Chapter 21 Planning Your Retirement—An Overview

“Retirement takes all the fun out of Sundays.”

Do I Need to Read This Chapter?

● Am I thinking about the financial and emotional implications of retirement? ● Do I know at what age I want to retire? ● Do I understand how pension payouts work? ● Am I clear on IRA rollover rules?

Ihave read of five emotional stages that people will go through before and during retirement:

1. Imagination.About 10 years before retirement,you begin to dream about that period of leisure life. 2. Anticipation.A few years before retirement,you begin to realize what a different lifestyle you will be entering into.This is a period of both excitement and worry. 3. Liberation.The first year of the period of retirement allows you the free time to read,travel,reconnect,and plan.

4. Reorientation.The honeymoon year is over,and it’s time to settle in and realize the vast amount of time you have on your hands and how costly retirement can be. 5. Reconciliation.Now is the time to reflect and learn what you can and cannot do,both physically and financially.

In the following chapters,various retirement plans are discussed.Whether you are employed by a corporation or a government agency,are selfemployed,or are working part time,some of the options explained will affect your future financial plans.

About 38 percent of all workers had traditional pension plans 25 years ago. Today, that number is less than 20 percent and shrinking, as employers continue to reduce their fringe benefits (medical, pensions).

How Does Early Retirement Play a Role in the Various Retirement Plans?

There is a story of a beautiful bird that was powerful and free.It had magnificent,colorful plumage,of which it was very proud.One day the bird decided to pluck its feathers,one by one,in order to make a nest in which it could rest in comfort and security.Now it cannot fly.

Don’t consider retiring until you are both financially and emotionally ready. Why? Because people have not been properly prepared for retirement in America.We spend a third of our lifetime preparing for a career but almost no time in preparing for the period afterward.

Why Should You Plan Ahead for Retirement?

Because of the medical breakthroughs that have allowed us to live longer, retirement can be as long as 20 to 30 years.Your income from social security and pension may not be enough to cover your lifestyle during your retirement. Yet people are not saving enough to bridge the gap.Add taxes and inflation to

this picture,and you understand why planning ahead is so important. Remember,Fix a roof before it rains.

Are you puzzled at this point? Are you thinking that there are thousands of books and magazines on retirement? Of course there are. But few of them cover the key point: the feeling of being retired. Today’s unanswered question seems to be not so much what happens physically to people when they retire as what happens to them emotionally. The American public, the government, and the medical profession put more effort into helping folks reach old age than in helping them enjoy it. Can you imagine filling 10 hours a day (3,650 hours a year) in leisure? That huge amount of time hangs over every retired person like unspent capital. I have met many retired women who complain about having their husbands always around. One told me, “I married him for better or worse, but not for lunch.”

How Long Will Your Money Last?

“Longevity risk”is the concept of the possibility of outliving your money.Lots of decisions,not all of them voluntary,help to determine when you will retire. If you have any say in the matter,I advise your being very careful about what age you will leave the workforce.The decision to retire should be based on your financial status,and careful planning is mandatory.For example,people who are nearing retirement or have begun retirement with a fixed-asset base may be concerned whether their money will last as long as it will be needed. If you are forced to dip into your principal in order to make ends meet, Table21.1 may be of great help to you.It shows how long your money will last if you must draw from it at a rate faster than it is growing.As an illustration, suppose your assets are earning an 8 percent annual return and you must withdraw 15 percent of your principal each year in order to live comfortably in retirement.As shown in the table,your money should last approximately 10 years.Some advisors state that you will need about 80 percent of preretirement income to keep your current standard of living after you retire.They base this percentage on the fact that you will no longer have work-related expenses. I do not believe this.Most retirees will need their full 100 percent as they now can take longer vacations,develop hobbies,and partake in a vast amount of costly entertainment.Your spending during retirement can even be higher

Table 21.1 Earnings and Withdrawals

If Principal Is Earning at This Rate And You Are Withdrawing at This Rate 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6%

12% 12 14 17 23 Here’s how many years 11 11 13 15 18 24 your principal will last 10 10 12 13 15 19 25 9 10 11 12 14 16 20 27 8 9 10 11 12 14 17 21 28 7 9 9 10 11 13 15 18 22 31 6 8 9 10 11 12 13 16 19 24 33 5 8 8 9 10 11 12 14 17 20 26 37

than that during your working period with the high cost of medical care and former employers’ cuts in their health plans.You must realize that you can save for a limited period in your life,but your spending is for all your life.Thus you must have sufficient assets during your working years in order to balance your retirement period.

How Do Lump-Sum Distributions Work?

Every day,for various reasons,people receive large lump-sum distributions representing the accumulated value of their pension plans.This may occur when you retire,or it may occur sooner if you become disabled,if you leave your present employer,or if the company decides to terminate your pension plan.In any case,when you receive such a lump-sum distribution,you face a problem:How do you minimize the taxes on this often sizable payment?

What Is an IRA Rollover?

A method to reduce the taxes on your lump-sum distribution is to roll it over— that is,reinvest it—in an IRA.This must be done within 60 days of receiving the distribution,or you will lose the tax-shelter status otherwise conferred by the IRA.You don’t have to pay any current income taxes on the distribution

amount if you deposit it in an IRA,nor will you owe taxes on the income that accumulates in the account.The IRA funds become taxable only upon withdrawal,which may begin after you reach age 591⁄2 and must begin by age 701⁄2. See the next chapter (Chapter 22) for specific rulings on IRAs.

And on the topic of retirement,before you decide to retire,take a week off and watch daytime TV.

It’s a Wrap

● Retirement is a major life change,financially and emotionally. ● In cashing out a pension,look to minimize taxes.

“The ‘Haves’ and ‘Have Nots’ can be traced back to the ‘Dids’ and ‘Did Nots.’”

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