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 until age 70, you’ll receive a benefit increase of 6 to 8%, depending on your age. One caveat: If you do decide to delay collecting Social Security, you may want to sign up for Medicare at age 65 to avoid possibly paying more for medical insurance later.
Also, plan ahead as to how you’ll pay for healthcare costs not covered by Medicare as you age. Remember that Medicare does not pay for ongoing long-term care or assisted living, and that qualifying for Medicaid requires spending down your assets.
If you have accumulated assets in qualified employer-sponsored retirement plans, now may be the time to decide whether to roll that money into a tax-deferred IRA, which could make managing your investments easier.
A tax and financial pro can help you decide which accounts to tap first at this point in your post-retirement planning—a situation that could significantly affect your financial situation.
Finally, don’t overlook any pension assets in which you may be vested, especially if you changed employers over the course of your career. Pensions can supply you with regular income for life. Annuities may also play a role in helping you generate steady income.*SR
Next month: The Middle and Later Years.
*Withdrawals from annuities before age 59-1/2 are taxed as ordinary income, and may be subject to a 10% federal penalty tax. In addition, the issuing insurance company may also have its own set of surrender charges for withdrawals taken during the initial years of the contract.
This material is for general information and not intended to provide specific advice or recommendations for any individual.
