Income strategies for retirement - East Valley Tribune: Ahwatukee Foothills

Income strategies for retirement

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Posted: Sunday, June 5, 2011 4:00 pm | Updated: 3:38 pm, Sat Dec 22, 2012.

Will I have enough money in retirement?

It's a question more and more Americans are asking. Baby boomers in particular wonder if they'll be able to live comfortably and securely when they leave the workaday world. The good news is that you may be able to retire with confidence and enough assets - if you get organized. That means thinking about what you want retirement to be, reviewing your current investments and benefits, and taking maximum advantage of some investment vehicles designed to provide retirement income. As with so many things, the key is to set clear goals and then pursue them.

"People who are getting ready for retirement are more financially responsible than their counterparts who are not planning for retirement," said David Karr, a CPA with the accounting firm of David E. Karr and Associates, LLC, in Rockville, Md. "People who spend less than they make and take maximum advantage of the opportunities presented them to save for retirement, these people understand that life is not all about today. If you want a nice retirement life, you need to start planning as early as possible."

Setting retirement goals is not just about dollars and sense. It's also about drawing on your values and hopes to create a satisfying life. For some, that may mean continuing to work past age 65, or even starting a new career. Others, of course, may be ready to stop laboring and start relaxing, volunteering, traveling or pursuing a pastime.

Because each individual's idea of the perfect retirement is different, everybody will have different financial needs. Try to determine what yours will be based on your vision of being retired. Don't accept the conventional wisdom that says all of us will require 60 to 80 percent of our income when we stop working. Instead, try to estimate a budget for your specific vision of retirement.

Start by noting what you spend on the basics - food, shelter, clothing, health care and transportation. Include expenses for raising children and the mortgage, if it still needs to be paid off. Also, if you keep working, account for any income you anticipate. Add costs for travel, hobbies, entertaining, donations and a second home, if that's something you've worked toward attaining. Think about what might happen to your taxes and apply that information accordingly. While admittedly imprecise, this estimate should be a fair starting place for creating a retirement budget.

As you look ahead, be sure to consider that, realistically, you may be retired for a long time, and your finances need to reflect that fact.

"If you retire at 65, you have a life expectancy of another 20 to 25 years. That's a long, long time not to have a regular check coming in," Karr said.

Once you have a sense of your financial needs, look at the benefits you're confident you'll receive. Make sure you know what you'll get from your employer. This typically will take only a quick visit to the human resources department.

"Make sure you talk to well-informed people. Make sure they know what they're talking about. Get all the facts. Sometimes there are gross misunderstandings about what you'll get. You want to focus too on when you get benefits," Karr said.

Also, review your savings and investments. Then check on your Social Security benefits. Once a year, Social Security sends a statement of these. If you don't have one, then use the benefit calculators at the Social Security website, www.ssa.gov.

When you know your goals and estimated expenses and income, you can create a written retirement plan that covers investments held in retirement and non retirement accounts. As you do, it's a good idea to look at several sources of income that you can use to save and invest.

Begin by considering using an Individual Retirement Account. Two types particularly deserve attention - traditional IRAs and Roth IRAs. Traditional IRAs tend to work best for people who believe they'll be in a lower tax bracket during retirement and meet the criteria for making tax-deductible contributions. Earnings and contributions are taxable as ordinary income when withdrawn, and withdrawals prior to age 59 1/2 may trigger a federal 10 percent penalty. Payments from the account must begin when the investor reaches age 70 1/2.

The Roth IRA generally appeals to people who want tax-deferred earnings, are OK with the idea of making after-tax contributions now in exchange for tax-free distributions in retirement and who expect to be in the same or a higher tax bracket when they retire. Holders of Roth IRAs often use them because they also may need access to their savings. The Roth IRA requires no minimum distribution during the investor's lifetime. With both IRAs, investors make periodic contributions and direct how the money will be invested.

Besides IRAs, annuities also may have a place in your portfolio. An annuity is a contract between you and an insurance company in which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date.

Annuities are designed to be long-term investments used for retirement. They have contract limitations, fees and charges that include, but are not limited to, mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. There are limitations on the amount of funds that may be withdrawn without a charge, and withdrawals reduce annuity contract benefits and values.

Additionally, withdrawals of earnings are subject to ordinary income tax, and a federal 10 percent penalty may apply to withdrawals taken prior to age 59 1/2.

Annuities have two basic forms - fixed and variable. Fixed annuities appeal to conservative investors because they deliver a fixed payment at a regular interval. On the other hand, variable annuities generally offer a range of investment options, and the value of your investment will vary depending on the performance of the investment options you choose, which may directly impact the payments you are able to receive.

Ultimately, proper planning may help you get the retirement you desire, if you know what you want and what your options are - and pursue both with resolve and clarity.

1. For Roth IRAs, qualified distributions are federally tax-free, provided a Roth account has been open for at least five tax years and the owner has reached age 59 1/2 or meets other requirements. Qualified Roth IRA distributions are not subject to state and local taxation in most states.

2. Insurance products are offered through non-bank insurance agencies of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.

Together, we can discuss:

• Your vision and goals for retirement.

• How an annuity might help strengthen your retirement plan.

• Whether a traditional IRA or Roth IRA makes sense for you.

• William J. Hertzog, CIMA, is first vice president of investments for Wells Fargo Advisors, LLC, in Ahwatukee. Reach him at (602) 952-5133 or www.TheHertzogGroup.com. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Note: Investment and insurance products are not FDIC insured, not bank guaranteed and may lose value.

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