by Donald Whelpley
@ 2022 All rights reserved.
[Before going forward, if you know something I do not, please make a comment. It will be better for everyone if the truth is made known. I know that not all rules apply to every state, so make sure you mention your state when commenting.]
- You have calculated your unique retirement needs.
- You have researched your Continuing Retirement Resources and subtracted those from your needs to determine how much you will need to rely on savings.
- Last week we started to look at types of resources you may have (The first is Social Security).
Stream 2: PENSIONS.
Even a tiny pension is valuable. In fact, even if you worked for an employer for a few years you MAY have a partial pension (my wife does). Go to pbgc.gov to do a search for every company where you were employed, even if they went bankrupt or were bought out.
One problem with pensions is that they seldom increase benefits due to inflation. Second, if the pension fund is underfunded then it may run out of money. Most pension plans are dangerously underfunded (My pension plan is better than most…being only 11% shy of being fully funded. I was stunned to discover that many pension plans are underfunded by 25%, 40%, or more.)
Therefore, begin taking your pension as early as possible and invest it.
Further, if your company offers a lump sum benefit you should talk with a financial advisor to help make the decision.
Stream 3: TRADITIONAL RETIREMENT ACCOUNTS (IRA, 401k, SIMPLE, SEP, etc.).
This is money you invested in tax-deferred accounts. It reduces your taxable income when you invest it, but is taxable when you withdraw it. NEVER put all your investment eggs in this basket. Hopefully you will be withdrawing this money only when your tax bracket is lower. If you believe your retirement tax bracket will not be lower than when you earn the money…for goodness sake…do not put it here. (The only exception is if you have an employer matching plan at work.) If you have an emergency that requires a significant additional cash withdrawal (like purchasing a new vehicle) you will need a ROTH IRA or other type of investment.
The second issue is that your IRA may rely heavily on the stock market, which rises and falls. You never want to withdraw money from your stock-invested IRA when the market is low. So, as you approach retirement you should move 50% of what you need in the NEXT 12 months into CASH funds. Replenish this fund quarterly after you retire as the market allows (that is, when stocks are not plummeting).
The third issue is that when your reach age 72 you MUST begin taking a Required Minimum Distribution (RMD) from Traditional IRA-type funds (but not Roth IRA funds). You may have to coordinate with several IRA-type plans. Make sure to take your full RMD BEFORE December 15 or you will face a large tax penalty. I read of one woman who developed dementia and, thus, failed to take her RMD … the government did not care and hit her with a 50% tax penalty for the $18,000 she was required to withdraw … she also had to pay state and federal income taxes on the entire amount. (Key point here: Your family may need to know the types of retirement accounts you have so that if you do have a cognitive or issue they can step in and help.)
Stream 4: ROTH IRA.
It may seem strange to separate Roth IRA from Standard IRA. However, it is a different animal. The money put into a ROTH is taxed money, but the growth is NOT taxable. This is money you can grab in an emergency which will have NO tax bite when you withdraw it. In that sense it is MUCH better than a regular IRA. Save this money for emergencies because there is no required minimum distribution. However, it has the same problem with market movement as traditional IRAs.
By the way, you and your spouse should have roughly equal amounts in retirement accounts and other investments. Keeping your funds balanced between spouses could preserve more of your hard-earned funds should one of you require Medicaid help. In my state, the person requiring Medicaid has to “spend down” all but $2000 of his resources, but his spouse is allowed to retain HALF of hers up to ~$125,000. There is a question as to whether my state would require us to spend down IRA investments. That is not clearly defined at the state website. This is where an Elder Law Attorney can be helpful. Check out your own state’s rules.
[If you have a traditional IRA and you need nursing home care…you will be taxed on every dollar you withdraw from that traditional IRA for that care, so make sure to make your state and federal quarterly estimated tax payments BEFORE you have spent all the money. ]
See Part 1 of A Layman’s Look from Don: Streams of Retirement Income
See Part 2 of A Layman’s Look from Don: Streams of Retirement Income
See Part 3 of A Layman’s Look from Don: Streams of Retirement Income