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When you retire, chances are you will rely on a number of different sources for your retirement income.
If you have earned a pension from a long-term employer, consider yourself fortunate. Pension plans have been phased out by many established companies and most newer companies never offered them. A pension is typically a percentage of your final pay, based on years of service. Most pensions are fixed. However, a few build in inflation protection over time.
Your employer may offer you a choice between receiving your pension as a regular monthly income stream over your lifetime or the lifetime of you and your spouse or as a lump sum distribution.
Factors to consider are your overall health and life expectancy, your comfort with managing a large sum of money, your tax situation and other sources of income.
Anyone who contributes to Social Security for approximately 10 years is eligible to collect Social Security benefits as early as age 62.
However, benefits taken this early are considerably lower than if delayed until full retirement age, which falls between 65 and 67 depending on when you were born. Also, benefits collected early can be reduced if you continue to work.
After full retirement age, you're entitled to full benefits even if you continue to work. However, a portion of your benefits may be subject to income tax depending on your total household income.
For more information on Social Security benefits, eligibility requirements, restrictions and taxes, go to www.ssa.gov.
Money that you've invested on the job in a 401(k), 403(b), 457, profit sharing or SIMPLE plan may be a major source of income for future retirees.
Many employer's plans offer systematic withdrawal plans so that you can leave your money in the plan. Or, you can roll your account balance over to an IRA and make your own decisions about distributions. You can also roll over your account to a qualified annuity, which will pay a regular stream of income based on the specific options you choose.
Money that you invest in a Traditional IRA is eligible for withdrawal, without penalty, after age 59 ½. At age 70 ½, you must begin to withdraw a minimum amount of income, determined by an IRS formula.
Roth IRAs are different. After age 59 ½ and after five years in your account, money withdrawn from a Roth IRA is tax FREE. There are no requirements for minimum withdrawals in your lifetime.
Money accumulated in a tax-deferred annuity can be converted to a regular stream of income, which can continue throughout your lifetime or for a specific period, which you can choose. If you don't annuitize for immediate income, you can delay withdrawals from a tax-deferred annuity until you are 85 or 90, depending on the state in which you live.
Personal investments in stocks, bonds, mutual funds, Certificates of Deposit, savings bonds, real estate or other financial instruments may also provide retirement income.
The number of Americans who continue to work after they "retire" is growing. According to McKinsey, 84% of baby boomers surveyed in 2007 said they expect to work after they retire and 63% said they didn't see themselves ever retiring completely*. A job can continue to provide income to supplement other available resources — and a sense of satisfaction that can help keep you younger longer in retirement. Our analysis also indicates that 60% of boomers will need to work to maintain their spending at 80% of their current levels.
*McKinsey Quarterly, 'Serving Aging Baby Boomers', November 2007
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.
