Jacqueline Berkelhamer

Friday, 20 August 2004 10:05

Check list

That special day you've planned for your entire working life is rapidly approaching -- the day you retire.. After another stressful day at the office or a business trip, unstructured free time sounds wonderful. But are you really ready to call it quits?

In order to be confident all your bases are covered and that there are no surprises ahead, here are seven points to prepare you for retirement.

1. What are your income sources? Your sources for income in retirement will be a combination of Social Security, retirement plans, IRAs, interest, dividends and rental income. The question is, will this be sufficient?

2. When can you receive Social Security? The earliest you can start receiving Social Security is at age 62. But if you begin then, the benefits are only 80 percent of what you would receive at "normal" retirement age (currently age 65 or older). People who defer Social Security benefits for as long as possible will increase their monthly benefit. This is especially important if you are still working, even part-time.

3. How much will you spend? Many people want to maintain the same standard of living and replace work-related expenses with travel, entertainment and other new costs. Since planners recommend that you assume 80 percent of current living expenses for retirement, make a realistic outline of expenses.

Remember to include income taxes and health insurance coverage in retirement, and don't forget about inflation-- assume at least 3 percent. A hefty retirement income at age 55 or 60 may be meager by the time you're 70.

4. How should you invest your capital once you're retired? The earlier you retire, the longer your retirement portfolio is going to have to work for you. Even though you're no longer working, it may not make sense to move all of your assets into conservative, lower-yielding, fixed-income investments.

Investing for both income and growth may be the more prudent approach to making your capital last. Therefore, plan on spending both capital gains and income, hoping that the growth portion of your portfolio will keep you from eating into principal. A withdrawal level of 4 percent to 5 percent of total invested capital usually works well and does not deplete your investments.

5. What if it doesn't add up? If your income needs in retirement don't mesh with your assets, what can you do? Is selling your home, taking your equity out and downsizing an option? Deferring retirement is another answer, as is decreasing your expenses. It never hurts to save more to reach your goals.

If you "practice" being retired and living on either one salary while you both work or reduce your monthly expenses, you can gauge what retirement could hold. Also consider working part-time during retirement.

6. Are you psychologically ready to retire? If the numbers are working for you and finances aren't a concern, are you psychologically prepared for not working? Do you have hobbies or outlets to occupy your time? How is your health? Will your spouse continue to work? Is that going to be an issue for you? How are you going to replace social contacts that were a critical part of your day?

Part-time work is an exciting thought, maybe even in a new field. Consider volunteer work or going back to school. There are as many ways to define retirement as there are retirees.

7. Finally, see a competent, experienced financial planner every few years to validate your assumptions and measure your progress. The planner can serve as a sounding board for a second opinion about your retirement strategy and investment allocations.

Retirement is your well-deserved reward for many years of hard work. It's important to know that you may be living for 30 years in retirement, and your money needs to be there, too.

After all, the only thing you really want to worry about is how your envious friends would give anything to be in your golf or tennis shoes.

Jacqueline C. Berkelhamer, MBA, CFP, (jberkelhamer@cpcadvisors.com) is a senior financial planner with Consolidated Planning Corporation. Her expertise includes estate and gift planning, retirement planning, and tax strategies. She is responsible for designing, integrating and implementing the firm's comprehensive financial planning process. Reach her at (404) 892-1995.

The phone rang at 6:30 a.m., an unusual hour in the Block household, although everyone was awake and preparing for work and school. Beverly answered and heard the dreaded news. Her widowed father had been killed in a tragic automobile accident.

A few weeks after the funeral, Beverly and her sister were informed by her father's lawyer that they had been left more than $400,000 each from her father's former company's pension plan. But there was a problem. Because of an election her father had made years ago, a Lump Sum Distribution from his retirement assets was required.

This meant they'd pay federal and state income taxes of more than 40 percent on the entire amount. So, dropping her inheritance to $240,000. On top of a large income tax bill, she'd lost the tax deferral on the assets forever. Sometimes I wonder who the real beneficiary is -- the children or the IRS.

Unfortunately, Beverly's father had never taken advantage of rolling his company retirement benefits into an Individual Retirement Account (IRA) when he retired two years ago. Had he done so, Beverly and her sister could had stretched the distributions (and the related income taxes) over each of their life expectancies and enjoyed years of compounded tax deferred growth. They would have also benefited from the increased flexibility in investment options.

There are trillions of dollars in 401(k), 403(b), pension and profit-sharing plans and IRAs. For most Americans, this represents their largest investment, other than their personal residence.

Although most people are aware of the benefits of having such plans, they are not aware of the rigid rules surrounding the distribution options that will ultimately dictate how they or their beneficiary will receive the benefits.

Let's look at the pitfalls you may want to avoid and how to protect the assets in your retirement plans from excessive taxes.

* First and foremost, understand that despite your well-designed estate plan, how you fill out the beneficiary forms for your retirement plan and IRAs will dictate how the money is handled. IRAs and retirement plans do not pass according to the terms of your will. They pass by beneficiary designation -- that sheet of paper you filled out years ago and may have forgotten.

* Get a copy of the beneficiary form you completed when you signed up for your company plan or IRA. A change in marital status, addition of children or other family changes may cause you to rethink your choices.

* If your spouse is your primary beneficiary, we strongly recommend naming a secondary or contingent beneficiary.

* Find out if your employer's plan has limitations on the way beneficiaries can receive benefits. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) has liberalized distribution options, and a simple amendment to the plan document could alter the distribution elections available. Your options may have changed.

* If you've changed employers or for any other reason left your company, roll your assets out of the company plan into an IRA. Your investment choices are greater and IRAs have more flexible distribution rules. Many companies will let you keep your assets in the company plan after you've left, but this may limit the distribution choices available to your heirs.

* The new EGTRRA regulations allow you to name a trust as beneficiary of your IRA to take advantage of the estate tax exemption. You can leave your retirement plan assets and IRA assets to trusts under your will or to a special needs trust for children with developmental disabilities. This designation of the trust as beneficiary allows you to continue to plan how your assets will pass and be managed after your death.

* IRAs can be split before or after your death so that children can be treated differently. One child may be able to handle a large inheritance. Another child may not.

The rules regarding retirement plan distributions and beneficiary elections can be very complicated and should be reviewed periodically with your financial planner and/or estate planning attorney.

Jacqueline C. Berkelhamer, MBA, CFP, (jberkelhamer@cpcadvisors.com) is a senior financial planner with Consolidated Planning Corp. Her expertise includes estate and gift planning, retirement planning and tax strategies. She is responsible for designing, integrating and implementing the firm's comprehensive financial planning process. Reach her at (404) 892-1995.