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Retirement Planning: Engineering the Perfect Retirement Cocktail February 5, 2009

Posted by retirementwithaplan in Uncategorized.
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When I mention retirement cocktail, I’m not talking about making the perfect Mai Tai. Retirement Planning has become a combination of factors, each of which is has its own importance and in many case, is associated with a certain age.

020509mt_ctailYour retirement plans through your work (or individually) have a minimum age when you can begin to withdraw funds. At age 59 1/2, your 401(k) or IRA may be tapped without penalty. And while you may tap the principal in a Roth IRA or Roth 401(k) prior to that age, the accumulated gains are out of reach until you reach that age marker. If you find yourself without a job at age 55, you can begin to tap those plans as well.

The next big age marker for retirement is 62. At this point, you can begin to withdraw your benefits from the program. You will receive only 75% of what you could have received had you waited until your full retirement age (if you were born between 1943 and 1954, your full retirement age is at age 66. That threshold increases until it hits 67 – if you were born in or after 1960).

For some of us, this also the first year we may tap our pensions. Although they may seem archaic, they still do exist in some form or another, providing yet another bump in post-work income. You may also continue to work past these ages, adding to your potential retirement income.

By age 66 (for some) or 67, the full benefit in your Social Security is available and continues to increase until age 70. Keep in mind that as you age, the length of time you can collect benefits is reduced for a good deal of us. Old age does not allows us to collect these indefinitely and the calculations that SSA makes assumes at age 77, your done. They are in the business of determining the actuarial benefit of life at this they feel is about the average age when those receiving Social Security no longer are alive. Sobering but remember, this is a moving target. If you are in ill-health at 62, 77-years-old might be an age that would be somewhat out of your statistical reach.

By age 70, you must begin some sort of distribution of your tax-deferred retirement plan.

So we have your retirement plans (dependent on the strength of your contributions while you are working and a favorable investment environment), your Social Security benefit (twenty five percent less at 62 if you tap it early than if you had waited – file at 63, the benefit is about 20% less, at 64, calculate the benefit at 13.3% smaller than full and if you are retiring at 65 with a full retirement age at 66, the reduction is about 6.7%), your pension (which is also based upon actuarial assumption of how long you might live but will pay a fixed amount at 62 for the rest of your life – assuming the pension stays healthy), and your potential earning power.

How do you mix this cocktail of possibilities?

The first thing you need is your health. This may be genetically difficult for some, but arriving at retirement age in good health can add years of earning power to your benefits (if you are receiving Social Security or a pension).

The second thing you need is clean financial future, free of debts and able to keep up your residence (insurance, taxes, and repairs). If you enter retirement with credit card debt, this acts as a negative draw on your benefits, taking what could have been income and instead turning it into debt service.

These two items are the glass into which we will pour the ingredients to your cocktail.

For many of, we will need to continue working. If that is the case, try not to draw on your tax-deferred retirement plans. Once you begin to withdraw from these types of plans, you lessen the potential earning power by removing assets that could have been gaining growth interest on the principal. If you do indeed need to draw these funds, try and live on them until your full retirement age.

That doesn’t mean you shouldn’t tap your Social Security at 62 but if you start your cocktail with good health, no debt, and your tax-deferred retirement monies, you can do something that is not often discussed among financial professionals: you can pay any all benefits you receive between 62 and your full retirement age back to SSA and receive the full benefit. In the meantime, you can open a Roth with those funds and begin replenishing the lost investment income. At your full retirement age, you fill out the necessary paperwork, return all of the benefits paid at the lower level and receive the full benefit for the rest of your life. For some seniors, this might be the best emergency account that should you hit a rough patch, is there is you need it and growing each year you don’t.

And finally, any other money that might be available to you (pensions, inheritances, annuities) will add the touches to your retirement cocktail that will make retirement both enjoyable and financial secure.

Your peak earning years are now. These sacrifices and contributions will make retirement easier and more secure. You may even beable to enjoy that cocktail with your toes in the sand.



1. Retirement Planning: One Retirement before Another « Retirement with a Plan - February 20, 2009

[…] subject of retirement planning that should not be separated and one that concerned itself with the The Perfectly Engineered Retirement Plan that this is actually a joint effort. Except when you retire before your significant […]

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