4. Review your investing strategy. For many people, this will have already happened years ago as a result of managing retirement plan money at work or IRAs they've established. But how you divide your money between stocks and bonds (which affects your risk level) changes as you move closer to retirement, so it's important to make sure your allocations are still appropriate. See point #5 for young couples for more on this.
5. Maximize your retirement plan at work. Your 401(k) or other retirement plan at work probably represents your best opportunity to load up for retirement. The tax advantages of such an account, which usually include pre-tax contributions, coupled with employer matching or other contributions, make it tough to beat. This isn't true in every case though, so investigate the details of your plan, as well as the investment options offered within it. New tax law changes will boost the amount you are eligible to contribute over the next decade; check with your human resources department or plan administrator regarding contribution limit changes within your plan.
6. Take advantage of IRA opportunities. If you're married and your gross income is over $85,000, you won't gain an immediate tax benefit from contributing to an IRA. But that doesn't mean it's not worth doing so anyway. The tax-free growth you get from investing in a Roth IRA is very valuable. Remember, your time horizon isn't just until you retire, it's through your retirement, which these days often extends 20 years or more. So if you've maxed out your retirement plans at work, definitely consider an IRA.
The Retirement Couple
The big day has finally arrived! Freedom! But with the freedom comes the unsettling loss of that familiar friend: the regular paycheck. And with the loss of a steady income comes the realization that you are more at the mercy of the markets than you realized. Don't panic, you can have peace of mind despite this adjustment. But it's definitely time to make sure your personal financial plan reflects these major changes. Here are the key points:
1. Decide whether to take your company retirement plan money in a lump sum or an annuity. This is an extremely important decision and should be made with great care. If you'll be making this decision soon, schedule an appointment with a CPA or financial planner to talk about which is a better option for you. (Read more on the Lump Sum vs. Annuity decision.)
2. Re-create your budget to reflect the realities of your retirement income. This doesn't just mean the changing amounts; it means the change in the timing of these payments as well. Match your living expenses to the amount and timing of your income, obviously remembering to include things such as social security income, pension benefits you receive, and so on.
3. Determine your strategy for withdrawing money from your retirement plans. This is a major decision, one you should make with a firm grasp of your income needs (from your newly revised budget). Let's review a few popular options:
• Taking a fixed amount out at regular intervals is certainly a simple method, but it exposes you more than the others to market declines and increases your risk of outliving your money.
• A slight variation involves taking out a fixed percentage at regular intervals. This improves your odds of not outliving your money, as you take less out when your account balance declines. As long as you are still able to meet your expenses, this can work well.
• Another option that greatly insulates you from market fluctuations is to set aside five years of living expenses in a money market fund account, and pay all current expenses from that account rather than your investments. History shows that over five year periods, the stock market has made money 98% of the time. This is a good way to extend your time horizon, allowing you to be slightly more aggressive in your asset allocation, by insuring that you won't be taking money out of your plan disproportionately during down markets. (Read more on Investing for Retirement.)
