Individual Retirement Planning
Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people are living longer. A person who turns 65 today could be expected to live as many as 20 years in retirement as compared to a retiree in 1950 who lived, on average, an additional 15 years. Longer life spans have created a number of new issues that need to be taken into consideration when planning for retirement.
Lifetime Income Needs
There actually is a lifetime after retirement and the need to be able to provide for a steady stream of income that cannot be outlived is more important than ever. With the prospect of paying for retirement needs for as many as 30 to 35 years, retirees need to be concerned with maintaining their cost-of-living.
Health Care Needs
Longer life spans can also translate into more health issues that arise in the process of aging. The federal government provides a safety net in the form of Medicare, however, it may not provide the coverage needed especially in chronic illness cases. Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today.
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 liquidation if the proper planning is not done.
Paying for Retirement
Retirees who have prepared for their retirement usually 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, personal savings and Social Security as the primary sources of income. Retirees need a steady income stream to replace salary, but they also need to be prepared for larger lump sum expenses that may be too large to be handled by their income stream.
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, building up a larger benefit up to age 70. Conversely, early retirement benefits are available, at a reduced level, as early as age 62. Evaluating your social security benefits and options in concert with your own retirement savings is crucial to maximizing your retirement strategy.
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.