Investments at the time
of retirement
Whether you have a retirement plan at work, an IRA, or separate
investments earmarked for retirement you will have decisions
to make as “R” day approaches, says Pat Swanson,
CFP® and families specialist with Iowa State University (ISU)
Extension’s Invest Wisely Project (www.extension.iastate.edu/investwisely).
If you have a pension plan, you will have choices on how you
wish to receive the money that has accumulated. Any plan will
have its own rules for payout. “When preparing to retire,
contact the benefits office where you work at least six months
before, to understand your options,” Swanson suggests. “It
is important not to be hasty, because once a payout decision
is made it cannot be changed.”
To select a payout option that is right for you, Swanson says
you need to consider your age and health, investment skills,
need for security, tax situation, and the company’s economic
health.
Some individuals choose to take a lump sum and invest the money
themselves. The advantage of this option is getting everything
out of your plan even if you die early in retirement. However,
this decision has tax consequences because income tax is paid
on the entire lump sum in a single tax year.
Another option is to roll over the amount into a traditional
Individual Retirement Account (IRA). You could then convert the
traditional IRA to a Roth IRA. The entire amount transferred
to the Roth would be taxed but the withdrawals from that point
on would not be taxed and there would be no mandatory withdrawal
age.
Employer pension plans also may provide the option of receiving
the payout as a lifetime annuity, i.e., a regular monthly payment
for your lifetime. With a 401(k) plan this annuity amount is
based on your life expectancy and the amount in your retirement
account at the time of your first withdrawal.
Another option is a joint and survivor annuity where annuity
payments are made over your lifetime and then upon your death
over the lifetime of a designated survivor. The major advantage
of a lifetime annuity is knowing you won’t outlive your
retirement nest egg. It also is important to consider the impact
of inflation when selecting an annuity. Unless it is indexed
for inflation, a fixed annuity will buy less as time goes by.
If you have a traditional IRA you may take as much or as little
as you wish between the ages of 59-1/2 and 70-1/2. If your traditional
IRA is a deductible IRA, income tax is due on both the earnings
and original contributions that are withdrawn but if it is a
nondeductible IRA, tax is due only on the earnings when withdrawn.
You must begin taking a minimum required distribution from your
traditional IRA by age 70-1/2. The minimum amount is based on
your life expectancy. However, a Roth IRA, unlike a traditional
IRA, does not require a minimum distribution during the owner’s
lifetime.
If you also have an investment portfolio that has been earmarked
for retirement, your investing strategy should change as retirement
nears and be not quite so aggressive. However, don’t go
overboard and be too conservative. “While you may be tempted
to invest very conservatively, it is wise to invest at least
some of the portfolio with growth in mind. If you invest too
conservatively, the return on your investments may not keep up
with inflation” Swanson warns.
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The ISU Extension Invest Wisely
Project provides a series of newspaper, radio, and web resources
for investors. It is funded by a grant from the Investor
Protection Trust (IPT). The IPT is a nonprofit organization
devoted to investor education. Since 1993 the IPT has
worked with the States to provide the independent, objective
investor education needed by all Americans to make informed
investment decisions. www.investorprotection.org.
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