When Is The Best Time to Retire?
by Ashby Daniels |
Many feds are wondering which retirement date will provide them with the highest possible payout. This is a vitally important question. First, you’ll want specific answers based on your specific situation, since the pension maximization date will vary from person to person. However, the real question you need to ask is: “When does your financial plan say you can retire?” To find the answer, ask yourself a few questions.
First, as we are about to enter the second straight year of no Cost of Living Allowance (COLA) adjustment for retirees, have you considered what inflation will do to your overall financial plan? If inflation averages 3.5 percent over the next 40 years, costs of living will nearly quadruple. Simply stated, if your household income is $100,000 per year today, in 40 years you’ll need about $400,000 per year just to live in a similar lifestyle. When considering this fact, a fixed income may be the biggest risk of all. Is your investment portfolio suited to make up for the shortfall that comes from a pension that doesn’t quite track inflation?
Second, how can you minimize taxes in retirement? When determining the order of taking distributions from your retirement accounts, consider how they are taxed. Generally speaking, the order of operations would be to take distributions from taxable accounts first, tax deferred accounts second, and Roth IRA/tax-free accounts last. However, you’ll need to consider the fact that you are required to take distributions from your tax-deferred accounts at age 70-½. Therefore, you may consider mixing in some tax-deferred distributions into your early retirement years to avoid possibly pushing you into a higher tax bracket later. A tax professional can help you figure out the most effective way to take retirement distributions.
Third, do you know what your expenses are going to be in retirement? Many people expect that they will need much less money to live on in retirement than they do now. The rule of thumb for many years has been to have 75-percent of your current income to have a nice lifestyle in retirement. Is that a realistic expectation for your situation? Few retirees have mortgage-free homes as they enter retirement, and now have much more free time. Make a list of the total expenses you expect to carry into retirement (including your newfound freedom expenses) and see if they are more or less than you live on now. Can you truly expect to spend less with so much more free time?
There are no right or wrong answers to these questions. The key is to consider them in terms of your comprehensive financial strategy. Run the numbers now so that you do not have to worry once you are already in retirement. Wouldn’t it be nice to be prepared, knowing you feel comfortable because you had taken the steps needed to ensure success? “Be Prepared” is more than just a Boy Scout motto; it should be your financial motto before you move into your retirement years.
© 2013 First Command Financial Services, Inc., parent of First Command Financial Planning, Inc. (Member SIPC, FINRA), First Command Insurance Services, Inc. and First Command Bank. Financial planning services and investment products, including securities, are offered by First Command Financial Planning, Inc. Insurance products and services are offered by First Command Insurance Services, Inc. Banking products and services are offered by First Command Bank. In certain states, as required by law, First Command Insurance Services, Inc. does business as a separate domestic corporation. Securities products are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met.
by Ashby Daniels |