Show #411 Airing Sunday, 12/9/07
What do retirement planning and 18 holes of golf have in common? They both require hard work to avoid "traps" and successfully put you in the "driver's" seat. Here to make sure your retirement is far "above par" is our financial quarterback and golf pro, Jim Lineweaver.
Question:Jim, on previous shows, you've made the analogy between playing a round of golf and planning for retirement. Can you explain?
Answer: Sure. The front nine holes refer to your accumulation stage of financial planning. How much money do you need for your retirement, and how can you save appropriately.
The back nine holes refer to your distribution, or income-planning, phase. If you retired today, where would your income come from? If you are already retired, do you have a plan that will insure you can meet your living expenses for the rest of your life?
Today, we are going to talk about which "club" do you want to pull out of your bag as your are playing the back nine holes. This strategy involves picking the assets you will use to supplement your retirement income, and in what order you will use them.
Question:And planning ahead is now more important than ever, isn't it?
Answer: Most American used to be covered by Social Security and a defined benefit pension. Both paid them a lifetime income. As we have discussed previously, fewer and fewer workers are covered by a traditional pension.
If you can live on Social Security alone, you have no real concerns: Social Security as we know it will be here for the rest of your lives. If Social Security alone will not do it, your lifetime income needs are going to be on your shoulders.
Question:So when playing the back 9, would you start withdrawing your retirement accounts first?
Answer: While you have established retirement accounts to pay for your retirement, this is not where you want to begin your withdrawals to help cover your living expenses. It's much better to leave your assets in tax-deferred retirement accounts, like IRAs, as long as you can to take advantage of the tax-deferred growth.
Question:So where do you begin?
Answer: First, look at your taxable assets. If they are generating income, like CD interest, spend that money-you've already paid taxes on it. Next, look at taxable cash equivalent assets, like savings accounts and money market accounts. Spend these down, but not to zero; you should always have a cushion of liquid assets to cover the unexpected.
Go next and examine your taxable assets that have dropped in value. Selling those can create losses that can be used to offset gains. I know, "we don't want to sell them because we want them to come back up in value." Here is a question to ask yourself, if you hold a stock or other asset at a loss, would you buy that same holding today? If the answer is no, you shouldn't be holding it. The opportunity cost is too great.
Then you should look at taxable investments that have appreciated in value but based on your outlook their future prospects have diminished. Assuming you have held them for over 12 months, the maximum tax your will pay is 15%. And if you have sold other assets at a loss, those losses can be offset against your gains, possibly avoiding any capital gains tax.
Question:Then can we finally look at our retirement accounts?
Answer: Yes, now we look at our retirement accounts, our IRAs, 401(k) s and our Roth IRAs. Because of the tax deferral, or lack of tax in a Roth IRA, we want to delay tapping these sources as long as possible. That allows our assets to continue to grow devoid of taxes. This greater growth helps extend the longevity of our assets. But with traditional qualified accounts you need to start withdrawals no later than April 1st after the year you turn 70 ˝. That doesn't mean you wait that long. If you wait until April, you will need to take two withdrawals that year. If doing so has the potential to push you into a higher tax bracket you should consider taking that initial required withdrawal IN the year you turn 70 ˝.
At the end of the line should be your Roth IRAs. They have been growing tax free, and will continue to grow tax free, and if you don't use the money will pass tax-free to your heirs. And, you are not required to take RMDs.
Question:Sounds like this can be complicated. Any other tips?
Answer: Much consideration is given to the planning needed to accumulate and manage assets to support your lifestyle in retirement, but the same consideration needs to be taken with the planning needed to produce the retirement income with the retirement assets people have accumulated. Many people like having guarantees, and the insurance industry recognizes this fact. So the insurance industry has developed products that can help guarantee your income for the rest of your life. There are costs associated with these income guarantees, but many people feel they like the comfort provide by them.
By putting a plan in place, and maybe adding some income protection to the plan, you will be able to answer the question, "am I going to run out of money?"
Do you want to shoot a retirement hole in one? Call Jim Lineweaver for help. His number's next. We'll be back.
