don’t let your 45th
birthday roll by without a comprehensive retirement plan. Remember, the longer you
wait, the less you will be able to shape your life in retirement.
Consider this: Centenarians are the fastest-growing segment of our population.
The second fastest is the age group 85+. While in 1950 there were only 2,300
centenarians, currently there are more than 72,200 centenarians in the United States, or a
little more than two centenarians per 10,000 in population; 83 percent are women, 17
percent men. Retirement planning has both emotional and financial components.
Emotional planning for retirement involves identifying your personal goals and setting
out to meet them. Financial planning for retirement involves assessing your post-
retirement needs and income and plugging any gaps you find.
You should anticipate your retirement years by analyzing your long-range goals.
What does retirement mean to you? Does it mean an opportunity to stop work and relax,
or does it mean time to travel, develop a hobby, or start a second career? Where and how
do you want to live during your retirement? Once you have considered your retirement
goals, you are ready to evaluate their cost and assess whether you can afford them.
No matter where you choose to invest your money—cash, mutual funds, stocks,
bonds, or real estate—the key to saving for retirement is to make your money work for
you. It does this through the power of compounding. Compounding investment earnings
is what can make even small investments become larger given enough time. You already
know the principle of compounding. Money you put into a savings account earns interest.
Then you earn interest on the money you originally put in, plus on the interest you’ve
accumulated. As the size of your savings account grows, you can earn interest on a bigger
and bigger pool of money. The following example shows how investment grows at
different annual rates of return over different time periods. Notice how the amount of
gain get bigger each 10-year period. That’s because money is being earned on a bigger
and bigger pool of money.
Also notice that when you double your rate of return from 4 percent to 8 percent,
the result after 30 years is over three times what you would have accumulated with a 4
percent return. That’s the power of compounding! The real power of compounding comes
with time. The earlier you start saving, the more your money can work for you. Look at it
another way. For every 10 years you delay before starting to save for retirement, you will
need to save three times as much each month to catch up. That’s why no matter how
young you are, the sooner you begin saving for retirement, the better.
b. Conducting a Financial Analysis
Reviewing your assets to ensure they are sufficient for retirement is a sound idea.
Make any necessary adjustments in your investments and holdings to fit your
circumstances. In reviewing your assets, consider the following factors. If you own your
house, it is probably your biggest single asset. The amount tied up in your house,
however, may be out of line with your retirement income. You might consider selling
your house and buying a less expensive one. The selection of a smaller, more easily
maintained house can also decrease your maintenance costs. The difference saved can be
put into a savings account or certificates of deposit or into other income-producing
investments. If your mortgage is largely or completely paid off, you may be able to get an
annuity to provide you with extra income during retirement. In this arrangement, a lender
uses your house as collateral to buy an annuity for you from a life insurance company.
Each month, the lender pays you (the homeowner) from the annuity after deducting the
mortgage interest payment. The mortgage principal, which was used to obtain the
annuity, is repaid to the lender by probate after your death. This special annuity is known
as a reverse annuity mortgage (RAM) or equity conversion.
Life insurance can serve as a valuable asset in retirement planning, offering
financial protection for loved ones and potential opportunities for cash flow or
supplemental income. As retirees reassess their financial needs and goals in retirement,
they may explore various strategies for leveraging their life insurance policies to support
their evolving needs.
One option for retirees with life insurance policies is to convert a portion of the
policy into cash or income through an annuity. An annuity allows retirees to receive
regular payments over a specified period, providing a steady stream of income to
supplement other retirement income sources. By converting a life insurance policy into
an annuity, retirees can access the cash value of the policy while still benefiting from the
financial security provided by the annuity payments.
Another possibility for retirees is to reduce premium payments on their life
insurance policies by decreasing the face value of the insurance coverage. This can free
up extra money to spend on living expenses or invest for additional income, helping
retirees better manage their cash flow during retirement. By adjusting the coverage
amount to better align with their current needs and financial situation, retirees can
optimize their life insurance policies to support their retirement lifestyle.
Moreover, retirees may consider exploring alternative options for utilizing their
life insurance policies to meet their financial goals. For example, some policies offer
accelerated death benefit riders that allow policyholders to access a portion of the death
benefit early in the event of a terminal illness or long-term care need. This can provide
valuable financial support during challenging times while still preserving the remaining
death benefit for beneficiaries.
Additionally, retirees may evaluate the tax implications of different strategies for
accessing cash value or modifying their life insurance policies. Depending on the specific
circumstances, certain options may have tax consequences that retirees should carefully
consider before making any decisions.
It's important for retirees to review their life insurance policies regularly and
assess whether the coverage aligns with their current needs and objectives. Consulting
with a financial advisor or insurance professional can provide valuable guidance and
assistance in exploring the various options available for leveraging life insurance assets in
retirement planning.
In summary, life insurance can be a valuable asset for retirees, offering flexibility
and potential opportunities for cash flow or supplemental income. By exploring options
such as annuities, adjusting coverage amounts, or utilizing riders, retirees can optimize
their life insurance policies to support their financial goals and retirement lifestyle.
Evaluating and reassessing your investment portfolio in retirement is a crucial
step in ensuring that your financial resources align with your retirement goals and
lifestyle needs. While the focus during the accumulation phase may have been on
maximizing growth, the transition to retirement often involves shifting priorities towards
generating income to support living expenses and maintain financial security.
One aspect of this evaluation involves reviewing any existing investments in your
portfolio and assessing whether it's time to transition from a growth-focused strategy to
one that prioritizes income generation. This may involve reevaluating investments such
as stocks, mutual funds, or exchange-traded funds (ETFs) that have historically been
chosen for their growth potential. In retirement, you may consider reallocating some of
these assets towards income-producing investments such as dividend-paying stocks,
bonds, or real estate investment trusts (REITs) to provide a steady stream of cash flow to
supplement other retirement income sources.
Furthermore, retirees may reassess their approach to dividends and consider
whether it's appropriate to start taking them as income rather than reinvesting them.
While reinvesting dividends can enhance long-term growth, taking dividends as income
can provide retirees with a regular source of cash flow to cover living expenses and
support their desired lifestyle in retirement. By strategically managing dividends and
other investment income, retirees can create a sustainable income stream to meet their
spending needs during retirement.
In addition to evaluating existing investments, retirees should also estimate their
spending needs during retirement years to ensure that their investment strategy aligns
with their financial goals. This involves assessing both essential expenses such as
housing, healthcare, and groceries, as well as discretionary expenses such as travel,
hobbies, and entertainment. By estimating spending needs and comparing them to
available income sources, retirees can identify any potential shortfalls and adjust their
investment strategy accordingly.
Moreover, retirees may explore other income-generating opportunities beyond
traditional investments, such as rental income from real estate properties, royalties from
intellectual property, or income from part-time work or consulting. Diversifying income
streams can provide additional financial security and flexibility, especially during periods
of economic uncertainty or market volatility.
Ultimately, the key to successful retirement income planning lies in careful
evaluation, strategic asset allocation, and ongoing monitoring of investment performance
and spending needs. By regularly reviewing your investment portfolio, estimating
spending requirements, and adjusting your strategy as needed, you can help ensure a
financially secure and fulfilling retirement lifestyle. Consulting with a financial advisor
or retirement planner can provide valuable guidance and expertise in navigating these
important decisions and maximizing the potential of your retirement assets.
Any divorce is difficult, particularly when it comes to a division of marital assets.
Your pension benefits are considered marital property, which must be divided in a
divorce. Even if a person is not ready to retire, pension benefits are considered a marital
asset subject to the division of property. Any retirement fund money, including a 401(k)
plan or a profit-sharing plan set aside during a marriage, and the dollar growth of a
pension plan during a marriage are considered marital property.
Division of pension benefits generally depends on the length of the marriage. “In
a five-year marriage, the percentage of one person’s assets given to the spouse is usually
small,” says Howard Sharfstein, divorce attorney. “In an eight-year marriage about 25
percent of the monetary assets earned by one partner may be given to the other partner. In
a marriage that lasts more than 15 years, there’s generally a 50-50 split of the marital
assets.”
Be warned: Many retirement-planning strategies accommodate the traditional
husband-wife-kids family unit. But millions of nontraditional households have unique
retirement needs. Nearly half of all American marriages end in divorce, creating
difficulties for millions of adults thinking about their retirement years. Likewise, single
parents, gays and lesbians, and individuals who choose to live together outside of
marriage all have formidable retirementplanning challenges.
c. Retirement Living Expenses
The exact amount of money you will need in retirement is impossible to predict.
However, you can estimate the amount you will need by considering the changes you
anticipate in your spending patterns and in where and how you live. Your spending
patterns will probably change. A study conducted by the Bureau of Labor Statistics on
how families spend money shows that retired families use a greater share for food,
housing, and medical care than nonretired families. Although no two families adjust their
spending patterns to changes in the life cycle in the same manner.
Understanding the nuances of federal income taxes in retirement is essential for
optimizing your tax situation and maximizing your after-tax income. While retirees may
experience lower overall tax liabilities compared to their working years, navigating the
complexities of retirement income taxation requires careful consideration and planning.
One significant advantage for retirees is the exclusion of certain types of income
from federal taxation. For example, railroad retirement benefits and certain veterans'
benefits are typically not subject to federal income tax. Additionally, under the U.S. Civil
Service Retirement System, retirement income is only taxed once retirees have received
the amount they initially invested in the retirement fund. After reaching this threshold,
retirement income becomes taxable at the individual's applicable tax rate.
Moreover, retirees may be eligible for various tax credits and deductions designed
to alleviate the tax burden on retirement income. For example, a retirement credit may be
available for certain sources of income, such as annuities, providing retirees with
additional tax relief. Additionally, retirees may benefit from deductions for medical
expenses, charitable contributions, and other eligible expenses, further reducing their
taxable income and overall tax liability.
Furthermore, retirees often find themselves in a lower tax bracket compared to
their working years due to reduced earned income and lower overall taxable income. This
can result in a lower effective tax rate, allowing retirees to retain more of their income for
living expenses and discretionary spending in retirement. However, it's essential for
retirees to carefully manage withdrawals from retirement accounts and other sources of
income to minimize tax implications and optimize tax efficiency.
Retirees can also take advantage of tax-advantaged retirement accounts such as
traditional IRAs, 401(k)s, and Roth IRAs to manage their tax liabilities in retirement.
Traditional IRAs and 401(k)s offer tax-deferred growth, allowing retirees to postpone
taxes on contributions and investment earnings until withdrawals are made in retirement.
Roth IRAs, on the other hand, offer tax-free withdrawals in retirement, providing retirees
with tax-free income to supplement other sources of retirement income.
In summary, understanding federal income taxes in retirement requires careful
consideration of various factors, including the types of income received, eligibility for tax
credits and deductions, and overall tax planning strategies. By leveraging tax-advantaged
accounts, taking advantage of available tax credits and deductions, and strategically
managing withdrawals from retirement accounts, retirees can minimize their tax burden
and maximize their after-tax income in retirement. Consulting with a tax professional or
financial advisor can provide valuable guidance and assistance in navigating the
complexities of retirement income taxation.
Creating a comprehensive comparison of present expenses versus estimated
retirement expenses requires a thorough analysis of various spending categories and
lifestyle factors. By examining fixed expenses such as housing costs, utilities, insurance
premiums, and taxes, as well as variable expenses like food, transportation, and
miscellaneous expenditures, retirees can develop a realistic budget to guide their
retirement planning.
Understanding the impact of inflation on retirement expenses is crucial for
effective financial planning and ensuring that retirees can maintain their purchasing
power over time. While expenses may be fixed at the time of retirement, the erosion of
buying power due to inflation underscores the importance of planning ahead and
incorporating inflationary factors into retirement income strategies.
Historically, inflation rates have varied significantly over time, with periods of
high inflation, such as the 1970s and early 1980s, when the cost of living increased at an
average rate of 6.1 percent per year. However, inflation rates have generally moderated
since then, with the annual increase slowing to less than 3 percent between 1983 and
2013. In April 2018, the U.S. Bureau of Labor Statistics reported an annual inflation rate
of 2.5 percent.
To illustrate the impact of inflation on retirement expenses, consider the following
example: Let's assume a retiree's annual expenses at the time of retirement total $50,000.
If we apply an inflation rate of 2.5 percent per year, we can estimate the future value of
these expenses over time: Year 1: $50,000 (current expenses) Year 2: $51,250 (estimated
expenses with 2.5% inflation) Year 3: $52,531.25 Year 4: $53,845.31 ... Year 10:
$64,545.69
As demonstrated in this example, even a relatively modest inflation rate of 2.5
percent can lead to a significant increase in expenses over a 10-year period. For retirees
relying on fixed sources of income, such as pensions or annuities, the erosion of
purchasing power due to inflation can pose a significant risk to their financial security in
retirement.
In summary, understanding the impact of inflation on retirement expenses is
essential for effective retirement planning. By incorporating inflationary factors into
retirement income strategies and adopting proactive measures to mitigate inflation risk,
retirees can help safeguard their financial security and maintain their purchasing power
throughout retirement.
d. Planning Your Retirement Housing
Think about where you will want to live. If you think you will want to live in
another city, it’s a good idea to plan vacations now in areas you might enjoy later. When
you find one that appeals to you, visit that area during various times of the year to
experience the year-round climate. Meet the people. Check into available activities,
transportation, and taxes. Be realistic about what you will have to give up and what you
will gain. Where you live in retirement can influence your financial needs. You must
make some important decisions about whether or not to stay in your present community
and in your current home. Everyone has unique needs and preferences; only you can
determine the location and housing that are best for you.
Consider what moving involves. Moving is expensive, and if you are not satisfied
with your new location, returning to your former home may be impossible. Consider the
social aspects of moving. Will you want to be near your children, other relatives, and
good friends? Are you prepared for new circumstances? Housing needs often change as
people grow older. The ease and cost of maintenance and nearness to public
transportation, shopping, worship center, and entertainment often become more important
to people when they retire.
DeLoma Foster of Greenville, South Carolina, has seen the future, and she wants
to be prepared. DeLoma, 69, has osteoporosis, just as her mother did. Although she’s not
having difficulty now, she knows the debilitating bone condition eventually could make it
difficult, if not impossible, to navigate steep stairs, cramped bathrooms, and narrow
doorways. So two years ago, she and her husband, Clyde, a 72-year-old retired textile
executive, moved into a novel type of home, one that can comfortably accommodate
them no matter what disabilities old age may bring. Called a “universal design home,”
their residence is on the cutting edge of an architectural concept that an aging population
may well embrace. The only house of its kind in the neighborhood, it has wide doors,
pull-out cabinet shelves, easy-to-reach electrical switches, and dozens of other features
useful for elderly persons or those with disabilities. Yet these features are incorporated
into the design unobtrusively.
Apart from aesthetics, universal design is appealing because it allows people to
stay in their homes as they grow older and more frail. “The overwhelming majority of
people would prefer to grow old in their own homes in their own communities,” says Jon
Pynoos, a gerontologist at the University of Southern California in Los Angeles.
Recognizing this trend, building suppliers now offer everything from lever door handles
to faucets that turn on automatically when you put your hand beneath the spigot.
Remodeling so far is creating the biggest demand for these products. But increasingly,
contractors are building universal design homes from scratch, which generally costs less
than completely retrofitting an existing house. Philip Stephen Companies in St. Paul,
Minnesota, has built six universal design homes in the Southeast, ranging from a 1,240-
squarefoot ranch in Greer, South Carolina, that sold for $90,000 to the 2,200-squarefoot
home that DeLoma and Clyde bought for $190,000.
With the many choices available, determining where to live in retirement is itself
turning into a time-consuming job. But whether you want to race cars, go on a safari, or
stay home to paint, the goal is to end up like Edna Cohen. “Don’t feel bad if I die
tomorrow,” she says. “I’ve had a wonderful life.” Who could ask for more? Whatever
retirement housing alternative you choose, make sure you know what you are signing and
understand what you are buying.
Too many people make the move without doing enough research, and often it’s a
huge mistake. How can retirees avoid being surprised by hidden tax and financial traps
when they move? Here are some tips from retirement specialists on how to uncover
hidden taxes and other costs of a retirement area before moving.
e. Planning Your Retirement Income
Social Security is the most widely used source of retirement income; it covers
almost 97 percent of U.S. workers. Many Americans think of Social Security as
benefiting only retired people. But it is actually a package of protection, providing
retirement, survivors’, and disability benefits. The package protects you and your family
while you work and after you retire. Today, more than 66 million people, almost one out
of every six Americans, collect over $1 trillion in some kind of Social Security benefit.
The Social Security Administration estimates that 47 percent of individuals age
65 and older would live in poverty without Social Security benefits, four times as many
as live in poverty today. Social Security should not be the only source of your retirement
income, however. It should be only a small part of your plan, or you won’t live a very
exciting retired life. Even the Social Security Administration cautions that Social Security
was never intended to provide 100 percent of retirement income.
Most people qualify for reduced Social Security retirement benefits at age 62;
widows or widowers can begin collecting Social Security benefits earlier. Three months
before your 65th birthday, apply for Social Security benefits online or by telephoning the
Social Security office at 1-800-772-1213. The payments will not start unless you apply
for them. If you apply late, you risk losing benefits. Moreover, your Medicare medical
insurance (Part B) and prescription drug coverage (Part D) may cost you more money.
Your Social Security benefits will be reduced if you retire before age 65.
Currently there is a permanent reduction of five-ninths of 1 percent for each month you
receive payments before age 65. Thus, if you retire at 62, your monthly payments will be
permanently reduced by 20 percent of what they would be if you waited until 65 to retire.
However, if you wait until 65 to collect Social Security, your benefits will not decrease.
If you work after 65, your benefits will increase by one-fourth of 1 percent for each
month past age 65 that you delay retirement, but only up to age 70.
The gradual increase in the full retirement age, which started in 2003 and affects
individuals born in 1938 and later, reflects a recognition of evolving demographic trends,
including longer life expectancies and changing workforce dynamics. This adjustment to
the retirement age has significant implications for retirement planning and the financial
well-being of future retirees.
The gradual increase in the full retirement age provides individuals with more
flexibility and options for retirement planning. However, it also necessitates careful
consideration and adjustment of retirement strategies to account for longer working lives
and delayed retirement.
For individuals approaching retirement age, understanding the implications of the
higher retirement age is essential for making informed decisions about when to retire and
how to structure retirement income. Delaying retirement and continuing to work can have
significant financial benefits, including increased social security benefits, additional
savings accumulation, and a shorter retirement period to fund.
Moreover, the increase in the full retirement age underscores the importance of
proactive retirement planning and saving for retirement early in one's career. By starting
to save and invest for retirement as soon as possible, individuals can better prepare for the
financial challenges of a longer retirement and mitigate the impact of the higher
retirement age on their retirement lifestyle.
In summary, the gradual increase in the full retirement age reflects broader
demographic and economic trends shaping the retirement landscape. While this change
presents challenges for future retirees, it also offers opportunities for individuals to adapt
their retirement plans, continue working if desired, and achieve financial security in
retirement. By staying informed and proactive in retirement planning, individuals can
navigate the evolving retirement landscape with confidence and peace of mind.
Would it be better for you to start getting benefits early with a smaller monthly
amount for more years, or wait for a larger monthly payment over a shorter time period?
The answer is personal and depends on several factors, such as your current cash needs,
your current health, and family longevity. Also, consider if you plan to work in
retirement and if you have other sources of retirement income. You must also study your
future financial needs and obligations, and calculate your future Social Security benefits.
Weigh all the facts carefully before making this crucial decision. This decision affects the
monthly benefit you will receive for the rest of your life, and may affect benefit
protection for your survivors.
The Social Security Administration now provides a history of your earnings and
an estimate of your future monthly benefits online. The statement includes an estimate, in
today’s dollars, of how much you will get each month from Social Security when you
retire—at age 62, 65, or 70—based on your earnings to date and your projected future
earnings. Use the nearby How To . . . Choose a Social Security Benefit Calculator to
estimate your potential monthly benefits.
To qualify for Social Security retirement benefits, you must have the required
number of quarters of coverage. The number of quarters you need depends on your year
of birth. People born after 1928 need 40 quarters to qualify for benefits.
Up to 85 percent of your Social Security benefits may be subject to federal
income tax for any year in which your adjusted gross income plus your nontaxable
interest income and one-half of your Social Security benefits exceed a base amount. For
current information, go online (irs.gov) or telephone the Internal Revenue Service at 1-
800-829-3676 for Publication 554, Tax Benefits for Older Americans, and Publication
915, Tax Information on Social Security.
Your Social Security benefits may be reduced if you earn above a certain amount
a year, depending on your age and the amount you earn. You will receive all of your
benefits for the year if your employment earnings do not exceed the annual exempted
amount.
Social Security benefits increase automatically each January if the cost of living
increased during the preceding year. Each year, the cost of living is compared with that of
the year before. If it has increased, Social Security benefits increase by the same
percentage.
The full benefit for a spouse is one-half of the retired worker’s full benefit. If your
spouse takes benefits before age 65, the amount of the spouse’s benefit is reduced to a
low of 37.5 percent at age 62. However, a spouse who is taking care of a child who is
under 16 or has a disability gets full (50 percent) benefits, regardless of age. If you are
eligible for both your own retirement benefits and for benefits as a spouse, Social
Security pays your own benefit first. If your benefit as a spouse is higher than your
retirement benefit, you’ll get a combination of benefits equal to the higher spouse benefit.
You can create a my Social Security account if you’re age 18 or older and have a
Social Security number, valid e-mail, and U.S. mail address. To create your personal and
confidential account, visit www.ssa.gov/myaccount. You’ll need to provide some
personal information to confirm your identity, and then choose a username and password.
To view and print the Social Security Administration’s publications, forms, reports, and
program history, with links to information for employers, employees, children, parents,
and teachers, visit the agency at www.ssa.gov.
According to the 2015 OASDI Trustees Report, “Social Security is not
sustainable over the long term at current benefit and tax rates.” 5 Beginning in 2010 and
continuing in 2011, Social Security paid more in benefits and expenses than it collected
in taxes and other income. The 2017 report projects this pattern to continue for the next
75 years. The trustees estimate that the trust funds will be exhausted by 2033. At that
point, payroll taxes and other income will flow into the fund but will be sufficient to pay
only 77 percent of program costs.
Many people are concerned about the future of Social Security. They contend that
enormous changes since Social Security started over 78 years ago have led to promises
that are impossible to keep. Longer life expectancies mean retirees collect benefits over a
greater number of years. More workers are retiring early, thus entering the system sooner
and staying longer. The flood of baby boomers who began retiring early in the 21st
century will mean fewer workers to contribute to the system. In 1945, 42 workers
supported every recipient. By 2016, that number had dropped to 2.8. The Social Security
Administration estimates the number will drop to 2.1 workers by 2036 and 2.0 workers
by 2070.
Besides Social Security, the federal government administers several other
retirement plans (for federal government and railroad employees). Employees covered
under these plans are not covered by Social Security. The Veterans Administration
provides pensions for many survivors of men and women who died while in the armed
forces and disability pensions for eligible veterans. The Railroad Retirement System is
the only retirement system administered by the federal government that covers a single
private industry. Many state, county, and city governments operate retirement plans for
their employees.
Another possible source of retirement income is the pension plan your company
offers. With employer plans, your employer contributes to your retirement benefits, and
sometimes you contribute too. Contributions and earnings on those contributions
accumulate tax free until you receive them. Since private pension plans vary, you should
find out (1) when you become eligible for pension benefits and (2) what benefits you will
be entitled to. Most employer plans are defined-contribution or defined-benefit plans.
Over the last two decades, the defined-- contribution plan has grown rapidly,
while the number of defined-benefit plans has generally dropped. A defined-contribution
plan has an individual account for each employee; therefore, these plans are sometimes
called individual account plans. The plan document describes the amount the employer
will contribute, but it does not promise any particular benefit. When a plan participant
retires or otherwise becomes eligible for benefits, the benefit is the total amount in the
participant’s account, including past investment earnings on amounts put into the
account.
Salary reduction or 401(k) plans. Under a 401(k) plan, your employer makes
nontaxable contributions to the plan for your benefit and reduces your salary by the same
amounts. Sometimes your employer matches a portion of the funds contributed by you. If
your employer is a tax-exempt institution such as a hospital, university, or museum, the
salary reduction plan is called a Section 403(b) plan. Or, if you are a government
employee, you may have a Section 457 plan. These plans are often referred to as tax-
sheltered annuity (TSA) plans.
The Economic Growth and Tax Relief Reconciliation Act (the EGTRRA) was
passed by Congress in 2001. The Act increased the employee contribution limit for
401(k) and other employer-sponsored retirement plans. For example, you can contribute
$18,500 to your 401(k), 403(b), or Section 457(b) plan in 2018 ($24,500 if you are 50 or
older). This new provision is intended to allow older workers to make up for lost time
and catch up on their contributions.
One caution! Don’t overlook your 401(k) plan fees. Fees and expenses paid by
your plan may substantially reduce the growth in your account and, ultimately, your
account balance. Your account balance will determine the amount of retirement income
you will receive from the plan. For example, assume you are a 30-year-old with $25,000
in a 401(k) plan. If your account earns 7 percent and incurs fees of 0.5 percent a year,
without another contribution, your payout at age 65 will be $227,000. But if the same
account incurs fees of 1.5 percent, your payout at age 65 will be only $163,000. That
extra 1 percent per year reduces your payout by 28 percent.
With a TSA, your investment earnings are tax deferred. Your savings compound
at a faster rate and provide you with a greater sum than in an account without this
advantage. Ordinary income taxes will be due when you receive the income. The
following table illustrates the difference between saving in a conventional savings plan
and a tax-deferred TSA for a single person earning $28,000 a year. Notice how you can
increase your takehome pay with a TSA.
What happens to your benefits under an employer pension plan if you change
jobs? One of the most important aspects of such plans is vesting. Vesting is your right to
at least a portion of the benefits you have accrued under an employer pension plan
(within certain limits), even if you leave the company before you retire.
In a defined-benefit plan, the plan document specifies the benefits promised to the
employee at the normal retirement age. The plan itself does not specify how much the
employer must contribute annually. The plan’s actuary determines the annual employer
contribution required so that the plan fund will be sufficient to pay the promised benefits
as each participant retires. If the fund is inadequate, the employer must make additional
contributions. Because of their actuarial aspects, defined-benefit plans tend to be more
complicated and more expensive to administer than defined-contribution plans.
Companies nationwide are switching their retirement plans to defined
contributions from defined benefits. “Paternalistic employers are dying fast—if they’re
not already dead,” says an actuary with an international consulting firm. The result is that
“the shift to defined contributions has forced employees to take more responsibility for
retirement. They have discretion as to how to invest the money and must make
substantive decisions about their own financial futures.”
Some pension plans allow portability. This feature enables you to carry earned
benefits from one employer’s pension plan to another’s when you change jobs. The
Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for
pension plans in private industry and protects more than 50 million workers. Under this
act, the federal government has insured part of the payments promised to retirees from
private defined-benefit pensions. ERISA established the Pension Benefit Guaranty
Corporation (PBGC), a quasi-- governmental agency, to provide pension insurance. The
PBGC protects employees’ pensions to some degree if a firm defaults. For example, in
2005 United Airlines and U.S. Airways terminated their defined-benefit plans in
bankruptcy. The PBGC will pay workers and retirees at airlines with reduced pension
benefits. The PBGC’s board of directors includes the secretaries of the U.S. Departments
of Labor, the Treasury, and Commerce.
Furthermore, the EGTRRA of 2001 increased the amount of money you can
contribute to an IRA from $2,000 in 2001 to $5,500 in 2018. If you are 50 or older, you
can contribute $1,000 more than the regular limits in 2018. Whether or not you are
covered by a pension plan, you can still make nondeductible IRA contributions, and all of
the income your IRA earns will compound tax deferred until you withdraw money from
the IRA. Remember, the biggest benefit of an IRA lies in its tax-deferred earnings
growth; the longer the money accumulates tax deferred, the bigger the benefit.
Your investment opportunities for IRA funds are not limited to savings accounts
and certificates of deposit. You can put your IRA funds in many kinds of investments—
mutual funds, annuities, stocks, bonds, U.S.-minted gold and silver coins, real estate, and
so forth. Only investments in life insurance, precious metals, collectibles, and securities
bought on margin are prohibited.
Roth IRA With a Roth IRA, contributions are not tax deductible, but earnings
accumulate tax free. You may contribute up to the amounts shown in the above paragraph
(reduced by the amount contributed to a traditional IRA). You can make contributions
even after age 70½. Five years after you establish your Roth IRA, you can take tax-free,
penalty-free distributions if you are at least 59½ or will use the fund for first-time home
buyer expenses.
A spousal IRA lets you contribute up to the amounts shown above on behalf of
your nonworking spouse if you file a joint tax return. As in the traditional IRA, whether
or not this contribution is tax deductible depends on your income and on whether you or
your spouse participates in an employerprovided retirement plan.
A rollover IRA is a traditional IRA that accepts rollovers of all or a portion of
your taxable distribution from a retirement plan or from another IRA. A rollover IRA
may also let you roll over to a Roth IRA. To avoid a mandatory 20 percent federal
income tax withholding, the rollover must be made directly to a similar employer-
provided retirement plan or to an IRA. If you receive the money yourself, you must roll it
over within 60 days. However, you will receive only 80 percent of the amount you
request as a distribution (distribution minus the mandatory 20 percent withholding tax).
Unless you add additional money to the rollover accumulation to equal the 20 percent
withheld, the IRS will consider the 20 percent withheld to be taxable income. If you are
under 59½, the 20 percent withholding will be considered an early distribution subject to
a 10 percent penalty tax. The 80 percent you roll over will not be taxed until you take it
out of the IRA.
The 2001 law made retirement savings more portable, permitting workers to roll
money between 401(k)s, 403(b)s, and governmental 457s. That’s especially good now for
those with a 457. Before, you could not even transfer savings into an IRA when you left a
job. You can now also roll regular deductible IRA savings into a 401(k). A 2016
landmark federal rule requires financial advisors to act solely in your best interest, not
their own. Read the nearby Financial Literacy for My Life feature on how this new rule
will affect your lifetime savings during retirement years.
Created in 1997, the Education IRA, renamed the Coverdell Education Savings
Account after the late Senator Paul Coverdell, has also been enhanced. You can now give
$2,000 a year to each child—up from $500—for the Education IRA. The contributions
must be made in cash and they are not deductible. These accounts grow tax-free and can
be invested any way you choose. Coverdells can now be used for elementary and
secondary school costs, including books, tuition, and tutoring.
A SEP–IRA plan is simply an individual retirement account funded by the
employer. Each employee sets up an IRA account at a bank or a brokerage house. Then
the employer makes an annual contribution of up to $54,000 in 2018 (indexed to cost-
ofliving adjustments in the future). The SEP–IRA is the simplest type of retirement plan
if you are fully or partially self-employed. Your contributions, which can vary from year
to year, are tax deductible, and earnings accumulate on a tax-deferred basis. A SEP–IRA
has no IRS filing requirements, so paperwork is minimal.
When you retire, you will be able to withdraw your IRA in a lump sum, withdraw
it in installments over your life expectancy, or place it in an annuity that guarantees
payments over your lifetime. If you take the lump sum, the entire amount will be taxable
as ordinary income and the only tax break you will have is standard five-year income
averaging. IRA withdrawals made before age 59½ are subject to a 10 percent tax in
addition to ordinary income tax, unless the participant dies or becomes disabled. You can
avoid this tax if you roll over your IRA.
You cannot keep money in most retirement plans indefinitely. Except for Roth
IRAs, most tax-qualified retirement plans, including 403(b), 401(k), and other IRAs, are
required by the IRS to begin what is known as “minimum lifetime distributions” at age
70½. If you have retired, you must either receive the entire balance of your tax-qualified
plan or start receiving periodic distributions by April 1 of the year following the year in
which you reach 70½ or retire, if later.
The amount of the minimum required distribution is based on your life
expectancy at the time of the distribution. The IRS provides single- and jointlife
expectancy tables for calculating required distribution amounts. The penalties for
noncompliance in this case are severe. Insufficient distributions may be subject to an
excise tax of 50 percent on the amount not withdrawn as required.
The new tax package of 2001 did not forget the selfemployed. A Keogh plan,
named for U.S. Representative Eugene James Keogh of New York, also known as an
HR10 or a self-employed retirement plan, is a qualified pension plan developed for self-
employed people and their employees. Generally, Keogh plans cannot discriminate in
favor of a self-employed person or any employee. Both defined-contribution and defined-
benefit Keogh plans have tax-deductible contribution limits, and other restrictions also
apply to Keogh plans. These plans are more complicated to set up and maintain, but offer
more advantages than SEP–IRAs. Therefore, you should obtain professional tax advice
before using this type of retirement plan. Whether you have an employer pension plan or
a personal retirement plan, you must start withdrawing at age 70½ or the IRS will charge
you a penalty.
You can buy an annuity with the proceeds of an IRA or a company pension or as
supplemental retirement income. You can buy an annuity with a single payment or with
periodic payments. You can buy an annuity that will begin payouts immediately, or, as is
more common, you can buy one that will begin payouts at a later date. To the extent that
annuity payments exceed your premiums, these payments are taxed as ordinary income as
you receive them, but earned interest on annuities accumulates tax free until the payments
begin. Annuities may be fixed, providing a specific income for life, or variable, with
payouts above a guaranteed minimum level dependent on investment return. Either way,
the rate of return on annuities is often pegged to market rates.
Immediate annuities are generally purchased by people of retirement age. Such
annuities provide income payments at once. They are usually purchased with a lump-sum
payment. With deferred annuities, income payments start at some future date. Interest
builds up on the money you deposit. Younger people often use such annuities to save
money toward retirement. If you are buying a deferred annuity, you may wish to obtain a
contract that permits flexible premiums. With such an annuity, your contributions may
vary from year to year. A deferred annuity purchased with a lump sum is known as a
singlepremium deferred annuity. In recent years, such annuities have been popular
because of the tax-free buildup during the accumulation period.
The straight life annuity gives more income per dollar of outlay than any other
type. But payments stop when you die, whether a month or many years after the payout
begins. Should you get an annuity with a guaranteed return? Opinions differ. Some
experts argue that it is a mistake to diminish your monthly income just to make sure your
money is returned to your survivors. Some suggest that if you want to ensure that your
spouse or someone else continues to receive annuity income after your death, you might
choose the joint-and-survivor annuity. Such an annuity pays its installments until the
death of the last designated survivor.
f. Living on Your Retirement Income
Stretching your retirement income requires a comprehensive approach that
involves maximizing existing income streams while exploring additional sources of
revenue. To begin with, it's crucial to ensure that you are accessing all the income sources
available to you. This entails a thorough examination of potential benefits and programs
that you might qualify for, such as social security benefits, pension plans, annuities, and
any other retirement accounts or investments you may have.
Moreover, beyond traditional retirement income sources, consider leveraging your
assets and valuables to generate cash flow. This could involve renting out a spare room in
your home, selling unused items, or even monetizing hobbies or skills such as crafting,
tutoring, or consulting. Additionally, explore options like reverse mortgages or life
settlements if applicable, as these can provide a lump sum or regular income stream
against the value of your home or life insurance policy.
Furthermore, if your retirement expenses exceed your initial estimates, it's
essential to reassess your spending plan and make necessary adjustments. Look for areas
where you can reduce costs or find alternative ways to meet your needs without
compromising your lifestyle. This might involve DIY projects around the house,
shopping for deals, or finding free or low-cost recreational activities as mentioned earlier.
Embracing a frugal mindset and seeking out cost-saving opportunities can
significantly impact your financial well-being in retirement. Consider meal planning,
buying in bulk, and exploring discount programs or senior discounts offered by retailers
and service providers. Additionally, explore community resources such as senior centers,
volunteer opportunities, and local support networks, which can provide valuable
assistance and social engagement at little to no cost.
Moreover, prioritize health and wellness to minimize healthcare expenses in
retirement. This includes staying active, eating a balanced diet, and taking advantage of
preventive care services. Investigate options for affordable healthcare coverage, such as
Medicare Advantage plans or supplemental insurance policies, and explore ways to save
on prescription medications through generic alternatives or prescription assistance
programs.
In summary, stretching your retirement income requires a multifaceted approach
that involves maximizing existing income streams, leveraging assets, and minimizing
expenses through careful budgeting and resourcefulness. By exploring all available
avenues and making strategic decisions, you can make the most of your retirement funds
and enjoy a financially secure and fulfilling post-work life.
Taking advantage of tax savings opportunities is crucial for retirees to optimize
their financial situation and preserve their retirement income. The tax landscape for
retirees can be complex, but there are numerous strategies and resources available to help
navigate it effectively.
One of the primary resources for understanding tax benefits for older Americans
is the IRS website, irs.gov. Here, retirees can access a wealth of information, including
publications, forms, and guidance specifically tailored to their tax needs. One valuable
resource available is the publication "Tax Benefits for Older Americans," which provides
detailed information on tax credits, deductions, and other benefits available to retirees.
Additionally, retirees can reach out to their local IRS office to request a free copy of this
publication or to seek assistance from knowledgeable tax professionals.
Furthermore, it's essential for retirees to stay informed about any changes to tax
laws or regulations that may affect their tax situation. Keeping abreast of updates through
reliable sources such as the IRS website or reputable financial publications can help
retirees make informed decisions when it comes to tax planning.
In some cases, retirees may need to file quarterly estimated income tax returns,
especially if they have significant income from sources such as investments or self-
employment. Failing to do so could result in penalties or underpayment of taxes.
Alternatively, retirees can arrange for withholding on Social Security and pension
payments to fulfill their tax obligations throughout the year, thereby avoiding the need for
quarterly estimated tax payments.
Moreover, retirees should explore various tax-saving strategies available to them,
such as taking advantage of tax-deferred retirement accounts like traditional IRAs or
401(k)s, which allow contributions to grow tax-free until withdrawn. Additionally,
retirees may consider Roth conversions, where they convert funds from traditional
retirement accounts to Roth accounts, potentially reducing future tax liabilities.
Furthermore, retirees should be mindful of deductions and credits available to
them, such as the standard deduction for taxpayers over 65, medical expense deductions,
and credits for elderly or disabled individuals. By leveraging these tax benefits, retirees
can reduce their tax burden and maximize their disposable income in retirement.
In summary, maximizing tax savings is an essential aspect of retirement planning.
By utilizing available resources, staying informed about tax laws, and implementing tax-
saving strategies, retirees can effectively manage their tax liabilities and preserve more of
their hard-earned retirement income.
Exploring part-time work or a new career path after retirement can offer
numerous benefits beyond just financial gain. While additional income is certainly a
motivating factor, engaging in work can also provide retirees with a sense of purpose,
fulfillment, and continued social connection.
One compelling reason to consider part-time work or a new career in retirement is
the opportunity to stay mentally and physically active. Many retirees find that
maintaining a regular routine and staying intellectually stimulated through work can help
ward off cognitive decline and keep them mentally sharp. Additionally, the physical
activity associated with certain jobs can contribute to overall health and well-being.
Moreover, working part-time or pursuing a new career can provide retirees with a
renewed sense of identity and self-worth. Many individuals derive a significant portion of
their self-esteem from their professional roles, and transitioning into retirement can
sometimes lead to a loss of identity. By continuing to work in some capacity, retirees can
maintain a sense of purpose and pride in their contributions to society.
Furthermore, part-time work or a new career can serve as an avenue for pursuing
personal interests and passions. Retirees may choose to explore hobbies or activities that
they didn't have time for during their working years, such as painting, gardening, or
volunteering. Alternatively, they may seek out employment opportunities that align with
their interests, such as working at a bookstore, teaching music lessons, or leading nature
walks.
Additionally, part-time work can offer retirees a chance to try something new and
expand their skill set. Whether it's learning a new trade, mastering a new technology, or
gaining experience in a different industry, embarking on a new career path can be
intellectually stimulating and personally rewarding.
For those interested in part-time work or a new career, there are various resources
available to help retirees find suitable opportunities. State and local agencies on aging
often provide information and assistance regarding employment opportunities specifically
geared towards older adults. Additionally, online job boards, career fairs, and networking
events can be valuable resources for connecting with potential employers and exploring
new career paths.
In summary, working part-time or starting a new career after retirement can offer
a wealth of benefits beyond just financial gain. From staying mentally and physically
active to finding renewed purpose and pursuing personal interests, engaging in work can
enrich the retirement experience and contribute to overall well-being. Retirees should
explore their options and consider how part-time work or a new career could enhance
their retirement lifestyle.
Understanding the impact of part-time work on Social Security benefits is crucial
for retirees considering employment after retirement. While part-time work can provide
additional income and fulfillment, it's essential to be aware of how earnings may affect
Social Security payments.
The Social Security Administration sets an annual exempt amount, which
represents the maximum earnings a retiree can make without affecting their Social
Security benefits. As of [current year], the exempt amount is [specific amount]. Retirees
who earn below this threshold can continue to receive their full Social Security payments
without any reduction.
However, if a retiree earns more than the annual exempt amount, their Social
Security payments may be subject to reduction. For every dollar earned above the exempt
amount, Social Security benefits are reduced by a certain percentage, depending on the
retiree's age and other factors. It's important for retirees to understand these earnings
limits and how they apply to their specific situation.
To get the most accurate and up-to-date information regarding Social Security
benefits and earnings limits, retirees should consult with their local Social Security office
or visit the official Social Security Administration website. Social Security
representatives can provide personalized guidance based on individual circumstances and
help retirees make informed decisions about part-time work and retirement income
planning.
In addition to understanding the impact on Social Security benefits, retirees
should also consider the broader financial implications of part-time work. This includes
evaluating how additional income will affect overall retirement income, tax liabilities,
and long-term financial goals. Working with a financial advisor or retirement planner can
be beneficial in navigating these complex financial considerations and optimizing
retirement income strategies.
Furthermore, retirees should weigh the non-financial aspects of part-time work,
such as work-life balance, job satisfaction, and overall well-being. While part-time work
can provide valuable social interaction, intellectual stimulation, and a sense of purpose,
it's essential to strike a balance that aligns with individual preferences and lifestyle goals.
Ultimately, the decision to work part-time after retirement should be made
thoughtfully, taking into account both financial and personal factors. By understanding
how earnings impact Social Security benefits and considering the broader implications of
part-time work, retirees can make informed choices that support their overall financial
security and well-being in retirement.
Creating a guaranteed-income portion of your retirement fund is a critical
component of financial planning for retirement. This portion typically consists of
investments in lower-yield but very safe vehicles, aimed at providing a steady stream of
income to cover essential expenses during retirement. While Social Security and
retirement plans like pensions may contribute to this guaranteed income stream, it's
essential for retirees to ensure that their retirement assets are also structured to offset
inflation and maintain purchasing power over time.
To effectively offset inflation and preserve the value of retirement assets, retirees
must carefully consider their investment strategy for the guaranteed-income portion of
their portfolio. While traditional safe investments like bonds and savings accounts offer
stability and capital preservation, they may not always keep pace with inflation,
especially during periods of rising prices.
One strategy for addressing inflation risk in the guaranteed-income portion of a
retirement portfolio is to diversify investments across asset classes that have historically
provided inflation-beating returns. This could include allocating a portion of the portfolio
to stocks, real estate investment trusts (REITs), and inflation-protected securities such as
Treasury Inflation-Protected Securities (TIPS). These assets have the potential to
generate higher returns over the long term, helping to offset the erosive effects of
inflation on purchasing power.
Moreover, retirees may consider incorporating annuities into their guaranteed-
income portfolio. Annuities offer a steady stream of income for life or a specified period,
providing a level of predictability and stability that can help mitigate inflation risk.
Certain types of annuities, such as inflation-indexed or variable annuities with inflation
protection features, can offer additional safeguards against rising prices.
Furthermore, retirees should regularly review and adjust their investment strategy
to ensure that the guaranteed-income portion of their portfolio remains aligned with their
financial goals and risk tolerance. This may involve rebalancing assets, reallocating
investments based on changing market conditions, and considering new investment
opportunities that offer potential for inflation-beating returns.
Additionally, retirees should be mindful of the impact of taxes and fees on their
retirement income. Minimizing tax liabilities and investment expenses can help maximize
the net returns of the guaranteed-income portion of the portfolio, ensuring that retirees
can maintain their standard of living in the face of inflationary pressures.
In summary, creating a guaranteed-income portion of the retirement fund is
essential for ensuring financial security and stability in retirement. By diversifying
investments, incorporating inflation-protected assets, and regularly reviewing and
adjusting the portfolio, retirees can offset inflation and preserve the purchasing power of
their retirement assets over time. Working with a financial advisor or retirement planner
can provide valuable guidance in developing and managing a retirement income strategy
that effectively addresses inflation risk.
Suppose you have $10,000 in a retirement plan account or an IRA. Your money is
invested in stocks and bonds that earn an average annual return of 6.4 percent. In 20
years, your account will grow, with compounding, to $34,400. If you withdraw this
amount after you reach age 59½ (the age at which you can receive money without a 10
percent penalty) and pay 25 percent income tax on that amount, you will keep nearly
$25,800. However, if you close your retirement plan account before age 59½, your
account balance will decrease from $10,000 to $6,500 after paying the 10 percent penalty
and 25 percent income tax. In addition, your account grows for the next 20 years but at a
lower rate of growth, because you are paying taxes on your investment earnings. As a
result, the value of your account after 20 years will be approximately $18,800, assuming
the same rate of return and tax bracket. The tax consequences of early withdrawal will
cost you 27 percent of your account balance at retirement.
Determining when to draw on your savings in retirement is a crucial decision that
depends on various factors, including your financial situation, age, retirement goals, and
legacy objectives. While there is no one-size-fits-all answer, careful consideration and
planning can help retirees make informed choices about when and how to access their
savings.
One key consideration when deciding when to draw on savings is assessing your
overall financial picture. This includes evaluating sources of retirement income such as
Social Security, pensions, annuities, and investment returns. If you have sufficient
guaranteed income to cover your essential expenses, you may have the flexibility to delay
drawing on your savings, allowing them to continue growing for future needs or to leave
a legacy for heirs.
Conversely, if your retirement income is insufficient to meet your expenses, you
may need to begin drawing on your savings sooner to supplement your cash flow. In this
case, it's essential to establish a sustainable withdrawal strategy that balances meeting
your current needs with preserving your savings for the long term. This may involve
setting a conservative withdrawal rate based on factors such as life expectancy,
investment returns, and inflation.
Additionally, your age at retirement can influence the timing of when to draw on
your savings. Retirees who retire early may need to rely more heavily on their savings
initially, while those who retire later may have the option to delay withdrawals and allow
their savings to continue growing. Understanding the implications of different retirement
ages on savings withdrawal strategies can help retirees make informed decisions based on
their individual circumstances.
Furthermore, considering your legacy goals is important when determining when
to draw on savings. Some retirees prioritize leaving a financial legacy for their heirs,
while others prefer to spend their savings during their lifetime to enjoy a comfortable
retirement. Balancing these competing objectives requires careful planning and may
involve adjusting withdrawal strategies over time as circumstances change.
It's crucial for retirees to approach drawing on savings with caution and prudence.
While dipping into savings is sometimes necessary to meet expenses, it's essential to
avoid excessive withdrawals that could deplete savings prematurely. Regularly reviewing
and adjusting your withdrawal strategy based on changes in financial markets, lifestyle
needs, and longevity expectations can help ensure that your savings last throughout
retirement.
In summary, the decision of when to draw on savings in retirement is multifaceted
and depends on various factors including financial circumstances, age, and legacy goals.
By carefully evaluating these considerations and developing a thoughtful withdrawal
strategy, retirees can make informed decisions to support their financial security and
well-being in retirement. Consulting with a financial advisor or retirement planner can
provide valuable guidance and assistance in navigating this important aspect of
retirement planning.
How long would your savings last if you withdrew monthly income? If you have
$10,000 in savings that earns 5.5 percent interest, compounded quarterly, you could take
out $68 every month for 20 years before reducing this nest egg to zero. If you have
$40,000, you could collect $224 every month for 30 years before exhausting your nest
egg. For different possibilities.
