Although many Americans now plan for a retirement up to 20
years, your retirement may last much longer.
Believe it or not, living nearly a century may someday soon be
almost commonplace. As a result, rather than thinking of retirement
as the final stage of life, a more realistic approach may be to
view it as a progression of phases, such as early, middle, and
late. This involves taking a fresh look at retiree expenses and
income, as well as withdrawal and estate planning strategies.
The Need for Flexible Planning
Traditionally, retirees were advised to project income needs
over the length of time of retirement, add on an annual adjustment
for inflation, and then identify any potential income shortfall.
But the planning required may not be that linear. For example,
research suggests that some retirees' expenses -- other than health
care -- may slowly decrease over time.
That means many retirees -- depending on personal expenses --
may need more income early in their retirement than later. That's
why it's critical not just to determine a sustainable withdrawal
rate at the outset of retirement but also to periodically evaluate
that withdrawal rate.
Or consider another trend: The desire to remain active means
many people are continuing to work part time or starting new
businesses in retirement. In fact, some psychologists and
gerontologists believe that many people don't really want to
retire, but instead want to reinvent themselves through a mixture
of work and leisure. As a result, more older men and women may be
inclined to jump back into the workforce - and possibly enjoy the
most productive years of their lives.
Early Years: Income and Tax Decisions
Keep in mind that adding employment earnings to your retirement
"paycheck" requires careful planning because it may impact other
sources of retirement income or bump you into a higher tax bracket.
For example, in 2013 retirees who collect Social Security before
the year of their full retirement age will see their benefits cut
$1 for every $2 earned above $15,120. Also, depending on adjusted
gross income, you might have to pay taxes on up to 85% of benefits,
according to the Social Security Administration.
The need to potentially stretch out income over a longer period
than previous generations also means that some people may not want
to tap Social Security when they're first eligible. Consider that
for each year you delay taking Social Security beyond your full
retirement age until age 70, you'll receive a benefit increase of
6% to 8%, depending on your age. One caveat: If you do decide to
delay collecting Social Security, you may want to sign up for
Medicare at age 65 to avoid possibly paying more for medical
Also plan ahead as to how you'll pay for health care costs not
covered by Medicare as you age. Remember that Medicare does not pay
for ongoing long-term care or assisted living and that qualifying
for Medicaid requires spending down your assets.
If you have accumulated assets in qualified employer-sponsored
retirement plans, now may be the time to decide whether to roll
that money into a tax-deferred IRA, which could make managing your
investments easier. A tax and financial pro can also help you
decide which accounts to tap first at this point in your
post-retirement planning -- a situation that could significantly
affect your financial situation.
Finally, don't overlook any pension assets in which you may be
vested, especially if you changed employers over the course of your
career. Pensions can supply you with regular income for life.
Annuities may also play a role in helping you generate steady
Middle Years: Distributions and Lifestyle Realities
By April 1 of the year after you reach age 70½, you'll
generally be required to begin making annual withdrawals from
traditional IRAs and employer-sponsored retirement plans (except
for assets in a current employer's retirement plan if you're still
working and do not own more than 5% of the business you work for).
The penalty for not taking your required minimum distribution (RMD)
can be steep: fifty percent of what you should have withdrawn.
Withdrawals from Roth IRAs, however, are not required during the
owner's lifetime. If money is not needed for income and efficient
wealth transfer is a goal, a Roth IRA may be an attractive
Also, consider reviewing the asset allocation of your investment
portfolio. Does it have enough growth potential to keep up with
inflation? Is it adequately diversified among different types of
stocks and income-generating securities?
Later Years: Your Legacy
Review your financial documents to make sure they are true to
your wishes and that beneficiaries are consistent. Usually, these
documents include a will and paperwork governing brokerage
accounts, IRAs, annuities, pensions, and in some cases, trusts.
Many people also draft a durable power of attorney (someone who
will manage your finances if you're not able) and a living will
(which names a person to make medical decisions on your behalf if
You'll still need to stay on top of your investments. For
example, an annual portfolio and asset allocation review are
important. Keep in mind that a financial advisor may be able to set
up an automatic rebalancing program for you. And finally, be aware
that some financial companies require that you begin taking
distributions from annuities once you reach age 85.
Preparing for a retirement that could encompass a third of your
life span can be challenging. Regularly review your situation with
financial and tax professionals and be prepared to make
Points to Remember
- By April 1 of the year after you reach age 70½, you'll
generally be required to begin making annual withdrawals from any
- Match living arrangements to changing lifestyle needs and plan
ahead for how you'll pay escalating health care expenses.
- Make sure that financial documents are true to your wishes and
beneficiaries are consistent.
- Regularly consult with financial and tax professionals and be
prepared to make adjustments, depending on how your life and needs