Planning for retirement these days has become a different process compared to what it used to be, only a decade or two ago. The average lifespan is now in the mid-eighties, so a person that retires at 65 could be expected to live another 20 years. In the 1950’s a person was only expected to live 15 years after retirement. Longer life spans have created several new issues that need to be taken into consideration when planning for retirement.
Lifetime Income Need
Life after retirement is now a larger issue than it used to be. Longer lifespans translate into more health issues, arising with the progression of aging. With so many retirees living longer, calculating the cost of living for a prolonged period of time is of the utmost importance.
Health Care Need
The federal government provides basic healthcare (Medicare) but may not provide the specific coverage needed for many retirees, especially in cases of chronic illness. Planning for the future often means planning for the worst, so long-term care options are becoming a key element of retirement plans today.
The transfer of assets at death is a critically important element of retirement planning, especially for spouses and other family members dependent on these assets for their financial security. In some cases estate transfer can be as simple as drafting a will, thus ensuring any assets are transferred under the wishes of the decedent. When larger estates are being settled, there will inevitably be larger settlement costs and sizable death taxes, this could force liquidation if the proper planning is not done.
Paying for Retirement
Retirees usually rely upon three primary sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their own savings or investments. A well thought our retirement plan will ensure qualified plans and personal savings are the primary sources of income, with Social Security as a safety net for steady income.
Social Security was established in the 1930’s as a safety net for people who could rely on a steady stream of income for the rest of their lives after paying into the system from their earnings. The original age of retirement for people opting into Social Security was 65, this has gradually increased over the years. People born in 1960 and beyond must reach the age of 67 before their Social Security begins. The amount paid in benefits is based upon the earnings of an individual whilst working. The scheme is flexible, early retirees will receive less money over a longer period of time, and vice versa for late retirees.
Employer-Sponsored Qualified Plans
Many employers will offer the option of a sponsored retirement plan, know as an Employer-Sponsored qualified Plan. When an employee pays into such a plan a certain “defined contribution” which will be a percentage of the employees’ wage, is saved for retirement. Depending on the size of the organization, they may offer a 401(k) plan, a simplified employee pension plan, or with non-profit organizations a 403(b) plan. The amount received by the employee upon retirement is calculated by the total saved in the plan and the employee’s retirement time horizon.
Traditional and Roth IRAs
IRA’s (Individual Retirement Accounts) are tax qualified retirement plans, established as a way for people to save for retirement and receive the benefit of tax favored treatment. Traditional IRS’s differ slightly in that contributions are made on a tax deductible basis, but accumulate without current taxation of earnings inside the account. However, distributions from a traditional IRA are taxable. Contributions from Roth IRA’s are not tax deductible , but the earnings growth are not currently taxable. To qualify for this tax-free and penalty-free withdrawals the IRA must be in place for at least five tax years. The distribution of a Roth IRA must take place after the age of 59 and a half or because of death, disability or a first-time home purchase (up to 10000 lifetime max). Different states have different laws pertaining to IRA’s and distribution may be subject to state taxes. Distributions from employer-sponsored retirement plans are taxed as ordinary income, also if taken before the age of 59 and a half may be subject to an additional 10% federal tax penalty.
If you require more information on retirement incomes, needs and income sources, please contact us today.