Retirement Planning & Lifetime Income Needs
Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people are living longer. It is not adequate to merely create a nest egg but to know how to generate income from that next egg. We believe at the distribution phase, “Income Should Be the Outcome”. Retirement income streams should be viable to last a lifetime without running out. They should have methods to hedge the devaluation of buying power caused by inflation. Joint life expectancies of married couples, in standard health, at 65, have one of the two, living until the mid-90’s3. This is the foundation upon which we base many of our recommendations. We believe including the “Two Economic Powers”2 approach when possible. For additional information on this powerful methodology and whether it can work for you please contact us.
Planning for the transfer of assets at death is a critical element of retirement planning especially if there are survivors who are dependent upon the assets for their financial security. Planning for estate transfer can be as simple as drafting a will, which is essential to ensure that assets are transferred according to the wishes of the decedent. Larger estates may be confronted with settlement costs and sizable death taxes which could force untimely liquidation of assets, if the proper planning is not done. At the very least, sizable retirement assets, such as IRA’s, can result in higher than ordinary income tax liabilities to heirs.
Paying for Retirement
Retirees who have prepared for their retirement, often rely upon three main sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their own savings or investments. A sound retirement plan will emphasize qualified plans and personal savings as the primary sources with Social Security as a safety net for steady income.
Social Security was established in the 1930’s as a safety net for people who, after paying into the system from their earnings, could rely upon a steady stream of income for the rest of their lives. The age of retirement, when the income benefit starts was, originally, age 65 which was referred to as the “normal retirement age”. Now, for a person born after 1937, the normal retirement age is being increased gradually until it reaches age 67 for all people born in 1960 and beyond. The amount paid in benefits is based upon the earnings of an individual while working. If a person wanted to continue to work and delay receiving benefits, they could do so and build up a larger benefit. Conversely, early retirement benefits are available, at a reduced level, as early as age 62. While there are 100s of possible social security choices of when and how to claim it, there is only one opportunity to get it right for your individual case. We invite you to call us for more information and an opportunity of what might be your best choice.
Traditional and Roth IRAs
Individual Retirement Accounts (IRA) are tax qualified retirement plans that were established as way for individuals to save for retirement with the benefit of tax favored treatment. The traditional IRA allows for contributions to be made on a tax deductible basis and to accumulate without current taxation of earnings inside the account. Distributions from a traditional IRA are taxable. A Roth IRA is different in that the contributions are not tax deductible, however, the earnings growth is not currently taxable. To qualify for tax-free and penalty-free withdrawals of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching 59 ½, may be subject to an additional 10% federal tax penalty.
For more information on retirement income needs and income sources, please contact us today.