Excerpt from "10 Questions you should ask yourself now about retirement" USA Today, June 9, 2005, pg. 7B
When should I retire? The answer varies, depending on how much you like your job, how long you expect to live and the size of your savings. Working longer is a particularly important strategy for workers who won't receive a pension or company-provided retiree medical benefits.
What will my expenses be in retirement? Short answer: more than you think. Medical expenses will probably eat up money that you save on your wardrobe and commuting expenses. A retiree without health care benefits from his/her former employer could end up spending 20% of retirement income on medical costs. With rising health care costs, the general rule of needing 70% of your income to live in retirement, has increased to needing as much as 100% of current income.
Should I buy long-term care insurance? Although most people won't need long-term care insurance, it does provide peace of mind. If you choose to go with a policy the insurance should not cost more than 5% of your retirement income.
Do I want to work after I retire? The answer may lie in the question "Do you need to?" Choosing to work after you retire will affect your Social Security payments. If you wait until you reach your Social Security retirement age (see www.ssa.gov ) you will receive your full benefits no matter how much you might be earning. If you are younger than your Social Security retirement age when you retire your benefits will be reduced.
How should I manage my retirement savings ? Ideally, you want to live off of the interest of your savings. Realistically you will have to tap into the principal of your savings. Assuming a 30-year retirement you could tap into 4 to 5% of your portfolio every year without fear of running out. If you take out 7% or more you run the risk of running out of cash. Splitting your money between conservative, dividend-paying stocks and high-quality bonds will usually get you through retirement without running out of cash.
How can I minimize taxes in retirement ? Financial planners recommend taking withdrawals in this order:
1) Taxable accounts. These are the investments that you are already paying annual taxes on dividends and capital gains.
2) Traditional retirement accounts, such as company retirement plans. You want these to grow as much as possible but must take distributions by 70 ½. 3) Roth IRA. You are not required to take minimum distributions from your Roth, so you can let your savings continue to compound until you have exhausted other sources of income. As long as you have owned the Roth for 5 years and are 59 ½ you will not have to pay taxes on the withdrawals.How much home equity do I have ? Equity is the difference between your home's value and the amount you owe on your mortgage. If you stay in your home after retirement, the equity can provide an important source of funds for emergencies. If you sell, you'll be able to use the proceeds to beef up your retirement savings.
Should I pay off my mortgage ? It's not a bad idea. If you pay off your mortgage while you're working, that's one less expense you'll have when you retire. One way to accelerate your mortgage payments is by making the equivalent of 13 monthly payments a year instead of 12. Make sure your lender does not have prepayment penalties and make it clear to your lender that the extra payment should be applied to the principal.
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