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YOUR “SECOND ACT” COULD START BEFORE 60
Many baby boomers are vowing to work past age 65, even into their seventies. You may be one of them, and you may realize that ambition. Keep in mind, though, that some people end up retiring prior to age 60 and not by choice. If you sense that could happen to you, think about some of the moves you could make regarding your retirement income and savings.
Your need for income streams could be immediate if you retire in your late fifties; you will be too young to claim Social Security. You may have to rely on your retirement savings earlier than you planned. The good news is that the Internal Revenue Service lets you take withdrawals from common employer-sponsored retirement plans without penalty starting at age 55, providing you have stopped working for that organization or business. You can also access funds in taxable investment accounts at any time without penalty. The I.R.S. does commonly assess a 10% penalty when you make a withdrawal from a traditional IRA prior to age 59½. Exceptions occur when the money is used for qualified medical expenses, college tuition, or a first-time home purchase (up to $10,000 may be withdrawn penalty free in that last instance). There is another way to potentially avoid this 10% penalty – you could arrange, and strictly follow, a schedule of substantially equal periodic payments (SEPPs) from the IRA. Roth retirement accounts allow you to withdraw a sum equivalent to your account contributions at any time without taxation or penalties, but premature distributions of the account earnings are subject to tax. You could also make catch-up contributions to these accounts in your fifties, which may help to enhance your degree of savings. You could ask for a raise; a higher annual salary would help in the calculation of your future Social Security benefits. You should also strive to maintain your health and to arrange private health insurance if you are not covered through a spouse or partner’s plan.
THINK OF YOUR RETIREMENT IN THREE PHASES
Phases, stages, acts, chapters, steps. Whatever you want to call them, consider that your retirement may unfold in a way many others have, in three successive financial segments. Your budget and income could see adjustments as you move from one phase into the next.
In the first phase of retirement, is not uncommon to arrange some “peak experiences” and live some longstanding dreams. These adventures sometimes cost more than new retirees expect, which can be a major financial concern given two possibilities: the prospect of retiring before you are eligible for your full Social Security benefits, and a probable reduction in your household income. If you retire early, you might want to tap tax-advantaged retirement savings accounts first. If you retire to a lower tax bracket, then shifting tax-deferred investments into a Roth IRA could be wise. A Roth IRA conversion is a taxable event, but the tax paid upon the conversion may be at a lower rate than you would pay later when taking Required Minimum Distributions (RMDs). After age 70, retirement may start to become more about relaxation; one key is to keep RMDs from pushing you into a higher tax bracket. After 85, paying for long term care may become the biggest financial worry – and so you may want to look at forms of LTC coverage now, as that coverage could help you avoid spending down your savings.
WHY TAKE ON DEBT TO HELP YOUR KIDS WITH COLLEGE?
An unsettling trend is emerging among pre-retirees and retirees. Parents are picking up a greater share of college education costs, and in doing so, they may risk damaging their retirement prospects.
A new analysis of higher education debt patterns by SavingforCollege.com finds that the average college loan debt shouldered by parents rose approximately 6% this year, topping $35,000. College is so expensive today that some students are hitting the ceilings on federal student loans, which allow them to borrow as much as they might make their first year after graduation. This year, those lending limits are set at $31,000 for dependent students and $57,500 for independent students. To some undergraduates, that seem low – and parents are opting to help.
Unfortunately, there is no such thing as a retirement loan (unless a reverse mortgage counts). With running out of money a prime retirement concern among baby boomers and Gen Xers, it seems financially perilous to tap savings accounts, IRAs and other retirement plans, or whole life insurance policies to help young adults whose peak earning years are presumably ahead of them. The desire to help sons and daughters deal with this debt is understandable, but it may backfire: if parents cannot fund their retirements adequately as a consequence of this generosity, their children may end up with another financial burden decades later – the burden of their impoverished elders moving in with them. The bottom line: put retirement saving first.