Welcome to retirement — you've finally got the time to enjoy hobbies, those terrific grandchildren, travel. The tricky part: How to make your money last so you can enjoy that time?
Heads-up, retirees: What do you have to spend?
Douse Social Security anxiety: Social Security makes news daily but changes won’t affect today’s retirees younger than 55: Payouts should proceed according to plan; changes under discussion would affect workers now middle-age or younger. The Social Security hotline (800-772-1213) is a first stop for questions about benefits.
Live long and prosper: Before crunching numbers for retirement spending, guesstimate your longevity (and that of spouse or significant other) based on family history, then tack on at least 10 years.
Plan passion: Build “passion” money into your retirement budget. “Enjoy the journey — travel, volunteer, bird-watch and ask yourself, ‘what are my dreams?’ ” suggests Kathleen Miller, president of Miller Advisors of Kirkland.
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How to figure out a retirement budget
Welcome to retirement — you’ve finally got the time to enjoy hobbies, those terrific grandchildren, travel. The tricky part: How to make your money last so you can enjoy that time?
Answers aren’t simple, but here are our Top 7 tips to maximize chances of your nest egg lasting as long as you do.
1. Seek professional help
Even those who have managed their own money and do their own taxes can benefit from a professional evaluation, ideally a year or two before retiring; many financial planners and accountants consult on an hourly basis.
The intricacies of federal tax law pertaining to lump-sum pensions, early or regular or delayed Social Security eligibility and mandated IRA withdrawals make a professional’s fee money well spent.
A visit to an estate lawyer ensures that your will reflects any changes you make as you stop working, such as canceled life insurance that your employer offered only while you worked.
2. Home sweet asset
Don’t let emotions keep you too long in a house you can’t afford: Even a paid-for house can be too expensive when property taxes, insurance, maintenance and upkeep are accounted for. Use realistic estimates that include large one-time expenses such as a new roof.
At the same time, if your retirement savings are too lean, consider that a paid-off (or nearly paid-off) house in pricey Seattle is a potential gold mine for those who cash in and downsize, especially if you move to an area of cheaper housing and lower property taxes.
Don’t want to move? Reverse mortgages, essentially loans to yourself against equity in your house, are a possibility, though not the favorite of most planners, mostly because fees can be high. More info: www.aarp.org/revmort
3. Take your lumps — maybe
The good news: You’ve vested in a pension with your employer. Now the hard part: deciding to take the money as a lump-sum payment or in monthly checks for the rest of your life.
After a quick trip to your accountant for tax advice, the key calculation here is whether a predictable check means more to you than the chance of better growth potential — but higher risk of losing money — by making your own decisions
Rolling the lump sum into an individual retirement account, or IRA — the best option for most people taxwise — puts you in the driver’s seat: You can withdraw money at your own pace; you decide where to invest the money, and check and recheck that decision for the next 10, 20 or 30 years.
Returns will vary year by year and, worst case, you could err with your money and forfeit some degree of comfort in retirement. If you are too conservative, the money doesn’t grow along with inflation and your probable rising health-care expenses. Too aggressive in the stock market and your nest egg could dip in value at a time you need it most.
On the other hand, monthly checks from a fund your employer or IRA company administers offer you money management by professionals, fixed income you can budget around and payments for life, no matter what the stock market does.
But you’ll never have access to that principal, so you can never parlay the money into any more. And inflation starts eroding the spending power of set monthly checks almost immediately.
Online calculators can help you crunch the numbers using different rates of return and timetables to help clarify the issue: Find a good one at www.troweprice.com.
4. Evaluate annuities, carefully
Annuities are like pensions you can buy. They function like a reverse life-insurance policy — you pay a lump sum up-front in return for a monthly check for a certain period of time, or for life. There are set and variable rates available; annuities are sold by insurance companies, investment houses and banks.
Low prevailing interest rates make buying a set-rate annuity less than appealing right now as you could be locked into a low interest rate for decades even if rates rise.
Among the arguments against annuities: typically high fees and commissions. Do your homework, including about the strength of the carrier. A good resource: the AARP Web site, www.aarp.org.
5. Spend principal — possibly
It’s fine to spend principal, within limits, if interest alone doesn’t offer enough to supplement your Social Security and pension. “There are years you’ll eat into principal,” predicts Vivienne Strickler, a Seattle planner with clients of all income levels; just as for working people, retirees sometimes face unusually expensive years, with high medical costs or perhaps a new roof or car to pay for.
Online calculators help determine the “burn rate” of spending a given amount of a nest egg each year, relative to the interest the money is earning. People with no heirs will have a significantly different spending plan than those with 10 grandchildren they’d like to help educate, Strickler notes.
6. Use your portfolio without using it up
There is a wide range of recommendations on withdrawal rates, ranging from 2 percent annually for the extremely conservative investor with a heavily fixed-income portfolio to as much as 6 percent for those still investing in the stock market at least 40 percent, suggests Alan Weiss, a certified financial planner and certified public accountant who heads Regent Retirement Planning in Connecticut. Noted financial author and Money Magazine columnist Walter Updegrave recently pondered the latest research and recommended sticking with the traditional recommended 4 percent (money.cnn.com).
Budget for inflation when calculating how much you can afford to withdraw annually and remember the vast majority of pensions — unlike Social Security — have no cost-of-living raise. Consider that health-care costs rise an average of three times the overall rate of inflation. A 3 percent inflation rate means costs double in 25 years, a key consideration for those who stop working in their 50s and early 60s.
7. What to draw down first
To maximize the money you saved while working, plan to tap the tax-advantaged accounts first, such as 401(k)s. Traditional IRA accounts mandate withdrawals to start when you are 70.5 years old; keep abreast of changes in regulations to avoid penalties.
Withdraw Roth IRA money last if at all; it has no legal mandate for withdrawals and the gains in Roth accounts can compound tax-free for decades and be passed onto heirs. Roth withdrawals are free of income tax as well; they’re a good spot for aggressive investments like growth stocks likely to gain more over time.
Sources: Money magazine; Alan P. Weiss, CFP, CPA, Regent Retirement Planning; U.S. Bureau of Labor Statistics; T. Rowe Price retirement-income calculator; Kathleen Miller, CFP, Miller Advisors, Kirkland
www.aarp.org/financial AARP, the advocacy group for Americans aged 50+, offers some of the most comprehensive online material on retirement finances. Also free booklets on topics such as financial planning, health insurance, Medicare can be ordered through www.aarp.org/booklets or 888-OUR-AARP (888-687-2277). Many also are available in Spanish. You do not need to be an AARP member. Order by name and stock number, including:
• Future focus: Your Guide to Financial Planning for Retirement / stock #D17731
• Money Matters: Your Guide to Financial Security / stock #D17732
• “Home Made Mortgages: A consumer’s guide to reverse mortgages,” stock #D15601, can be ordered by phone, or at www.aarp.org/revmort
Also, homeowners aged 62 and over can get reverse mortgage counseling for federally-insured Home Equity Conversion Mortgages through the AARP Foundation’s Reverse Mortgage Education Project, which is funded by the U. S. Department of Housing and Urban Development.
Consumers can locate a counselor in their area by going to the Home Equity Conversion Mortgages Resource site at www.hecmresources.org/requests.cfm
If you click through the above site, you’ll find counselors in Seattle, Tacoma and Kennewick.
National Retiree Legislative Network, a nonprofit organization dedicated to protecting retiree pensions and benefits, such as company-paid health care; newsletter is $12 a year.
moneycentral.msn.com/content/Retirementandwills/Retireinstyle/P34815.asp Good, basic info on calculating withdrawal rates.