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The penalty for not taking your required minimum distribution (RMD) can be steep: like 50% of what you should have withdrawn.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 from annuities once you reach age 85. Preparing for a retirement that could encompass a third of your lifespan can be challenging. Regularly review your situation with financial and tax professionals and be prepared to make adjustments.
Points to remember
- 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 any tax-deferred accounts.
- Match living arrangements to changing lifestyle needs and plan ahead for how you’ll pay escalating health care expenses.
- Make sure that financial documents are true to your wishes and beneficiaries are consistent.
- Regularly consult with financial and tax professionals and be prepared to make adjustments, depending on how your life and needs change.
(This material is for general information and not intended to provide specific advice or recommendations for any individual.)
