How can you determine your retirement income needs?
You'll want to evaluate your present circumstances, income, expenses, assets, and debts to determine your retirement income needs. Next, you'll need to think about your future circumstances. Your retirement income has four primary sources: Social Security, pensions or other retirement vehicles, your investment portfolio, and savings. If you predict that your current income will not provide you with your desired retirement lifestyle, there are specific steps you can take now to help change your circumstances.
You'll want to consider your future income sources and where you'll live. For instance, will you continue to live in your current home or move to a condominium or retirement community? And if your employer typically provides early retirement packages to its employees, you'll need to know how to evaluate them from several perspectives.
How do you save for retirement?
Learning how to save for retirement is imperative. Several retirement vehicles are available, including traditional and Roth IRAs, employer-sponsored retirement plans, nonqualified deferred compensation plans, stock plans, and commercial annuities. Proper retirement planning requires an understanding of the workings of these tools.
In addition, your personal investment planning can help you on the road toward your retirement goals. The sooner you start, the longer you'll have to accumulate funds for retirement.
You'll want to understand the taxation of your retirement and investment vehicles. This is especially important since the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act). The 2003 Tax Act reduced the capital gains tax rates and the tax rates of certain dividends, deciding to allocate assets inside or outside a retirement plan more crucial.
Finally, you may want to learn strategies for handling the competing demands of educating your children and retiring.
What should you know about distributions from IRAs and other retirement plans?
Effective retirement planning involves an awareness of the types of savings vehicles available and an understanding of taking distributions from these vehicles. In particular, you should be familiar with the income tax ramifications of distributions (including a possible 10 percent premature distribution penalty tax for distributions made before age 59½). You may be interested in knowing whether you can borrow money from your retirement plan, whether it is better to receive your retirement money in one lump sum or monthly checks, and whether you can roll your retirement plan balance into an IRA.
In addition, you may be concerned about naming one or more beneficiaries for your IRA or employer-sponsored retirement plan. What are the tax implications? What about the required minimum distributions from the plan after you reach age 70½?
What if you are an executive or business owner?
Several additional retirement planning tools are often available for executives, such as nonqualified deferred compensation plans offered by employers to their key employees. If you're an executive, you should realize that nonqualified plans and stock plans can be valuable tools for retirement planning. It would be best if you understood the mechanics of the special benefits afforded by your employer, including the tax implications for you.
If you are a business owner, on the other hand, you have some unique retirement planning concerns of your own. In particular, you may want to plan for the succession of your business to family members or others. You may also want to know which retirement plans are best suited to your form of business. For information about these and related topics, see Special Planning Considerations for Executives, Planning for a Succession of a Business Interest, or Retirement Planning Options for Business Owners.
How do Social Security and other government benefits programs impact retirement planning?
If you're planning for retirement, you should also consider the Social Security income (if any) you'll receive in the future. You can estimate your Social Security benefits ahead of time. You may want to check your Social Security record periodically to ensure that you have met the eligibility requirements and that your information is accurate and complete.
You'll also want to learn ways to optimize your Social Security benefits and minimize their taxation. The timing of your receipt of benefits can be significant, as can the impact of post-retirement employment.
Other governmental programs should also be considered when planning for retirement. In particular, you should review the topics of Medicare and Medicaid. You should know what Medicare does and does not cover and what other healthcare options are available. How expensive are these governmental and supplemental health programs? What are the eligibility requirements? Medicaid planning can be essential for people of modest means. You should know the Medicaid eligibility requirements, the penalties for transferring assets inappropriately, and the various strategies available for protecting assets. In addition, you should become familiar with the specific methods of protecting your personal residence and the extent to which your state can impose liens on your property and pursue recovery remedies after your death. Suppose you are planning for your post-retirement years. In that case, you should also gain some familiarity with long-term care insurance, nursing homes, retirement communities, assisted living, and other housing options for elders. For information on all of the above, see Health Care in Retirement.
Do government employees have unique retirement concerns?
If you work for the federal government, a state government, a railroad, or if you are in the military, your retirement benefits may be subject to special rules. You should know how your retirement plan works, what distribution rules apply, how your survivors can benefit, how your plan may be integrated with Social Security, and what tax rules apply.
