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DO YOU KNOW how you’ll replace your paycheck after you
retire?
Retirees typically receive income from at least three or
four areas. These include Social Security benefits; a
defined benefit pension plan; part-time work; and
personal savings, such as a 401(k) or similar workplace
savings plan, an Individual Retirement Account (IRA),
and non-retirement savings.
To
construct a retirement income plan, you’ll make a number
of key decisions:
When
should you begin taking your Social Security benefits?
You’ll be eligible for reduced benefits at age 62, full
benefits at your normal retirement age – gradually
rising from 65 to 67 over the next few years, or
increased monthly benefits by delaying when you begin
receiving benefits as late as age 70. For
more information, visit www.ssa.gov.
Once
you begin taking these benefits, you can’t change your
mind. So, if you’re receiving reduced monthly benefits,
they’ll stay at that lower level for the rest of your
life. Conversely, delay your benefits and you’ll receive
increased benefits each month as long as you live.
Would
you like to work part-time?
Review all your potential sources of income and go
through some possible budgets that include or exclude
income from part-time employment. Perhaps you won’t need
to work at all. On the other hand, you might want to,
even if you don’t really need the income.
Would
you like to guarantee some income through an annuity?
Annuities can guarantee you some income for life.
However, they come with fees and costs. If you choose an
annuity, consider whether you prefer a fixed or variable
annuity, and whether you’d like a life annuity or a term
annuity, which will pay you income for a specified
period, such as 10 or 25 years.
What
is a safe withdrawal rate from your savings accounts?
The
so-called safe annual withdrawal rate – where your money
will most likely last 25-30 years – is about 4% of your
initial retirement nest egg, plus an annual inflation
increase of about 3%. Withdrawing at a faster rate could
increase your risk of outliving your money.1
How
should you construct your savings and investment
accounts?
One
way is to segment your portfolio:
• An
account with money for the next year – allocated to
money market funds.
•
Money you’ll need within three to five years – income
generated through Treasury bills, CDs and bonds.
•
Money you won’t need for five-plus years. With
short-term needs taken care of, you could invest much of
this money – depending on your risk tolerance – in stock
funds.
Some
additional tips:
Watch
your RMDs
Required minimum distributions govern 401(k)s as well as
traditional IRAs and Rollover IRAs. Generally, you’ll
need to begin taking regular distributions by age 70 ½,
or you’ll be liable for hefty penalties – 50% of the
amount not withdrawn.
Build
ladders
Bond
or CD ladders are a way to generate regular income by
creating a series of regularly maturing bonds or
certificates of deposit. They could initially mature
one, two, three, four and five years from now. When the
first one matures, if you don’t need the cash, buy
another five-year bond, extending your ladder further
and further.
Consolidate
For
simplicity, many retirees consolidate their investment
accounts. This makes it quicker and easier to track
investment performance and make sure you follow the RMD
rule, avoiding penalties.
For
more information on retirement income planning, go to
www.ta-retirement.com. Click on “Employees,” “Planning
Tools, ” “Retirement Planners” and then on “Your Guide
to Approaching Retirement.”
1
Source: “Retirement Savings: Choosing a Withdrawal Rate
That Is Sustainable” by Philip L. Cooley, Carl M.
Hubbard and Daniel T. Walz, “AAII Journal”, February
1998, Volume XX, No. 2.
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