Retirement is like a flight destination: Once it's clearly within sight, there are things you need to do to prepare for landing. The final months leading up to your retirement are a critical time to reassess your finances and position yourself for lasting security.
As you look to the years ahead, you have some fundamental decisions to make about your assets. Four of the most important topics are covered in this article. A professional financial or investment advisor can help you make your way through these decisions and discuss any concerns or questions you may have as you transition into post-work life. Let's talk through some of the most important issues you may need to address.
As you gear up for the journey ahead, one of your key objectives should be crafting a strategy to draw from your retirement assets in ways that allow you to live with financial security. This
strategy should take a number of considerations into account:
Harry is a maintenance worker for his local school district. He is retiring next year at age 67, and is looking forward to spending more time with his grandchildren and in the garage where he keeps his woodworking projects.
He estimates that he’ll need $28,000 in essential expenses each year in retirement, including $5,000 for health care coverage and $8,000 for each of the next three years to clear his mortgage. He also wants to budget $12,000 per year for discretionary “fun” in retirement, bringing his total retirement budget to $40,000 per year. Harry will receive a $12,000 annual pension and about $18,000 each year from Social Security. He has saved $80,000 in his 403(b) plan at work.
The good news is that between his pension and Social Security, he can cover all of his essential needs, and even has a surplus of $2,000 that he can use toward his discretionary expenses. However, his 403(b) plan assets will not be enough to meet the full $12,000 that he would like for discretionary expenses. He could withdraw about 5% initially, which gives him an additional $4,000. Added in with the surplus, that would give him $6,000 for discretionary income, which leaves him short by half.
Harry has some options and will need to decide how to handle his shortfall: He can scale back his discretionary spending for the first few years until his mortgage is paid off. He could try turning his woodworking hobby into a paying hobby. Or, he could turn a portion of his 403(b) into an income annuity that may give him a higher withdrawal rate plus a guarantee of not outliving his assets. The remaining portion can be invested for potential growth and to help offset inflation.
Maria is a history professor at a private university who will be retiring after this semester at age 68. She is married to Frank, who retired two years ago. This is a second marriage for both, so they have chosen to keep the majority of their finances separate. They live in New York City and are looking forward to having more time to enjoy all that New York has to offer, and to spend more time traveling now that they will both be fully retired. Maria is planning for a long retirement as her mother is still living at age 95. And, ideally, she would like to start gifting some of her assets to her two adult children and plan for a financial legacy as well.
She estimates that she will need $80,000 each year in retirement: $35,000 for her share of essential expenses and $45,000 for discretionary expenses. Maria has saved more than $1.2 million in her 403(b), which will afford her some flexibility in deciding how to pay for her retirement. She knows that once her required minimum distributions begin at age 70½, she’ll be drawing out somewhere around $45,000 per year. She also has $180,000 in her checking account.
She has several options to consider and key decisions to make:
These are complex decisions with tax consequences. Maria would benefit from working closely with her financial advisor and accountant to figure out the best strategy to maximize her income choices and her financial goals.
Joanne is divorced and is about to retire at age 69 from her job as a hospital administrator. She is entering retirement with $275,000 in a traditional IRA; a 403(b) plan containing $750,000; a savings account with $80,000; and a brokerage account with $100,000. She has estimated her annual expenses in retirement at $70,000 per year: $49,000 for essential expenses and $21,000 for discretionary expenses.
Retiring at age 69, Joanne only has one year to wait until she can maximize both her Social Security payments and her tax-deferred IRA and 403(b) plan assets. Since she has sufficient assets in her brokerage and savings accounts, she could pull the full $70,000 for her annual expenses from those accounts for her first year in retirement.
Then at age 70, she will collect her maximum Social Security payment of approximately $3,000 per month, or $36,000 per year, which will cover a large portion of her essential expenses. She can cover the $13,000 balance by annuitizing enough of her 403(b) assets to generate a guaranteed payment stream for the rest of her life. Calculating how much of her assets to annuitize is complex, and she can expect to annuitize somewhere around $175,000 to $200,000, depending on the factors at the time she converts to a lifetime income annuity. She should discuss the details with her financial advisor.
Her discretionary expenses can be covered from her required minimum distributions on the remaining 403(b) plan assets and her IRA. The RMD amount, around $25,000 in the first year, is enough to cover her lifestyle budget of $21,000 and provide her with a cash cushion for any emergencies or opportunities that could occur.
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