How to Transition into RetirementDocument Transcript
Chris Winn, CFP®
1500 NW Bethany Blvd #280
Beaverton, OR 97006
Retirement Income: The
Transition Into Retirement
July 23, 2009
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3 Are You Ready to
4 Timing Is Everything
5 Do You Plan to Work in
6 How Much Annual
Retirement Income Will
7 Retirement Income:
9 Asset Allocation
10 Making Portfolio
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Are You Ready to Retire?
The question is actually more receiving a regular paycheck. For these individuals,
complicated than it first ap- it's not necessarily the income that the paychecks
pears, because it demands represent, but the emotional reassurance of continu-
consideration on two levels. ing to accumulate funds.
First, there's the emotional
component: Are you ready to Finally, it's often not simply a question of whether
enter a new phase of life? Do you are ready to retire. If you're married, consider
you have a plan for what you whether your spouse is ready for you to retire. Does
would like to accomplish or he or she share your ideas of how you want to
do in retirement? Have you spend your retirement? Many married couples find
thought through both the the first few years of one or both spouse's retirement
good and bad aspects of a period of rough transition. If you haven't discussed
transitioning into retirement? your plans with your spouse, you should do so; think
Second, there's the financial component: Can you through what the repercussions will be--positive and
afford to retire? Will your finances support the retire- negative--on your roles and your relationship.
ment lifestyle that you want? Do you have a retire-
ment income plan in place? Can you afford the retirement you
What does retirement mean to you?
Separate from the issue of whether you're emotion-
When you close your eyes and think about your ally ready to retire is the question of whether you're
retirement, what do you see? Over your career, you financially ready. Simply--can you afford to do every-
may have had a vague concept of retirement as a thing you want in retirement? Of course, the answer
period of reward for a lifetime of hard work, full of to this question is anything but simple. It depends on
possibility and potential. Now that retirement is ap- your goals in retirement (i.e., how much the lifestyle
proaching, though, you need to be much more spe- you want will cost), the amount of income you can
cific about what it is that you want and expect in count on, and your personal savings. It also de-
retirement. pends on how long a retirement you want to plan for
and what your assumptions are regarding future
Do you see yourself pursuing hobbies? Traveling? inflation and earnings.
Have you considered volunteering your time, taking
the opportunity to go back to school, or starting a Are You Financially Ready?
new career or business? It's important that you've No Yes
given it some consideration, and have a plan. If you • Consider delaying
haven't--for example, if you've thought no further retirement
than the fact that retirement simply means that you • Consider more
won't have to go to work anymore--you're not ready aggressive (and
to retire. risky) retirement
Don't underestimate the emotional • Consider working in
Are You Emotionally Ready?
aspect of retirement • Consider alternate
Many people define themselves by their profession. (e.g., downsizing
Affirmation and a sense of worth may have come, in home)
large part, from the success that you've had in your • Reevaluate
career. Giving up that career can be disconcerting retirement
on a number of levels. Consider as well the fact that expectations
your job provides a certain structure to your life. You • Consider delaying • Consider a plan for
may also have work relationships that are important retirement retirement that
to you. Without something concrete to fill the void, • Consider continuing addresses
you may find yourself scrambling to address unmet work at reduced emotional needs
hours/phased (e.g., volunteering
retirement time, new career)
While many see retirement as a new beginning, • Implement • Consider continuing
short-term plan to work at reduced
there are some for whom retirement is seen as the
address financial hours/phased
transition into some "final" life stage, marking the retirement
"beginning of the end." Others, even those who have • Discuss with
the full financial capacity to live the retirement life- • Reevaluate
style they desire, can't bear the thought of not expectations
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Timing Is Everything
When it comes to transitioning though, you're increasing the number of years that
into retirement, timing really is your retirement savings will need to provide for your
everything. The age at which expenses. And a few years can make a tremendous
you retire can have an enor- difference.
mous impact on your overall
retirement income situation, so There are other factors to consider as well:
you'll want to make sure
you've considered your deci- • A longer retirement period means a greater
sion from every angle. In fact, potential for inflation to eat away at your pur-
you may find that deciding chasing power.
when to retire is actually the
product of a series of smaller • You can begin receiving Social Security retire-
decisions and calculations. ment benefits as early as age 62. However,
your benefit may be as much as 20% to 30%
Your retirement: How long should less than if you waited until full retirement age
(65 to 67, depending on the year you were
you plan for? born).
The good news is that, statistically, you're going to • If you're covered by an employer pension plan,
live for a long time. That's also the bad news, check to make sure it won't be negatively af-
though, because that means your retirement income fected by your early retirement. Because the
plan is going to have to be sufficient to provide for greatest accrual of benefits generally occurs
your needs over (potentially) a long period of time. during your final years of employment, it's pos-
sible that early retirement could effectively re-
How long? The average 65-year-old American can duce the benefits you receive.
expect to live for over
19 additional years. According to the U.S. • If you plan to start using your 401(k) or tradi-
(Source: National Vital Census Bureau, the tional IRA savings before you turn 59½ , you
Statistics Reports, segment of the older may have to pay a 10% early distribution pen-
Volume 56, Number population that grew alty tax in addition to any regular income tax
16, June 2008.) Keep most rapidly in the due (with some exceptions, including payments
in mind as well that 1990s was individuals made from a 401(k) plan due to your separation
life expectancy has age 85 and older. In from service in or after the year you turn 55, and
increased at a steady fact, in the year 2000, distributions due to disability).
pace over the years, the census reported
and is expected to over 50,000 • You're not eligible for Medicare until you turn
continue increasing. Americans over age 65. Unless you'll be eligible for retiree health
100. (U.S. Census benefits through your employer (or have cover-
The bottom line is that age through your spouse's plan), or you take
Bureau, “The 65
it's not unreasonable another job that offers health insurance, you'll
Years and Over
to plan for a retire- need to calculate the cost of paying for insur-
ment period that lasts ance or health care out-of-pocket, at least until
Census 2000 Brief)
for 30 years or more. you can receive Medicare coverage.
Thinking of retiring early?
Accumulation Period Distribution Period Accumulation Period Distribution Period
Retiring early can be wonderful if you're ready both
Thinking of postponing retirement?
emotionally and financially. Consider the financial Postponing retirement lets you continue to add to
aspect of an early retirement with great care, your retirement savings. That's especially advanta-
though. An early retirement can dramatically change geous if you're saving in tax-deferred accounts, and
your retirement finances because it affects your in- if you're receiving employer contributions. For exam-
come plan in two major ways. ple, if you retire at age 65 instead of age 55, and
manage to save an additional $20,000 per year in
First, you're giving up what could be prime earning
your 401(k) at an 8% rate of return during that time,
years, a period of time during which you could be
you can add an extra $312,909 to your retirement
adding to your retirement savings. More importantly,
fund. (This is a hypothetical example and is not in-
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July 23, 2009
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tended to reflect the actual performance of any spe- Key Decision Points
Age Don't forget...
Even if you're no longer adding to your retirement
savings, delaying retirement postpones the date that Eligible to tap Federal income
you'll need to start withdrawing from your savings. tax-deferred 59½* taxes will be due
That could significantly enhance your savings' po- savings without on pretax
tential to last throughout your lifetime. early withdrawal contributions and
And, of course, there are other factors that you
should consider: Taking benefits
Eligible for early before full
• Postponing full retirement gives you additional Social Security 62 retirement age
transition time if you need it. If you're consider- benefits reduces each
ing a new career or volunteer opportunities in monthly payment
retirement, you could lay the groundwork by
taking classes or trying out your new role part- Contact Medicare
time. 65 3 months before
your 65th birthday
• Postponing retirement may allow you to delay
taking Social Security retirement benefits, po- 65 to 67, After full
tentially increasing your benefit. Full retirement depending retirement age,
age for Social on when earned income no
• If you postpone retirement beyond age 70½, Security you were longer affects
born Social Security
you'll need to begin taking required minimum
distributions from any traditional IRAs and em- *Age 55 for distributions from employer plans upon
ployer-sponsored retirement plans (other than termination of employment; other exceptions apply
your current employer's retirement plan), even if
you do not need the funds.
Do You Plan to Work in Retirement?
An increasing number of affordable health care (more and more
employees nearing re- employers are offering this important benefit to
tirement plan to work for part-time employees)?
at least some period of
time during their retire- • Will working in retirement allow you to delay
ment years. The obvious receiving Social Security retirement benefits? If
advantage of working so, your annual benefit--when you begin receiv-
during retirement is that ing benefits--may be higher.
you'll be earning money
and relying less on your • If you'll be receiving Phased retirement
retirement savings-- Social Security
leaving more to poten- benefits while work-
have begun to offer
tially grow for the future ing, how will your
and helping your savings work income affect
to last longer. the amount of Social
programs allow you
to receive all or part
But there are also non-economic reasons for work- that you receive?
of your pension
ing during retirement. Many retirees work for per- Additional earnings
benefit once you've
sonal fulfillment--to stay mentally and physically ac- can increase bene-
tive, to enjoy the social benefits of working, or to try fits in future years.
their hand at something new. The reasons are as However, for years
while you continue
varied as the retirees themselves. before you reach full
to work on a part-
retirement age, $1 in
If you're thinking of working during a portion of your time basis for the
benefits will gener-
retirement, you'll want to consider carefully how it same employer.
ally be withheld for
might affect your overall retirement income plan. For every $2 you earn
example: over the annual earnings limit ($14,160 in
2009). Special rules apply in the year that you
• If you continue to work, will you have access to reach full retirement age.
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How Much Annual Retirement Income Will You Need?
How much annual income cleaning, retirement savings contributions), in
will you need in retirement? addition to payroll taxes.
If you aren't able to answer
this question, you're not • Health care--Health-care costs can have a sig-
ready to make a decision nificant impact on your retirement finances (this
about retiring. And, if it's can be particularly true in the early years if you
been more than a year retire before you're eligible for Medicare).
since you've thought about
it, it's time to revisit your • Long-term care costs--The potential costs in-
calculations. Your whole volved in an extended nursing home stay can
retirement income plan starts with your target annual be catastrophic.
income, and there are a significant number of factors
to consider; start out with a poor estimate of your • Entertainment--It's not uncommon to see an
needs, and your plan is off-track before you've even increase in general entertainment expenses like
begun. dining out.
• Children/parents--Are you responsible finan-
General guidelines cially for family members? Could that change in
It's common to discuss desired annual retirement future years?
income as a percentage of your current income.
Depending on who you're talking to, that percentage • Gifting--Do you plan on making gifts to family
could be anywhere from 60% to 90%, or even more, members or a favorite charity? Do you want to
of your current income. The appeal of this approach ensure that funds are left to your heirs at your
lies in its simplicity, and the fact that there's a fairly death?
common-sense analysis underlying it: Your current
income sustains your present lifestyle, so taking that Accounting for inflation
income and reducing it by a specific percentage to
reflect the fact that there will be certain expenses Inflation is the risk that the purchasing power of a
you'll no longer be liable for (e.g., payroll taxes) will, dollar will decline over time, due to the rising cost of
theoretically, allow you to sustain your current life- goods and services. If inflation runs at its historical
style. average of about 3%, a given sum of money will lose
half its purchasing power in 23 years.
The problem with this approach is that it doesn't
account for your specific situation. If you intend to Assuming a consistent annual inflation rate of 3%,
travel extensively in retirement, for example, you and excluding taxes and investment returns in gen-
might easily need 100% (or more) of your current eral, if $50,000 satisfies your retirement income
income to get by. It's fine to use a percentage of needs in the first year of retirement, you'll need
your current income as a benchmark, but it's worth $51,500 of income the next year to meet the same
going through all of your current expenses in detail, income needs. In 10 years, you'll need about
and really thinking about how those expenses will $67,196. In other words, all other things being equal,
change over time as you transition into retirement. inflation means that you'll need more income each
year just to keep pace.
Factors to consider
How much will you need to equal
It all starts with your plans for retirement--the life-
style that you envision. Do you expect to travel ex- $50,000 in today's dollars given 3%
tensively? Take up or rediscover a hobby? Do you inflation?
plan to take classes? Whatever your plan, try to as-
sign a corresponding dollar cost. Other specific con- $90,306
• Housing costs--If your mortgage isn't already $51,500
paid off, will it be paid soon? Do you plan to
relocate to a less (or more) expensive area?
• Work-related expenses--You're likely to elimi- After 1 After 10 After 20
nate some costs associated with your current Year Years Years
job (for example, commuting, clothing, dry
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Retirement Income: The "Three-Legged Stool"
Traditionally, retirement Social Security Full Retirement Age
income has been described
as a "three-legged stool" Birth Year Full Retirement Age
comprised of Social Secu-
rity, traditional employer 1937 and earlier 65 years
pension income, and indi-
1938 65 years, 2 months
vidual savings and invest-
ments. With fewer and 1939 65 years, 4 months
fewer individuals covered
by traditional employer pen- 1940 65 years, 6 months
sions, though, the analogy 1941 65 years, 8 months
doesn't really hold up well today.
1942 65 years, 10 months
Social Security retirement income 1943-1954 66 years
Today, 96% of U.S. workers are covered by Social 1955 66 years, 2 months
Security (Source: SSA Publication No. 05-10035, 1956 66 years, 4 months
January 2008). The amount of Social Security retire-
ment benefit that you're entitled to is based on the 1957 66 years, 6 months
number of years you've been working and the 1958 66 years, 8 months
amount you've earned. Your benefit is calculated
using a formula that takes into account your 35 high- 1959 66 years, 10 months
est earning years. 1960 and later 67 years
The earliest that you Source: Social Security Administration
can begin receiving Each year, you should
Social Security re- receive a Social than it would be if you waited until normal retirement
tirement benefits is Security Statement age, you'll end up receiving more benefit checks.
age 62. If you decide from the Social For example, if your normal retirement age is 66, if
to start collecting Security Administration you opt to receive Social Security retirement benefits
benefits before your that summarizes your at age 62 rather than waiting until 66, you'll receive
full retirement age earnings history, and 48 additional monthly benefit payments.
(which ranges from estimates the benefits
65 to 67, depending you may receive based The good news is that, for many people, Social Se-
on the year you were on those earnings. curity will provide a monthly benefit each and every
born), there's a ma- month of retirement, and the benefit will be periodi-
jor drawback to con- cally adjusted for inflation. The bad news is that, for
sider: Your monthly many people, Social Security alone isn't going to
retirement benefit will provide enough income in retirement. For example,
be permanently re- According to the according to the quick calculator on Social Security's
duced. In fact, if you Social Security website, an individual born in 1944 who currently
begin collecting re- Administration (SSA), earns $100,000 a year can expect to receive ap-
tirement benefits at approximately 73% of proximately $23,000 annually at full retirement age,
age 62, each Americans elect to which in this case would be age 66. Of course, your
monthly benefit receive their Social actual benefits will depend on your work history,
check will be 20% to Security benefits earnings, and retirement age. The point is that So-
30% less than it early. (Source: SSA cial Security will probably make up only a portion of
would be at full re- Annual Statistical your total retirement income needs.
tirement age. The Supplement, April
exact amount of the 2008) Traditional employer pensions
reduction will depend
on the year you were If you're entitled to receive a traditional pension,
born. (Conversely, you can get a higher payout by you're lucky; fewer Americans are covered by them
delaying retirement past your full retirement age--the every year. If you haven't already selected a payout
government increases your payout every month that option, you'll want to carefully consider your choices.
you delay retirement, up to age 70.) And, whether or not you've already chosen a payout
option, you'll want to make sure you know exactly
If you begin receiving retirement benefits at age 62, how much income your pension will provide, and
however, even though your monthly benefit is less whether or not it will adjust for inflation.
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In a traditional pension plan (also known as a de- their needs. And traditional pensions are becoming
fined benefit plan), your retirement benefit is gener- more and more rare. That leaves the last leg of the
ally an annuity, payable over your lifetime, beginning three-legged stool, or per-
at the plan's normal retirement age (typically age sonal savings, to carry most
65). Many plans allow you to retire early (for exam- of the burden when it comes
ple, at age 55 or earlier). However, if you choose to your retirement income
early retirement, your plan.
pension benefit is Your pension plan
actuarially reduced to must provide you with Your personal savings are
account for the fact an explanation of funds that you've accumu-
that payments are your options prior to lated in tax-advantaged re-
beginning earlier, and retirement, including tirement accounts like 401(k)
are payable for a an explanation of plans, 403(b) plans, 457(b)
longer period of time. your right to waive plans, and IRAs, as well as any investments you
the QJSA, and the hold outside of tax-advantaged accounts.
If you're married, the relative values of any
plan generally must optional forms of Until now, when it came to personal savings, your
pay your benefit as a benefit available to focus was probably on accumulation--building as
qualified joint and you. large a nest egg as possible. As you transition into
survivor annuity retirement, however, that focus changes. Rather
(QJSA). A QJSA provides a monthly payment for as than accumulation, you're going to need to look at
long as either you or your spouse is alive. The pay- your personal savings in terms of distribution and
ments under a QJSA are generally smaller than un- income potential. The bottom line: You want to maxi-
der a single-life annuity because they continue until mize the ability of your personal savings to provide
both you and your spouse have died. annual income during your retirement years, closing
the gap between your projected annual income need
Your spouse's QJSA survivor benefit is typically and the funds you'll be receiving from Social Secu-
50% of the amount you receive during your joint rity and from any pension payout.
lives. However, depending on the terms of your em-
ployer's plan, you may be able to elect a spousal Some of the factors you'll need to consider, in the
survivor benefit of up to 100% of the amount you context of your overall plan, include:
receive during your joint lives. Generally, the greater
the survivor benefit you choose, the smaller the • Your general asset allocation--The challenge is
amount you will receive during your joint lives. If to provide, with reasonable certainty, for the
your spouse consents in writing, you can decline the annual income you will need, while balancing
QJSA and elect a single-life annuity or another op- that need with other considerations, such as
tion offered by the plan. liquidity, how long you need your funds to last,
your risk tolerance, and anticipated rates of
The best option for you depends on your individual return.
situation, including your (and your spouse's) age, • Specific investments and products--Should you
health, and other financial resources. If you're at all consider an annuity? Municipal bonds? What
unsure about your pension, including which options about a mutual fund that's managed to provide
are available to you, talk to your employer or to a predictable retirement income (sometimes
financial professional. called a "distribution" mutual fund)?
• Your withdrawal rate--How much can you afford
Pension maximization to withdraw each year without exhausting your
One option to consider when deciding portfolio? You'll need to take into account your
between a single-life annuity and the asset allocation, projected returns, your distribu-
QJSA is "pension maximization." Under tion period, and whether you expect to use both
this strategy, you choose the single-life principal and income, or income alone. You'll
annuity, with its larger benefit, and then also need to consider how much fluctuation in
use the additional income to purchase income you can tolerate from month to month,
life insurance with your spouse as the and year to year.
beneficiary, thereby providing for your • The order in which you tap various accounts--
spouse's financial future. Tax considerations can affect which accounts
you should use first, and which you should defer
Personal savings using until later.
• Required minimum distributions (RMDs)--You'll
Most people are not going to be able to rely on So- want to consider up front how you'll deal with
cial Security retirement benefits to provide for all of required withdrawals from tax-advantaged ac-
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counts like 401(k)s and traditional IRAs, or manent life insurance policy that has cash value
whether they'll be a factor at all. After age 70½, can sometimes be a potential source of retire-
if you withdraw less than your RMD, you'll pay a ment income. (Policy loans and withdrawals can
penalty tax equal to 50% of the amount you reduce the cash value, reduce or eliminate the
failed to withdraw. (Note: The Worker, Retiree death benefit, and can have negative tax conse-
and Employer Recovery Act of 2008 waives quences.)
required minimum distributions for the 2009
calendar year.) What if you still don't have enough?
If there's no possibility that you're going to be able to
Other sources of retirement income afford the retirement you want, your options are
If you've determined that you're not going to have
sufficient annual income in retirement, consider pos- 1. Postpone retirement--You'll be able to continue
sible additional sources of income, including: to add to your retirement savings. More impor-
• Working in retirement--Part-time work, regular tantly, delaying retirement postpones the date
consulting, or a full second career could all pro- that you'll need to start withdrawing from your
vide you with valuable income. personal savings. Depending on your individual
• Your home--If you have built up substantial circumstances, this can make an enormous
home equity, you may be able to tap it as a difference in your overall retirement income
source of retirement income. You could sell plan.
your home, then downsize or buy in a lower- 2. Reevaluate retirement expectations--You might
cost region, investing that freed-up cash to pro- consider ratcheting down your goals and expec-
duce income or to be used as needed. Another tations in retirement to a level that better aligns
possibility is borrowing against the value of your with your financial means. That doesn't neces-
home (a course that should be explored with sarily mean a dramatic lifestyle change--even
caution). small adjustments can make a difference.
• Permanent life insurance--Although not the pri-
mary function of life insurance, an existing per-
Your asset allocation inopportune time, jeopardizing future income and
strategy in retirement undercutting your long-term retirement income plan.
will probably be differ- Without proper planning, a market loss that occurs in
ent than the one you the early years of your retirement could be devastat-
used when saving for ing to your overall plan. Asset allocation alone does
retirement. During your not guarantee a profit or ensure against a loss, but it
accumulation years, can help you manage the level and types of risk you
your asset allocation take with your investments based on your specific
decisions may have needs.
been focused primarily on long-term growth. But as
you transition into retirement, your priorities for and An effective asset allocation plan:
demands on your portfolio are likely to be different.
For example, when you were saving, as long as your • Provides ongoing income needed to pay
overall portfolio was earning an acceptable average expenses
annual return, you may have been happy. However, • Minimizes volatility to help provide both reliable
now that you're planning to rely on your savings to current income and the ability to provide income
produce a regular income, the consistency of year- in the future
to-year returns and your portfolio's volatility may
• Maximizes the likelihood that your portfolio will
assume much greater importance.
last as long as you need it to
The goal of asset allocation • Keeps pace with inflation in order to maintain
purchasing power over time
Balancing the need for both immediate income and
long-term returns can be a challenge. Invest too Look beyond preconceived ideas
conservatively, and your portfolio may not be able to
grow enough to maintain your standard of living. The classic image of a retirement income portfolio is
Invest too aggressively, and you could find yourself one that's invested almost entirely in bonds, with the
having to withdraw money or sell securities at an bond interest providing required annual income.
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However, retirees who put all their investments into
bonds often find that doing so doesn't adequately Accounting for interest rate risk
account for the impact of inflation over time. Con- Some retirees are surprised to learn that even
sider this: If you're earning 4% on your portfolio, but though a bond's interest rate may be fixed,
inflation is running between 3% and 4% (its historical bond prices can go up and down (though
average), your real return is only 1% at best--and typically not as much as those of stocks).
that's before subtracting any account fees, taxes, or When interest rates rise, bond prices typically
other expenses. fall. That may not matter if you hold a bond to
maturity, but if you must sell a bond before it
That means that you may not want to matures, you could get less than you paid for
turn your back on growth-oriented it. Also, if you hold individual bonds or
investments. Though past perform- certificates of deposit, and interest rates fall
ance is no guarantee of future results, before that investment matures, you may not
stocks historically have had better be able to get the same interest rate if you try
long-term returns than bonds or cash. to reinvest that money. That could, in turn,
Keeping a portion of your portfolio
affect your income.
invested for growth (generally the role
of stocks in a portfolio) gives you the potential for
higher returns that can help you at least keep pace There's no one right answer
with inflation. The tradeoff: Equities also generally
involve more volatility and risk of loss than income- Your financial situation is unique, which means you
oriented investments. But effective diversification need an asset allocation strategy that's tailored to
among various types of investments can help you you. That strategy may be a one-time allocation that
balance lower-yielding, relatively safe choices that gets revisited and rebalanced periodically, or it could
can provide predictable income or preserve capital be an asset allocation that shifts over time to corre-
with those that may be volatile but that offer potential spond with your stage of retirement. The important
for higher returns. thing is that the strategy you adopt is one that you're
comfortable with and understand.
Making Portfolio Withdrawals
When planning for retirement income, you'll need to including the timeframe that you want to plan for. For
determine your portfolio withdrawal rate, decide many, though, there's a basic assumption that an
which retirement accounts to tap appropriate withdrawal rate falls in the 4% to 5%
first, and consider the impact of range. In other words, you're withdrawing just a
required minimum distributions. small percentage of your investment portfolio each
year. To understand why withdrawal rates generally
Withdrawal rates aren't higher, it's essential
to think about how inflation The higher your
Your retirement lifestyle will de- can affect your retirement withdrawal rate,
pend not only on your asset alloca- income. the more you'll
tion and investment choices, but have to consider
also on how quickly you draw down your retirement Consider the following whether it is
portfolio. The annual percentage that you take out of example: Ignoring taxes sustainable over
your portfolio, whether from returns or the principal for the sake of simplicity, if the long term.
itself, is known as your withdrawal rate. a $1 million portfolio is
invested in a money mar-
Take out too much too soon, and you might run out ket account yielding 5%, it provides $50,000 of an-
of money in your later years. Take out too little, and nual income. But if annual inflation pushes prices up
you might not enjoy your retirement years as much by 3%, more income--$51,500--would be needed the
as you could. Your withdrawal rate is especially im- following year to preserve purchasing power. Since
portant in the early years of your retirement; how the account provides only $50,000 income, an addi-
your portfolio is structured then and how much you tional $1,500 must be withdrawn from the principal
take out can have a significant impact on how long to meet expenses. That principal reduction, in turn,
your savings will last. reduces the portfolio's ability to produce income the
following year. As this process continues, principal
What's the right number? It depends on your overall reductions accelerate, ultimately resulting in a zero
asset allocation, projected inflation rate and market portfolio balance after 25 to 27 years, depending on
performance, as well as countless other factors, the timing of the withdrawals.
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When setting an initial withdrawal rate, it's important The bottom line is that this decision is also a compli-
to take a portfolio's potential ups and downs into cated one, and needs to be looked at closely.
account--and the need for a relatively predictable
income stream in retirement isn't the only reason. If
it becomes necessary during market downturns to
sell some securities in order to continue to meet a
fixed withdrawal rate, selling at an inopportune time
could affect a portfolio's ability to generate future
income. Also, making your portfolio either more ag-
gressive or more conservative will affect its lifespan.
A more aggressive portfolio may produce higher
returns, but might also be subject to a higher degree Required minimum distributions
of loss. A more conservative portfolio might produce
steadier returns at a lower rate, but could lose pur-
chasing power to inflation. In practice, your choice of which assets to draw on
first may, to some extent, be directed by tax rules.
Tapping tax-advantaged You can't keep your money in tax-deferred retire-
accounts--first or last? ment accounts forever. The law requires you to start
taking distributions--called "required minimum distri-
You may have assets in butions" or RMDs--from traditional IRAs by April 1 of
accounts that are tax de- the year following the year you turn age 70½,
ferred (e.g., traditional whether you need the money or not. For employer
IRAs) and tax free (e.g., plans, RMDs must begin by April 1 of the year fol-
Roth IRAs), as well as lowing the year you turn 70½, or, if later, the year
taxable accounts. Given a you retire. Roth IRAs aren't subject to the lifetime
choice, which type of ac- RMD rules. (Note: The Worker, Retiree and Em-
count should you with- ployer Recovery Act of 2008 waives required mini-
draw from first? mum distributions for the 2009 calendar year.)
If you don't care about If you have more than one IRA, a required distribu-
leaving an estate to bene- tion amount is calculated separately for each IRA.
ficiaries, consider with- These amounts are then added together to deter-
drawing money from tax- mine your total RMD for the year. You can withdraw
able accounts first, then your RMD from any
tax-deferred accounts, and lastly, any tax-free ac- one or more of
counts. The idea is that, by using your tax-favored your IRAs. (Your RMDs are calculated
accounts last, and avoiding taxes as long as possi- traditional IRA by dividing your
ble, you'll keep more of your retirement dollars work- trustee or custo- traditional IRA or
ing for you on a tax-deferred basis. dian must tell you retirement plan
how much you're account balance by a
If you're concerned about leaving assets to benefici- required to take life expectancy factor
aries, however, the analysis is a little more compli- out each year, or specified in IRS tables.
cated. You'll need to coordinate your retirement offer to calculate it Your account balance
planning with your estate plan. For example, if you for you.) For em- is usually calculated
have appreciated or rapidly appreciating assets, it ployer retirement as of December 31 of
may make sense for you to withdraw those assets plans, your plan the year preceding the
from your tax-deferred and tax-free accounts first. will calculate the calendar year for
The reason? These accounts will not receive a step- RMD, and distrib- which the distribution
up in basis at your death, as many of your other ute it to you. (If is required to be made.
assets will. you participate in
more than one employer plan, your RMD will be
But this may not always be the best strategy. For determined separately for each plan.)
example, if you intend to leave your entire estate to
your spouse, it may make sense to withdraw from It's very important to take RMDs into account when
taxable accounts first. This is because your spouse contemplating how you'll withdraw money from your
is given preferential tax treatment when it comes to savings. Why? If you withdraw less than your RMD,
your retirement plan. Your surviving spouse can roll you will pay a penalty tax equal to 50% of the
over retirement plan funds to his or her own IRA or amount you failed to withdraw. The good news: You
retirement plan, or, in some cases, may continue the can always withdraw more than your RMD amount.
plan as his or her own. The funds in the plan con-
tinue to grow tax deferred, and distributions need not
begin until after your spouse reaches age 70½.
See disclaimer on final page
July 23, 2009
Ameriprise Financial Page 12 of 14
A well-thought-out asset allo- also can buy bond mutual funds or exchange-traded
cation in retirement is essen- funds (ETFs). A bond fund has no specific maturity
tial. But consideration must date and therefore behaves differently from an indi-
also be given to the specific vidual bond, though like an individual bond, you
investments that you choose. should expect the market price of a bond fund share
While it's impossible to dis- to move in the opposite direction from interest rates.
cuss every option available,
it's worth mentioning invest- Dividend-paying stocks
ment choices that might have
a place in the income- Dividend-paying stocks, as well as mutual funds and
producing portion of your ETFs that invest in them, also can provide income.
overall investment strategy. Because dividends on common stock are subject to
the company's performance and a decision by its
Annuities board of directors each quarter, they may not be as
predictable as income from a bond. Dividends on
An annuity is a contract between you and an annuity preferred stock are different; the rate is fixed and
issuer (an insurance company); in the most general they're paid before any dividend is available for com-
terms, you pay money (a premium or premiums) in mon stockholders.
exchange for the issuer's promise to make pay-
ments to you for a fixed period of time or for the rest Other options worth noting
of your life. Annuities
The bottom line is
are able to offer some- • Certificates of deposit (CDs)--CDs offer a fixed
thing unique--a guaran- that annuities may
interest rate for a specific time period, and usu-
teed income stream for be seen as a full
ally pay higher interest than a regular savings
the rest of your life or or partial solution,
account. Typically, you can have interest paid at
for the combined lives since they can offer
regularly scheduled intervals. A penalty is gen-
of you and your spouse stable, predictable
erally assessed if you cash them in early.
(although that guaran- income payments,
but they're not right • Treasury Inflation-Protected Securities
tee is subject to the (TIPS)--These government securities pay a
claims-paying ability of for everyone.
slightly lower fixed interest rate than regular
the issuer). In return for Treasuries. However, your principal is automati-
this guaranteed income stream, you generally give cally adjusted twice a year to match increases
up control of your funds, so annuities are not as liq- in the Consumer Price Index (CPI). Those ad-
uid as other investment options; you get a fixed in- justed amounts are used to calculate your inter-
come, but you may not have the ability to withdraw est payments.
extra cash if you need it. And, annuities often do not
provide as great a potential return as other invest- • Distribution funds--Some mutual funds are de-
ment options--especially when fees and expenses signed to provide an income stream from year
are factored in. to year. Each fund's annual payment (either a
percentage of assets or a specific dollar
amount) is divided into equal payments, typi-
Bonds Before investing in
cally made monthly or quarterly. Some funds
a mutual fund,
A bond portfolio can carefully consider are designed to last over a specific time period
help you address in- the investment and plan to distribute all your assets by the end
vestment goals in objectives, risks, of that time; others focus on capital preserva-
multiple ways. Buying charges, and tion, make payments only from earnings, and
individual bonds expenses of the have no end date. You may withdraw money at
(which are essentially fund. This any time from a distribution fund; however, that
IOUs) at their face information is may reduce future returns. Also, payments may
values and holding vary, and there is no guarantee a fund will
available in the
them to maturity can achieve the desired return.
provide a predictable can be obtained These are just a few of the options worth
income stream and from the fund. considering--there are many more. You
the assurance that Read it carefully should not invest in any of these options
unless a bond issuer before investing. without a full understanding of the
defaults, you'll receive advantages and disadvantages the
the principal when the bond matures. (Bear in mind option offers, as well as an understanding
that if a bond is callable, it may be redeemed early,
of how any earnings are taxed.
and you would have to replace that income.) You
See disclaimer on final page
July 23, 2009
Ameriprise Financial Page 13 of 14
At any age, health care is a prior- approved by Medicare.
ity. When you retire, however, you
will probably focus more on health Unfortunately, Medicare won't cover all of your
care than ever before. Staying health-care expenses. For some types of care, you'll
healthy is your goal, and this can have to satisfy a deductible and make co-payments.
mean more visits to the doctor for That's why many retirees purchase a Medigap
preventive tests and routine policy.
checkups. There's also a chance
that your health will decline as you Medigap
grow older, increasing your need
for costly prescription drugs or medical treatments. Unless you can afford to pay for the things that
That's why having health insurance can be ex- Medicare doesn't cover, including the annual co-
tremely important. payments and deductibles that apply to certain types
of care, you may want to buy some type of Medigap
If you are 65 or older when you retire, you're most policy when you sign up for Medicare Part B. There
likely eligible for certain health benefits from Medi- are 12 standard Medigap policies available. Each of
care. But if you retire before age 65, you'll need these policies offers certain basic core benefits, and
some way to pay for your health care until Medicare all but the most basic policy offer various combina-
kicks in. Generous employers may offer extensive tions of additional benefits designed to cover what
health insurance coverage to their retiring employ- Medicare does not. Although not all Medigap plans
ees, but this is the exception rather than the rule. If are available in every state, you should be able to
your employer doesn't extend health benefits to you, find a plan that best meets your needs and your
you might need to consider other options, such as budget.
buying a private health insurance policy or extending
your employer-sponsored coverage through When you first enroll in Medicare Part B at age 65 or
COBRA, if that's a possibility. older, you have a six-month Medigap open enroll-
ment period. During that time, you have a right to
Medicare buy the Medigap policy of your choice from a private
insurance company, regardless of any health prob-
Most Americans automatically become entitled to lems you may have.
Medicare when they turn 65. In fact, if you're already
receiving Social Security benefits, you won't even Long-term care and Medicaid
have to apply--you'll be automatically enrolled in
Medicare. However, you will have to decide whether The possibility of a prolonged stay in a nursing home
you need only Part A coverage (which is premium- weighs heavily on the minds of many older Ameri-
free for most retirees) or if you also want to pur- cans and their families. That's hardly surprising,
chase Part B coverage. Part A, commonly referred especially considering the high cost of long-term
to as the hospital insurance portion of Medicare, can care. Many people look into purchasing long-term
help pay for your home health care, hospice care, care insurance (LTCI). A good LTCI policy can cover
and inpatient hospital care. Part B helps cover other the cost of care in a nursing home, an assisted-living
medical care such as physician care, laboratory facility, or even your own home. But if you're inter-
tests, and physical therapy. You may also choose to ested, don't wait too long to buy it--you'll generally
enroll in a managed need to be in good health. In addition, the older you
care plan or private Medicare won't pay are, the higher the premium you'll pay.
fee-for-service plan for long-term care if
under Medicare Part Many people assume that Medicaid will pay for long-
you ever need it.
C (Medicare Advan- term care costs. You may be able to rely on Medi-
You'll need to pay
tage) if you want to caid to pay for long-term care, but your assets and/
for that out-of-
pay fewer out-of- or income must be low enough to allow you to qual-
pocket or rely on
pocket health-care ify. Additionally, Medicaid eligibility rules are numer-
benefits from long-
costs. If you don't ous and complicated, and vary from state to state.
term care insurance
already have ade- Talk to an attorney or financial professional who has
or, if your assets
quate prescription experience with Medicaid before you make any as-
and/or income are
drug coverage, you sumptions about the role Medicaid might play in your
low enough to allow
should also consider overall plan.
you to qualify,
joining a Medicare Medicaid.
prescription drug plan
offered in your area
by a private company or insurer that has been
See disclaimer on final page
July 23, 2009
Page 14 of 14
Ameriprise Financial The information contained in this material is being provided for general education
Chris Winn, CFP® purposes and with the understanding that it is not intended to be used or interpreted
1500 NW Bethany Blvd #280 as specific legal, tax or investment advice. It does not address or account for your
Beaverton, OR 97006 individual investor circumstances. Investment decisions should always be made
based on your specific financial needs and objectives, goals, time horizon and risk
The information contained in this communication, including attachments, may be
provided to support the marketing of a particular product or service. You cannot rely
on this to avoid tax penalties that may be imposed under the Internal Revenue
Code. Consult your tax advisor or attorney regarding tax issues specific to your
Neither Ameriprise Financial Services, Inc. nor any of its employees or
representatives are authorized to give legal or tax advice. You are encouraged to
seek the guidance of your own personal legal or tax counsel. Ameriprise Financial
Services, Inc. Member FINRA and SIPC.
The information in this document is provided by a third party and has been obtained
from sources believed to be reliable, but accuracy and completeness cannot be
guaranteed by Ameriprise Financial Services, Inc. While the publisher has been
diligent in attempting to provide accurate information, the accuracy of the information
cannot be guaranteed. Laws and regulations change frequently, and are subject to
differing legal interpretations. Accordingly, neither the publisher nor any of its
licensees or their distributees shall be liable for any loss or damage caused, or
alleged to have been caused, by the use or reliance upon this service.
Prepared by Forefield Inc, Copyright 2009