|
Retirement
Time has
come for
Retirement
Comfortable retirement in the 21st Century requires a
new approach.
In
the new millennium, the standard of living we enjoy in retirement
hinges not so much on a company pension plan and Social Security, but
on how much we take advantage of tax-deferred savings options like
401(k) plans and IRAs and how skillfully we invest our money. Americans
are also living longer, staying healthier, and remaining more active
after they retire.
Retirees are surfing waves and the Net, not to mention launching
post-retirement careers. A recent American Association of Retired
Persons poll shows that 8 out of 10 Baby Boomers plan to work full or
part time after retiring, not necessarily because they have to, but
because they see work as a way to remain socially engaged and
fulfilled. In short, retirement in the next century is a whole new gig
that offers more options, but also demands more careful planning on our
part to take advantage of all those benefits.
What
is needed before retirement
1.
Save as much as you can as early as you can.
Though it's never too late to start, the sooner you begin saving, the
more time your money has to grow. Gains each year build on the prior
year's, that's the power of compounding, and the best way to accumulate
wealth.
2. Set realistic goals.
Project your retirement expenses based on your needs, not rules of
thumb. Be honest about how you want to live in retirement and how much
it will cost. Then calculate how much you must save to supplement
Social Security and other sources of retirement income.
3. A 401(k) is one of the best ways to save for
retirement.
Contributing money to a 401(k) gives you an immediate tax deduction,
tax-deferred growth on your savings, and usually a matching
contribution from your company.
4. An IRA can also give your savings a
tax-advantaged boost.
Like a 401(k), IRAs offer huge tax breaks, either up front (with a
traditional IRA) or when you withdraw funds (with a Roth). With both
types, you don't have to pay taxes each year on dividends, gains and
other distributions.
5. Focus on your asset allocation more than on
individual picks.
How you divide your portfolio between stocks and bonds will have the
most impact on your long-term returns.
6. Stock investing is your best long-term growth
vehicle.
Stocks have the best chance of achieving high returns over long
periods. A healthy dose will help ensure that your savings grow faster
than inflation, increasing the purchasing power of your nest egg.
7. Don't invest too heavily into bonds, even in
retirement.
Many retirees stash most of their portfolio in bonds for the income.
Unfortunately, over 10 to 15 years, inflation easily can erode the
purchasing power of bonds' interest payments.
8. Making tax-efficient withdrawals can stretch the
life of your nest egg.
Once you're retired, your assets can last several more years if you
draw on money from taxable accounts first and let tax-advantaged
accounts compound for as long as possible.
9. Work part-time while in retirement.
Working keeps you socially engaged and reduces the amount of your nest
egg you must withdraw annually once you retire.
10. Other creative ways to get more mileage out of
retirement assets.
You might consider relocating to an area with lower living expenses, or
transforming the equity in your home into income by taking out a
reverse mortgage.
Your First Step To Retirement
Your path to a successful retirement starts with
creating an overall plan
To
live well in retirement, you can no longer rely on just a company
pension plan or Social Security. Instead, you will have to depend on
how skillfully you plan and invest, and whether you make good use of
tax-advantaged savings plans such as 401(k)s and IRAs.
1) Estimate how much you will need. One rule of thumb is that you'll
need 70 percent of your annual pre-retirement income to live
comfortably. That might be enough if you've paid off your mortgage and
are in excellent health when you kiss the office goodbye. But if you
plan to build your dream house, trot around the globe or get that Ph.D.
in philosophy you've always wanted, you may need 100 percent of your
income or more. Remember, too, that your health care expenses are
likely to go up in retirement, if only because you'll be paying more
for insurance.
2) Figure out how you'll meet those expenses. There are three main
sources of retirement income: Social Security, pensions and annuities,
and your savings. Start by determining your estimated Social Security
benefits. (If you haven't already received a statement in the mail, you
can order one online or
use an online
calculator to make estimates based on expected earnings.) Next, add
in any annual pay outs you expect from an annuity or company pension.
If it's not enough, it's time to think about where that money will come
from. Count on needing at least $15 to $20 in investment savings to
cover each dollar of that shortfall. If your projected retirement
expenses exceed Social Security and pensions by, say, $20,000 a year!
That means you'll need a nest egg of $300,000 to $400,000 to bridge the
gap.
How
Should I Invest For My Retirement?
Move your
portfolio mix toward stocks to keep ahead of inflation
Your
retirement savings are sacred, so you don't want to take crazy
risks. But that doesn't mean you should rely solely on such safe
investments as bank CDs and money-market funds. To build a nest egg
large enough to see you through retirement, which may last 30 years or
more, you'll need the growth that stocks provide.
Over the past 75 years, stocks have posted an average annual return of
just over 11 percent versus just over 5 percent for bonds. Given
stocks' superior returns, some financial advisers recommend that
investors whose retirement is still 20 years or more away put the
lion's share of their portfolio in stocks and stock funds.
A 100 percent stock portfolio can give you some hair-raising moments.
In the 1973-74 bear market, for example, U.S. stocks lost 43 percent of
their value and took three-and-a-half years just to get back to where
they started. And who knows when stocks will get back to the highs
reached in early 2000?
If you don't have the stomach for such a steep downturn, a more prudent
course is to throw some bonds into the mix. Putting 70 percent of your
portfolio into stocks and 30 percent into bonds, for example, will let
you capture most of the long-term growth of stocks while sheltering
your investments somewhat during meltdowns. As you approach retirement
age, the idea is to shift more into bonds. But even in retirement,
which can last 20 or 30 years (or more), it pays to maintain a healthy
dose of stocks (maybe upwards of 50 percent in your seventies, and up
to 30 percent in your eighties).
401(k)
Retirement Asset
Uncle Sam doesn't offer many gifts. But, here is one.
If
someone offered you free money, would you refuse it? Probably not! But
that's just what you're doing if you don't contribute to your 401(k).
The more you contribute, the more free money you get. Here's how it’s
done.
Contributing part of your salary to a 401(k) gives you three compelling
benefits:
-
You get an immediate tax break,
because contributions come out of your paycheck before taxes are
withheld.
-
The possibility of a matching
contribution from your employer. Most commonly 50 cents on the dollar
for the first 6 percent you save.
-
You get tax-deferred growth,
meaning you don't pay taxes each year on capital gains, dividends and
other distributions.
Thanks
to the Tax Relief Reconciliation Act of 2001, there are a few changes
to 401(k)s that will be of greater benefit to you.
For starters, the federal limit on annual contributions is increasing
gradually from $10,500 in 2001 to $15,000 in 2006. The Tax Relief Act
also offers catch-up provisions for workers 50 and older. Starting in
2002, if you're 50 or more, you may contribute an additional $1,000
above your maximum allowable 401(k) contribution, a catch-up amount
that will increase gradually to $5,000 by 2006.
Keep in mind, however, while federal law sets the guidelines for what's
permissible in 401(k) plans, your employer may set tighter
restrictions. Plus, it will take time for the administrators of your
plan to implement the changes.
What's more, there are other federal non-discrimination tests a 401(k)
plan must meet, one of which applies to "highly compensated" employees.
So if you make more than $90,000 a year, you may not be permitted to
contribute as high a percentage of your salary as some of your lower
paid colleagues.
For
all its tax advantages, the 401(k) is not a penalty-free ride. Pull out
money from your account before age 59-1/2, and with few exceptions,
you'll owe income taxes on the amount withdrawn plus an additional 10
percent penalty.
Also, be aware of your plan's vesting schedule, the time you're
required to be at the company before you're allowed to walk away with
100 percent of your employer matches. Of course, any money you
contribute to a 401(k) is yours.
IRA Benefits
Even if you've got a 401(k), an IRA can give your
savings a big boost.
Whether
or not you have a 401(k) or other tax-advantaged savings plan at work,
consider investing in an IRA to augment your retirement savings plan.
As with a 401(k), you don't pay taxes each year on capital gains,
dividends and other distributions from securities held in your IRA.
Beyond that, there are different tax advantages, depending on what type
of IRA you open.
There are two types: traditional and Roth. A traditional IRA offers tax-deferred
growth, meaning you pay taxes on your investment gains only when you
make withdrawals. A Roth, by contrast, offers tax-free growth,
meaning you owe no tax when you make withdrawals.
|
|
A traditional IRA comes in two flavors: deductible and
nondeductible. To see if you qualify for a deductible IRA,
which lets you deduct all or part of your contributions from
your taxable income, use the following guidelines If you have no retirement plan at work and
you're under 70-1/2, you can invest in a deductible IRA and
deduct the entire amount from your taxes. |
-
(A non-working spouse may
also invest up to the federal limit and deduct the full amount if the
couple's combined earned income is at least $4,000.)
-
If you have a 401(k) or other
retirement plan at work, you may qualify for a full or partial
deduction only if your adjusted gross income is below $43,000 if you're
single, or below $63,000 if you're married and filing jointly. (These
income limits will increase gradually to $60,000 for singles by 2006
and $100,000 for couples by 2007.)
-
If you're not covered by a
retirement plan, but your spouse is, you may qualify for a full or
partial deduction if your joint income is $160,000 or less.
If
you're not allowed to contribute to a deductible IRA, a nondeductible
IRA is a valid option. You miss out on the immediate tax deduction, but
at least your savings grow tax-deferred.
You can invest in a Roth IRA if your adjusted gross income (AGI) is
less than $110,000 (for singles) or $160,000 (for married couples).
So which IRA is best for you? The nondeductible is the least
attractive, so open one only if you don't qualify for the other two.
The choice between a deductible and a Roth is more difficult, but
generally you're better off in a Roth if you expect to be in a higher
tax bracket when you retire. Plus, the Roth offers more flexibility:
You aren't required to make mandatory withdrawals from your account
when you turn 70 ½, as you are with other IRAs, making the Roth a great
way to leave money to your heirs. And, if you need the money before
retirement, there are more opportunities for penalty-free withdraws.
Getting The Most Out of My Money In Retirement
These
strategies can help you get more mileage out
of your assets in retirement.
Once
you hit retirement, you get to kick back and enjoy your savings. But
you'll enjoy them a lot more and a lot longer if you manage your
withdrawals smartly. To give yourself the best chance of outliving your
money, financial experts recommend you withdraw no more than 4 percent
to 5 percent of your total nest egg every year.
You also want to minimize your tax bite. Generally speaking, the more
money you leave tax-deferred in a 401(k) or IRA, the more your nest egg
will grow, because a large balance can compound faster without the drag
of taxes.
But
taxes will eventually come due on that money. The key is to manage it
so that you pay the lowest possible tax rates on your withdrawals.
That's why experts suggest in the early years of retirement that you
draw some of your income from your taxable accounts and some of it from
your tax-deferred accounts. To find the right mix for you, consult a
professional tax adviser.
You might stretch your money even farther if you convert your
traditional IRA to a Roth and tap it only after depleting your taxable
accounts.
Remember
if you have a traditional IRA, you must start taking minimum required
distributions when you turn 70-1/2. There are no such withdrawal
requirements for a Roth.
If you need to make any portfolio adjustments in retirement, do so in
your tax-deferred accounts. That way, you won't pay any taxes or, in
many instances, broker fees to move your money around, as you do when
you sell off a taxable investment and buy another.
Your taxable account, in turn, is the best place to harvest tax losses.
A process in which you sell an investment on which you've lost money
and apply that loss against future capital gains, in effect reducing
your tax bill.
If your nest egg isn't quite large enough when you retire, there are
still things you can do to stretch the assets you have accumulated. For
instance, you might:
-
Take a job in retirement. Imagine
taking a part-time job that reduces your withdrawals from an IRA by
$15,000 a year for 10 years. By letting that money grow tax-deferred
longer, after 10 years you would have almost $220,000 that you
otherwise wouldn't have had, assuming you earned an 8 percent annual
return.
-
Get money from your home. If you
are age 62 or older, you can convert your home equity into tax-free
retirement income by taking a reverse mortgage.
-
Move to less expensive area.
Doing so could stretch your retirement income by 15 percent or more.
Living in
Retirement: Make it Last
How to make the most out of your savings, without
running through it all.
As
a retiree, you have one overriding concern: making sure your money
lasts as long as you do. In an era of reduced return expectations and
rock-bottom interest rates, you face the daunting task of figuring out
how to use your portfolio without using it up.
We've got a plan.
Start
by figuring out how much income you need as opposed to how much you'd
like.
-
Basic living, food, taxes,
clothing, shelter, insurance, and it tends to be a pretty small number.
-
Travel and leisure, the fun
stuff, and the third is charitable giving and gifting to heirs. Make
sure tier one is bulletproof.
For
some people, pension and Social Security checks cover basic expenses.
Other people will have so much saved for retirement that they can sock
much of their money into relatively safe fixed-income investments and
live off the monthly interest.
But
to pull in $50,000 a year from a diversified bond portfolio today, when
the 10-year Treasury is yielding less than 5 percent, you'd need more
than $1 million.
"Retired
investors have to consider a mind-set change." There is a big
misconception that one can set up an income-producing portfolio that
will meet one's needs without requiring dips into principal. But our
mainstream clients would have to sacrifice their standard of living to
avoid using principal.
Most
people will need to draw on a combination of sources that includes
Social Security plus any pensions, interest and dividends, and modest
withdrawals from an investment portfolio.
Keeping a Balance
Now comes
the tricky part, how do you divide your portfolio among stocks, bonds
and cash, and how much can you afford to withdraw each year?
The
key issues: How long do you expect to live? Will your portfolio need to
last the lifetime of a younger spouse? Do you want to leave an
inheritance for children or a bequest to charity? What kind of returns
do you expect your portfolio to earn?
Despite
all the variables, your answers will probably fall within a fairly
narrow range.
That's
because you can't count on a diversified portfolio averaging more than
7 or 8 percent a year, and you have to leave some leeway to make up for
any down years you might encounter.
Vanguard's
Brod notes that a conservative investor, one who doesn't want to invest
too much in stocks or risk running out of money, might be more
comfortable withdrawing as little as 2 percent each year.
If
you can't rely on income, then you need stocks to keep your portfolio
growing even as you pull money out. But retired investors can't afford
to absorb big losses; bonds can help cushion the downside. Putting 40
to 60 percent of your money in stocks is usually a good bet for growth
with moderate volatility.
No
matter how careful a strategy you devise, be prepared to alter it as
circumstances change. Sometimes the only course is to tighten your belt
a notch: Skimming 4 percent off a portfolio that lost 4 percent in
2001, as did the typical balanced mutual fund could leave you short on
spending money this year. But if you take out more, you'll have even
less money at work when the next rally rolls around, and if your
portfolio doesn't grow enough, it may not survive.
You
can also tweak your portfolio as times demand. With interest rates
down, you can consider putting 10 to 20 percent of your fixed-income
portfolio into high-yield bonds. Their yield advantage over
high-quality bonds is historically high, and many market watchers are
expecting them to surge when the economy rebounds. And some advisers
recommend a small stake in real estate investment trusts, or REITs,
which offer high yields, for clients who can stand the volatility of
these securities.
Take Taxes Into Account
There's
one more variable to consider: taxes. Conventional wisdom says to start
with tax-free withdrawals from your Roth IRA, then pull from taxable
accounts. But if you plan to leave a legacy, you may want to leave the
Roth untouched. You never have to make withdrawals from a Roth, so it's
a good way to let money for your heirs grow tax-free.
A
commonsense strategy to postpone taxes is to put off taking money from
your IRA or 401(k) until you have to at age 701/2. Good news for those
who must: The IRS has simplified the process for figuring required
minimum distributions.
Better
yet, you may be able to take out less than you have been; see
Publication No. 590 at www.irs.gov
for details.
Remember,
you don't have to spend required distributions. Set aside what you
don't need and reinvest it in a taxable account. You'll boost your odds
of making your portfolio last a lifetime.
Retirement
Copyright © 2000 - 2006 HomeBaseBuck$™ All Rights Reserved
HomeBaseBucks.com, HomeBaseBuck$.com, HomeBaseBucks, and Home Base Bucks
are Trade Marks of Clark County Ent., Inc. 5344 Images Court, Las
Vegas, NV, 89107
|
