DO YOU HAVE AN INVESTMENT PLAN for your retirement years? Yes, retirement years!
Your first reaction to hearing that you need to save and invest during retirement may be surprise. After all, many people expect a significant income reduction when they retire. While it is true that you will no longer contribute 10 to15% of your annual income to a retirement plan, compelling reasons should prompt you to continue saving and investing well into retirement.
The two biggest changes that affect income following retirement are the reduction in income taxes and social security benefits. When combined with income from your pre-retirement investments, these benefits usually leave the financial picture better than most retirees anticipate.
But it is sobering to consider that the average cost of a gallon of gasoline has nearly doubled since 2003, and that the cost of real estate continues to rise at a record pace. Gas and housing aren’t the only rising costs, but you get the picture. Assuming you live ten years beyond retirement, how much will the standard cost of living increase by the year 2020?
For married couples, the death of a spouse means the surviving partner must live on a combination of savings, investments, Social Security benefits, and sometimes a pension—depending on where he/she was employed during working years. Often, however, pension funds are available only to the former employee and do not transfer to spouses or dependents. In those cases, the surviving spouse faces a lower standard of living.
The point is this. Retired families need to continue the saving and investment habits they maintained during their active working years, even if they do so at a reduced rate. For those with qualified retirement plans, individuals who reach age 70 1/2 must take a withdrawal from the account and pay taxes on the amount. (In certain instances, this might not apply to ministers who continue to work past 65.) Withdrawals are based on life expectancy and may be taken at age 65, but must be taken at age 70 1/2 (and every year thereafter). The average life expectancy for males, by the way, is 78 years and 81 years for females. If you receive monthly benefits from your retirement plan, you won’t need to make additional withdrawals as long as you meet the withdrawal threshold set by the federal government.
For example, imagine an individual who retired at 65 but lived on personal savings, plus a small pension and social security until age 70 1/2. He did not make withdrawals from his 401(k) until required to do so. Because he adjusted his lifestyle to fit the reduced income, he was able to use the funds he was required to withdraw to create a new investment account. Many seniors use income earned during retirement for this purpose.
Today’s seniors are more active than previous generations, and they frequently work past age 65. Others use dividend income, the cash value of insurance policies no longer needed to protect family, or matured savings bonds to make investments during retirement. Each situation is unique and requires careful thought and appropriate strategies. While it is tempting to spend the “extra” cash, even small amounts—if saved regularly—will grow, softening the effects of the rising costs of living.
Making plans to save and invest during retirement to insure a dependable stream of income throughout your golden years!
Former magazine editor Norma Jackson Goldman enjoys a free-lance career in her retirement. She lives in Nashville, TN