Preparing for an Excellent Retirement

When I first heard the Beatles’ “When I’m 64” it seemed like it would be forever before I got there. But here I am. Eligible for Medicare and Social Security. Where did the years go?

 

Now that we’re nearing retirement, it’s time to make sure that we’re properly prepared. That’s important. Retiring when you’re not prepared can be costly. And, unfortunately some financial mistakes cannot be easily corrected.

 

Estimate Your Retirement Income

 

Your plans call for a comfortable lifestyle. An occasional meal out and a visit to see the grands at least once a year. And that costs money. Have you estimated your expected income and expenses after retirement?

 

Begin with your income. For most of us that could include a pension, Social Security, income from savings and retirement accounts (401k, IRA) and perhaps some part-time income. It’s easiest if you figure everything in annual/yearly amounts.

 

Start with your Social Security income. Their website has an has an estimator <https://www.ssa.gov/benefits/retirement/estimator.html> that’s helpful. You’ll want to have your prior year’s earning amount handy when you visit their site.

 

Add to that any pensions you may have earned. Some may pay you in a monthly check from the pension fund. Others will purchase an annuity for you which will pay a regular income. The pension administrator will be able to tell you how much to expect.

 

Ask your financial advisor how much you can expect to get from your savings and retirement accounts. Traditionally it was assumed that you could expect to earn/spend 4% on your investments without depleting the principal. But some advisors have begun to question that assumption and use different calculations.

 

You may choose to work part-time. Either because you need the income or because you’d be bored without work. Do a rough estimate on how many hours you’ll work each week and how much you’ll earn per hour. Then multiply by 52 to get an annual estimate.

 

Estimate Your Retirement Expenses

 

Traditionally it was assumed that you’d spend less in retirement than you did while you were working. The rule-of-thumb estimate was that you’d spend between 70 and 80% of your pre-retirement expenses. Many planners still use that as a fair estimate.

 

But some suggest that with more time to spend on hobbies and travel that retirees could actually spend as much or even more than they did when working. You’re in the best position to know what lifestyle you expect after retirement. And that puts you in the best place to estimate your post-retirement expenses.

 

Start with your present expenses for a year. Then make the appropriate adjustments.

 

Review Your Estate Plans

 

Much as we’d like to think that we’ll live forever it’s time to recognize that’s simply not true. And that we need to make provisions for the end of our life or a time when we cannot care for ourselves.

 

If your affairs are simple it’s tempting to attempt to do-it-yourself. But this has some serious downsides that might not become apparent until it’s too late. It’s not as simple as writing “I leave everything to _____” on a napkin and signing it. There are laws to follow. And they’re not the same everywhere. Some inheritance rules are different in each state.

 

You may think that “everyone knows” that you want your car to go to Junior, but that might not hold water with the department of motor vehicles when he tries to reregister it. And banks, credit card companies and other financial institutions can be sticklers for following the rules.

 

Incapacitation is another issue. The laws saying who can make decisions for you if you become incapacitated are complex. Failure to follow them could leave you dependent on a state appointed guardian to make decisions for you. I prefer to have someone I trust make those decisions for me.

 

As a general rule you’ll need the following documents:

– a will providing instructions as to how your assets are to be distributed.

– a durable power of attorney listing on can act on your behalf

– health care power of attorney authorizes someone to make medical decisions for you

– living will states your wishes for life-sustaining measures if your prognosis is terminal.

 

In some cases, if you have a need for privacy or your affairs are complicated you may want to explore a Revocable Living Trust.

 

Spend a Little Time Learning About Retirement Finances

 

Retirement is a big change in your life. And a big change in your finances. In most cases the biggest change since you entered the workforce.

 

Not only will your income and expenses change, but Some financial issues will take on a new urgency while others fade in importance. This is not a time to put your finances on autopilot and assume that everything will work out for the best.

 

There is one big difference in retirement finances that can affect every decision you make. Unlike when you’re younger and working you do not have time on your side. Some decisions cannot be undone and a mistake could seriously affect your retirement lifestyle or your estate.

 

It’s wise to seek wise professional counsel and read quality information sources. Both will serve you well in this stage of your life.

Also, check out How to Use Your Emergency Fund In Retirement

 

author’s bio: Gary Foreman is a former financial planner and has shared sound personal finance advice since 1982. He founded <a href=”https://www.stretcher.com/index.cfm?KimHoward“>The Dollar Stretcher.com website href=”https://stretcher.com/subscribe/subscribeAFF.cfm?Kim Howard“>After 50 Finance newsletter</a>. Also by Gary Foreman: <a href=”https://www.stretcher.com/stories/18/18jul23c-how-to-use-emergency-fund-in-retirement.cfm?KimHoward“>How to Use Your Emergency Fund In Retirement</a>

 

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Withdrawing From a 401(k) Know Your Options

You contributed to a 401(k) retirement plan for years and your employer added some matching funds. Now that you’re ready to retire it’s time to think about how to withdraw your money.

 

Two sets of rules govern your 401(k). Both the Internal Revenue Service and your plan administrator (probably your employer) oversee what you can do with the account. The IRS controls how your choices affect your taxes, the administrator how you invest and can withdraw assets.

 

If you’re 59½ or older, you can withdraw funds from your 401(k) without paying a tax penalty (generally 10% of what you take out). Under some circumstances involved in leaving a job, you can also withdraw a lump sum penalty-free if you’re older than 55.

 

Note: You avoid penalties, not ordinary income taxes. Some retirees delay taking withdrawals as long as possible, often to help savings compound safe from taxes.

 

Beginning the year you turn 70½, you must begin taking annual required minimum distribution (RMD) withdrawals. The amount is related to your life expectancy. To estimate your RMD, divide one by the number of years of your life expectancy, according to the IRS, and multiply that by the value of the assets in your 401(k).

 

Most financial advisors recommend that you take your money out of the 401(k) once you retire, either as a one-time distribution or as a rollover (a penalty-free transfer) into an individual retirement account. You avoid plan fees and gain greater flexibility in investing your funds.

 

If you decide to keep your money in the 401(k), you must adhere to the rules affecting both your options for distribution and your investment choices. Check with your plan administrator to find out how to take out your money; most will allow you to make periodic or regularly scheduled withdrawals. Other rules may also cover your RMDs or when and how often you can change your distribution options.

 

Again, withdrawals will be added to your taxable income unless you roll them over into a qualifying IRA. (Check the IRS chart to see how to safely transfer money from one kind of retirement account to another.)

 

Rolling into an IRA may well be your best choice: You have lower fees, more investment choices and similar distribution rules but can still let your money compound tax-free.

 

If you plan to take your distribution in cash, do some tax planning. Taking a regular distribution will allow you to spread the taxes and keep you in the lower tax brackets. Taking a lump-sum distribution might throw you into a higher bracket designed for the wealthy; your distribution will also incur a 20% withholding that you can apply to your next year’s tax bill.

 

A popular option is to take part or all of your distributed funds and buy an annuity to provide steady retirement income. Annuities come in various types. Retirees tend to prefer ones that provide guaranteed lifetime payouts.

 

Proponents point out that with an annuity you can’t outlive your money. You need to realize, though, that not all annuities are indexed for inflation (currently less than 1%). Your monthly guarantee might look good today yet buy much less in 20 years if prices rise.

 

You face the culmination of years of saving, and your moves will affect your finances for the rest of your life. You must think about many variables: how much you saved; your investment philosophy; your income needs, expected longevity and tax situation. Even your children’s financial situation can sway your decision.

 

No one choice suits everyone.