retirement income: the transition into retirement · married, consider whether your spouse is ready...

Retirement Income: The Transition Into Retirement

March 21, 2012 of 13, see disclaimer on final page

Are You Ready to Retire?

The question is actually more complicatedthan it first appears, because it demandsconsideration on two levels. First, there's theemotional component: Are you ready to entera new phase of life? Do you have a plan forwhat you would like to accomplish or do inretirement? Have you thought through boththe good and bad aspects of transitioning intoretirement? Second, there's the financialcomponent: Can you afford to retire? Will yourfinances support the retirement lifestyle thatyou want? Do you have a retirement incomeplan in place?

What does retirement mean toyou?When you close your eyes and think aboutyour retirement, what do you see? Over yourcareer, you may have had a vague concept ofretirement as a period of reward for a lifetimeof hard work, full of possibility and potential.Now that retirement is approaching, though,you need to be much more specific aboutwhat it is that you want and expect inretirement.

Do you see yourself pursuing hobbies?Traveling? Have you considered volunteeringyour time, taking the opportunity to go back toschool, or starting a new career or business?It's important that you've given it someconsideration, and have a plan. If youhaven't--for example, if you've thought nofurther than the fact that retirement simplymeans that you won't have to go to workanymore--you're not ready to retire.

Don't underestimate theemotional aspect of retirementMany people define themselves by theirprofession. Affirmation and a sense of worthmay have come, in large part, from thesuccess that you've had in your career. Givingup that career can be disconcerting on anumber of levels. Consider as well the factthat your job provides a certain structure toyour life. You may also have workrelationships that are important to you.Without something concrete to fill the void,you may find yourself scrambling to addressunmet emotional needs.

While many see retirement as a newbeginning, there are some for whomretirement is seen as the transition into some"final" life stage, marking the "beginning of theend." Others, even those who have the fullfinancial capacity to live the retirement lifestylethey desire, can't bear the thought of notreceiving a regular paycheck. For theseindividuals, it's not necessarily the income thatthe paychecks represent, but the emotionalreassurance of continuing to accumulatefunds.

Finally, it's often not simply a question ofwhether you are ready to retire. If you'remarried, consider whether your spouse isready for you to retire. Does he or she shareyour ideas of how you want to spend yourretirement? Many married couples find the firstfew years of one or both spouse's retirement aperiod of rough transition. If you haven't

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discussed your plans with your spouse, youshould do so; think through what therepercussions will be, positive and negative,on your roles and your relationship.

Can you afford the retirementyou want?Separate from the issue of whether you'reemotionally ready to retire is the question ofwhether you're financially ready. Simply--can

you afford to do everything you want inretirement? Of course, the answer to thisquestion is anything but simple. It depends onyour goals in retirement (i.e., how much thelifestyle you want will cost), the amount ofincome you can count on, and your personalsavings. It also depends on how long aretirement you want to plan for and what yourassumptions are regarding future inflation andearnings.

Timing is EverythingWhen it comes to transitioning into retirement,timing really is everything. The age at whichyou retire can have an enormous impact onyour overall retirement income situation, soyou'll want to make sure you've consideredyour decision from every angle. In fact, youmay find that deciding when to retire isactually the product of a series of smallerdecisions and calculations.

Your retirement: How longshould you plan for?The good news is that, statistically, you'regoing to live for a long time. That's also thebad news, though, because that means yourretirement income plan is going to have to besufficient to provide for your needs over(potentially) a long period of time.

How long? The average 65-year-old Americancan expect to live for over 18.8 additionalyears. (Source: National Vital StatisticsReports, Volume 59, Number 4, March 2011.)Keep in mind as well that life expectancy hasincreased at a steady pace over the years,and is expected to continue increasing.

The bottom line is that it's not unreasonable toplan for a retirement period that lasts for 30years or more.

Thinking of retiring early?

Retiring early can be wonderful if you're readyboth emotionally and financially. Consider thefinancial aspect of an early retirement withgreat care, though. An early retirement candramatically change your retirement financesbecause it affects your income plan in two

major ways.

First, you're giving up what could be primeearning years, a period of time during whichyou could be adding to your retirementsavings. More importantly, though, you'reincreasing the number of years that yourretirement savings will need to provide foryour expenses. And a few years can make atremendous difference.

There are other factors to consider as well:

• A longer retirement period means a greaterpotential for inflation to eat away at yourpurchasing power.

• You can begin receiving Social Securityretirement benefits as early as age 62.However, your benefit may be as much as20% to 30% less than if you waited until fullretirement age (65 to 67, depending on theyear you were born).

• If you're covered by an employer pensionplan, check to make sure it won't benegatively affected by your earlyretirement. Because the greatest accrual ofbenefits generally occurs during your finalyears of employment, it's possible thatearly retirement could effectively reducethe benefits you receive.

• If you plan to start using your 401(k) ortraditional IRA savings before you turn59½, you may have to pay a 10% earlydistribution penalty tax in addition to anyregular income tax due (with someexceptions, including payments made froma 401(k) plan due to your separation fromservice in or after the year you turn 55, anddistributions due to disability).

• You're not eligible for Medicare until youturn 65. Unless you'll be eligible for retireehealth benefits through your employer (orhave coverage through your spouse'splan), or you take another job that offershealth insurance, you'll need to calculatethe cost of paying for insurance or healthcare out-of-pocket, at least until you can

Life expectancy hasincreased at a steady paceover the years, and isexpected to continueincreasing. In fact, in theyear 2010, the censusreported over 53,000Americans over age 100.(U.S. Census Bureau, "Ageand Sex Composition:2010", 2010 Census Briefs)


receive Medicare coverage.

Thinking of postponingretirement?

Postponing retirement lets you continue toadd to your retirement savings. That'sespecially advantageous if you're saving intax-deferred accounts, and if you'rereceiving employer contributions. Forexample, if you retire at age 65 instead ofage 55, and manage to save an additional$20,000 per year in your 401(k) at an 8%rate of return during that time, you can addan extra $312,909 to your retirement fund.(This is a hypothetical example and is notintended to reflect the actual performanceof any specific investment.)

Even if you're no longer adding to yourretirement savings, delaying retirementpostpones the date that you'll need to startwithdrawing from your savings. That couldsignificantly enhance your savings'potential to last throughout your lifetime.

And, of course, there are other factors thatyou should consider:

• Postponing full retirement gives youadditional transition time if you need it. Ifyou're considering a new career orvolunteer opportunities in retirement,you could lay the groundwork by takingclasses or trying out your new rolepart-time.

• Postponing retirement may allow you todelay taking Social Security retirementbenefits, potentially increasing yourbenefit.

• If you postpone retirement beyond age70½, you'll need to begin taking requiredminimum distributions from anytraditional IRAs and employer-sponsored retirement plans (other thanyour current employer's retirement plan),even if you do not need the funds.

Key Decision PointsAge Don't forget

...Eligible totaptax-deferredsavingswithoutearlywithdrawalpenalty

59½* Federalincome taxeswill be dueon pretaxcontributionsand earnings

Eligible forearly SocialSecuritybenefits

62 Takingbenefitsbefore fullretirementage reduceseach monthlypayment

Eligible forMedicare

65 ContactMedicare 3monthsbefore your65th birthday

Fullretirementage forSocialSecurity

65 to 67,dependingon when youwere born

After fullretirementage, earnedincome nolonger affectsSocialSecuritybenefits

* Age 55 for distributions from employer plansupon termination of employment; otherexceptions apply

How Much Annual Retirement Income Will YouNeed?How much annual income will you need inretirement? If you aren't able to answer thisquestion, you're not ready to make a decisionabout retiring. And, if it's been more than ayear since you've thought about it, it's time torevisit your calculations. Your wholeretirement income plan starts with your targetannual income, and there are a significantnumber of factors to consider; start out with apoor estimate of your needs, and your plan is

off-track before you've even begun.

General guidelinesIt's common to discuss desired annualretirement income as a percentage of yourcurrent income. Depending on who you'retalking to, that percentage could be anywherefrom 60% to 90%, or even more, of yourcurrent income. The appeal of this approach


lies in its simplicity, and the fact that there's afairly common-sense analysis underlying it:Your current income sustains your presentlifestyle, so taking that income and reducing itby a specific percentage to reflect the fact thatthere will be certain expenses you'll no longerbe liable for (e.g., payroll taxes) will,theoretically, allow you to sustain your currentlifestyle.

The problem with this approach is that itdoesn't account for your specific situation. Ifyou intend to travel extensively in retirement,for example, you might easily need 100% (ormore) of your current income to get by. It's fineto use a percentage of your current income asa benchmark, but it's worth going through allof your current expenses in detail, and reallythinking about how those expenses willchange over time as you transition intoretirement.

Factors to considerIt all starts with your plans for retirement--thelifestyle that you envision. Do you expect totravel extensively? Take up or rediscover ahobby? Do you plan to take classes?Whatever your plan, try to assign acorresponding dollar cost. Other specificconsiderations include:

• Housing costs--If your mortgage isn'talready paid off, will it be paid soon? Doyou plan to relocate to a less (or more)expensive area? Downsize?

• Work-related expenses--You're likely toeliminate some costs associated with yourcurrent job (for example, commuting,clothing, dry cleaning, retirement savingscontributions), in addition to payroll taxes.

• Health care--Health-care costs can have asignificant impact on your retirementfinances (this can be particularly true in theearly years if you retire before you'reeligible for Medicare).

• Long-term care costs--The potential costsinvolved in an extended nursing home staycan be catastrophic.

• Entertainment--It's not uncommon to seean increase in general entertainmentexpenses like dining out.

• Children/parents--Are you responsiblefinancially for family members? Could thatchange in future years?

• Gifting--Do you plan on making gifts tofamily members or a favorite charity? Doyou want to ensure that funds are left toyour heirs at your death?

Accounting for inflationInflation is the risk that the purchasing powerof a dollar will decline over time, due to therising cost of goods and services. If inflationruns at its historical average of about 3%, agiven sum of money will lose half itspurchasing power in 23 years.

Assuming a consistent annual inflation rate of3%, and excluding taxes and investmentreturns in general, if $50,000 satisfies yourretirement income needs in the first year ofretirement, you'll need $51,500 of income thenext year to meet the same income needs. In10 years, you'll need about $67,196. In otherwords, all other things being equal, inflationmeans that you'll need more income eachyear just to keep pace.

How much will you need to equal $50,000in today's dollars given 3% inflation?

Do You Plan to Work in Retirement?An increasing number of employees nearingretirement plan to work for at least someperiod of time during their retirement years.The obvious advantage of working duringretirement is that you'll be earning money andrelying less on your retirement savings--leaving more to potentially grow for the futureand helping your savings to last longer.

But there are also non-economic reasons for

working during retirement. Many retirees workfor personal fulfillment--to stay mentally andphysically active, to enjoy the social benefitsof working, or to try their hand at somethingnew. The reasons are as varied as the retireesthemselves.

If you're thinking of working during a portion ofyour retirement, you'll want to considercarefully how it might affect your overall


retirement income plan. For example:

• If you continue to work, will you haveaccess to affordable health care (more andmore employers are offering this importantbenefit to part-time employees)?

• Will working in retirement allow you todelay receiving Social Security retirementbenefits? If so, your annual benefit--whenyou begin receiving benefits--may behigher.

• If you'll be receiving Social Securitybenefits while working, how will your workincome affect the amount of Social Securitybenefits that you receive? Additionalearnings can increase benefits in futureyears. However, for years before you reachfull retirement age, $1 in benefits willgenerally be withheld for every $2 you earnover the annual earnings limit ($14,640 in2012). Special rules apply in the year thatyou reach full retirement age.

Retirement Income: The "Three-Legged Stool"Traditionally, retirement income has beendescribed as a "three-legged stool" comprisedof Social Security, traditional employerpension income, and individual savings andinvestments. With fewer and fewer individualscovered by traditional employer pensions,though, the analogy doesn't really hold up welltoday.

Social Security retirementincomeToday, 94% of U.S. workers are covered bySocial Security (Source: SSA--Social SecurityBasic Facts, 2011). The amount of SocialSecurity retirement benefit that you're entitledto is based on the number of years you'vebeen working and the amount you've earned.Your benefit is calculated using a formula thattakes into account your 35 highest earningyears.

Social Security Full RetirementAgeBirth Year Full Retirement Age1943-1954 661955 66 and 2 months1956 66 and 4 months1957 66 and 6 months1958 66 and 8 months1959 66 and 10 months1960 and later 67

Source: Social Security Administration

The earliest that you can begin receivingSocial Security retirement benefits is age 62. Ifyou decide to start collecting benefits beforeyour full retirement age (which ranges from 65to 67, depending on the year you were born),there's a major drawback to consider: Yourmonthly retirement benefit will be permanentlyreduced. In fact, if you begin collecting

retirement benefits at age 62, each monthlybenefit check will be 20% to 30% less than itwould be at full retirement age. The exactamount of the reduction will depend on theyear you were born. (Conversely, you can geta higher payout by delaying retirement pastyour full retirement age--the governmentincreases your payout every month that youdelay retirement, up to age 70.)

If you begin receiving retirement benefits atage 62, however, even though your monthlybenefit is less than it would be if you waiteduntil normal retirement age, you'll end upreceiving more benefit checks. For example, ifyour normal retirement age is 66, if you opt toreceive Social Security retirement benefits atage 62 rather than waiting until 66, you'llreceive 48 additional monthly benefitpayments.

The good news is that, for many people,Social Security will provide a monthly benefiteach and every month of retirement, and thebenefit will be periodically adjusted forinflation. The bad news is that, for manypeople, Social Security alone isn't going toprovide enough income in retirement. Forexample, according to the quick calculator onSocial Security's website, an individual born in1952 who currently earns $100,000 a year canexpect to receive approximately $26,500annually at full retirement age, which in thiscase would be age 66. Of course, your actualbenefits will depend on your work history,earnings, and retirement age. The point is thatSocial Security will probably make up only aportion of your total retirement income needs.

Traditional employer pensionsIf you're entitled to receive a traditionalpension, you're lucky; fewer Americans arecovered by them every year. If you haven'talready selected a payout option, you'll wantto carefully consider your choices. And,whether or not you've already chosen apayout option, you'll want to make sure you

Phased retirementSome employers have begunto offer phased retirementprograms. These programsallow you to receive all or partof your pension benefit onceyou've reached retirement age,while you continue to work on apart-time basis for the sameemployer.

According to the SocialSecurity Administration(SSA), approximately 74% ofAmericans elect to receivetheir Social Security benefitsearly. (Source: SSA AnnualStatistical Supplement,2011)

Your pension plan mustprovide you with anexplanation of your optionsprior to retirement, includingan explanation of your rightto waive the QJSA, and therelative values of anyoptional forms of benefitavailable to you.


know exactly how much income your pensionwill provide, and whether or not it will adjustfor inflation.

In a traditional pension plan (also known as adefined benefit plan), your retirement benefit isgenerally an annuity, payable over yourlifetime, beginning at the plan's normalretirement age (typically age 65). Many plansallow you to retire early (for example, at age55 or earlier). However, if you choose earlyretirement, your pension benefit is actuariallyreduced to account for the fact that paymentsare beginning earlier, and are payable for alonger period of time.

If you're married, the plan generally must payyour benefit as a qualified joint and survivorannuity (QJSA). A QJSA provides a monthlypayment for as long as either you or yourspouse is alive. The payments under a QJSAare generally smaller than under a single-lifeannuity because they continue until both youand your spouse have died.

Your spouse's QJSA survivor benefit istypically 50% of the amount you receiveduring your joint lives. However, depending onthe terms of your employer's plan, you may beable to elect a spousal survivor benefit of up to100% of the amount you receive during yourjoint lives. Generally, the greater the survivorbenefit you choose, the smaller the amountyou will receive during your joint lives. If yourspouse consents in writing, you can declinethe QJSA and elect a single-life annuity oranother option offered by the plan.

The best option for you depends on yourindividual situation, including your (and yourspouse's) age, health, and other financialresources. If you're at all unsure about yourpension, including which options are availableto you, talk to your employer or to a financialprofessional.

Personal savingsMost people are not going to be able to rely onSocial Security retirement benefits to providefor all of their needs. And traditional pensionsare becoming more and more rare. Thatleaves the last leg of the three-legged stool, orpersonal savings, to carry most of the burdenwhen it comes to your retirement income plan.

Your personal savings are funds that you'veaccumulated in tax-advantaged retirementaccounts like 401(k) plans, 403(b) plans,457(b) plans, and IRAs, as well as anyinvestments you hold outside oftax-advantaged accounts.

Until now, when it came to personal savings,your focus was probably onaccumulation--building as large a nest egg aspossible. As you transition into retirement,however, that focus changes. Rather thanaccumulation, you're going to need to look atyour personal savings in terms of distributionand income potential. The bottom line: Youwant to maximize the ability of your personalsavings to provide annual income during yourretirement years, closing the gap betweenyour projected annual income need and thefunds you'll be receiving from Social Securityand from any pension payout.

Some of the factors you'll need to consider, inthe context of your overall plan, include:

• Your general asset allocation--Thechallenge is to provide, with reasonablecertainty, for the annual income you willneed, while balancing that need with otherconsiderations, such as liquidity, how longyou need your funds to last, your risktolerance, and anticipated rates of return.

• Specific investments and products--Shouldyou consider an annuity? Municipal bonds?What about a mutual fund that's managedto provide predictable retirement income(sometimes called a "distribution" mutualfund)?

• Your withdrawal rate--How much can youafford to withdraw each year withoutexhausting your portfolio? You'll need totake into account your asset allocation,projected returns, your distribution period,and whether you expect to use bothprincipal and income, or income alone.You'll also need to consider how muchfluctuation in income you can tolerate frommonth to month, and year to year.

• The order in which you tap variousaccounts-- Tax considerations can affectwhich accounts you should use first, andwhich you should defer using until later.

• Required minimum distributions(RMDs)--You'll want to consider up fronthow you'll deal with required withdrawalsfrom tax-advantaged accounts like 401(k)sand traditional IRAs, or whether they'll be afactor at all. After age 70½, if you withdrawless than your RMD, you'll pay a penaltytax equal to 50% of the amount you failedto withdraw.

Other sources of retirementincomeIf you've determined that you're not going tohave sufficient annual income in retirement,consider possible additional sources of

Pension maximizationOne option to consider whendeciding between a single-lifeannuity and the QJSA is"pension maximization." Underthis strategy, you choose thesingle-life annuity, with itslarger benefit, and then use theadditional income to purchaselife insurance with your spouseas the beneficiary, therebyproviding for your spouse'sfinancial future.


income, including:

• Working in retirement--Part-time work,regular consulting, or a full second careercould all provide you with valuable income.

• Your home--If you have built up substantialhome equity, you may be able to tap it as asource of retirement income. You could sellyour home, then downsize or buy in alowercost region, investing that freed-upcash to produce income or to be used asneeded. Another possibility is borrowingagainst the value of your home (a coursethat should be explored with caution).

• Permanent life insurance--Although not theprimary function of life insurance, anexisting permanent life insurance policythat has cash value can sometimes be apotential source of retirement income.(Policy loans and withdrawals can reducethe cash value, reduce or eliminate thedeath benefit, and can have negative taxconsequences.)

What if you still don't haveenough?If there's no possibility that you're going to beable to afford the retirement you want, youroptions are limited:

1. Postpone retirement--You'll be able tocontinue to add to your retirementsavings. More importantly, delayingretirement postpones the date that you'llneed to start withdrawing from yourpersonal savings. Depending on yourindividual circumstances, this can makean enormous difference in your overallretirement income plan.

2. Reevaluate retirement expectations--Youmight consider ratcheting down yourgoals and expectations in retirement to alevel that better aligns with your financialmeans. That doesn't necessarily mean adramatic lifestyle change--even smalladjustments can make a difference.

Asset AllocationYour asset allocation strategy in retirement willprobably be different than the one you usedwhen saving for retirement. During youraccumulation years, your asset allocationdecisions may have been focused primarily onlong-term growth. But as you transition intoretirement, your priorities for and demands onyour portfolio are likely to be different. Forexample, when you were saving, as long asyour overall portfolio was earning anacceptable average annual return, you mayhave been happy. However, now that you'replanning to rely on your savings to produce aregular income, the consistency ofyear-to-year returns and your portfolio'svolatility may assume much greaterimportance.

The goal of asset allocationBalancing the need for both immediate incomeand long-term returns can be a challenge.Invest too conservatively, and your portfoliomay not be able to grow enough to maintainyour standard of living. Invest tooaggressively, and you could find yourselfhaving to withdraw money or sell securities atan inopportune time, jeopardizing futureincome and undercutting your long-termretirement income plan. Without properplanning, a market loss that occurs in the earlyyears of your retirement could be devastatingto your overall plan. Asset allocation alonedoes not guarantee a profit or ensure againsta loss, but it can help you manage the level

and types of risk you take with yourinvestments based on your specific needs.

An effective asset allocation plan:

• Provides ongoing income needed to payexpenses

• Minimizes volatility to help provide bothreliable current income and the ability toprovide income in the future

• Maximizes the likelihood that your portfoliowill last as long as you need it to

• Keeps pace with inflation in order tomaintain purchasing power over time

Look beyond preconceivedideasThe classic image of a retirement incomeportfolio is one that's invested almost entirelyin bonds, with the bond interest providingrequired annual income. However, retireeswho put all their investments into bonds oftenfind that doing so doesn't adequately accountfor the impact of inflation over time. Considerthis: If you're earning 4% on your portfolio, butinflation is running between 3% and 4% (itshistorical average), your real return is only 1%at best--and that's before subtracting anyaccount fees, taxes, or other expenses.

That means that you may not want to turnyour back on growth-oriented investments.Though past performance is no guarantee of

Accounting for interest rateriskSome retirees are surprised tolearn that even though a bond'sinterest rate may be fixed,bond prices can go up anddown (though typically not asmuch as those of stocks).When interest rates rise, bondprices typically fall. That maynot matter if you hold a bond tomaturity, but if you must sell abond before it matures, youcould get less than you paid forit. Also, if you hold individualbonds or certificates of deposit,and interest rates fall beforethat investment matures, youmay not be able to get thesame interest rate if you try toreinvest that money. Thatcould, in turn, affect yourincome.


future results, stocks historically have hadbetter long-term returns than bonds or cash.Keeping a portion of your portfolio invested forgrowth (generally the role of stocks in aportfolio) gives you the potential for higherreturns that can help you at least keep pacewith inflation. The tradeoff: Equities alsogenerally involve more volatility and risk ofloss than income-oriented investments. Buteffective diversification among various typesof investments can help you balancelower-yielding, relatively safe choices that canprovide predictable income or preserve capitalwith those that may be volatile but that offerpotential for higher returns.

There's no one right answerYour financial situation is unique, whichmeans you need an asset allocation strategythat's tailored to you. That strategy may be aone-time allocation that gets revisited andrebalanced periodically, or it could be an assetallocation that shifts over time to correspondwith your stage of retirement. The importantthing is that the strategy you adopt is one thatyou're comfortable with and understand.

Making Portfolio WithdrawalsWhen planning for retirement income, you'llneed to determine your portfolio withdrawalrate, decide which retirement accounts to tapfirst, and consider the impact of requiredminimum distributions.

Withdrawal ratesYour retirement lifestyle will depend not onlyon your asset allocation and investmentchoices, but also on how quickly you drawdown your retirement portfolio. The annualpercentage that you take out of your portfolio,whether from returns or the principal itself, isknown as your withdrawal rate.

Take out too much too soon, and you mightrun out of money in your later years. Take outtoo little, and you might not enjoy yourretirement years as much as you could. Yourwithdrawal rate is especially important in theearly years of your retirement; how yourportfolio is structured then and how much youtake out can have a significant impact on howlong your savings will last.

What's the right number? It depends on youroverall asset allocation, projected inflation rateand market performance, as well as countlessother factors, including the timeframe that youwant to plan for. For many, though, there's abasic assumption that an appropriatewithdrawal rate falls in the 4% to 5% range. Inother words, you're withdrawing just a smallpercentage of your investment portfolio eachyear. To understand why withdrawal ratesgenerally aren't higher, it's essential to thinkabout how inflation can affect your retirementincome.

Consider the following example: Ignoringtaxes for the sake of simplicity, if a $1 millionportfolio is invested in a money marketaccount yielding 5%, it provides $50,000 of

annual income. But if annual inflation pushesprices up by 3%, moreincome--$51,500--would be needed thefollowing year to preserve purchasing power.Since the account provides only $50,000income, an additional $1,500 must bewithdrawn from the principal to meetexpenses. That principal reduction, in turn,reduces the portfolio's ability to produceincome the following year. As this processcontinues, principal reductions accelerate,ultimately resulting in a zero portfolio balanceafter 25 to 27 years, depending on the timingof the withdrawals.

When setting an initial withdrawal rate, it'simportant to take a portfolio's potential upsand downs into account--and the need for arelatively predictable income stream inretirement isn't the only reason. If it becomesnecessary during market downturns to sellsome securities in order to continue to meet afixed withdrawal rate, selling at an inopportunetime could affect a portfolio's ability togenerate future income. Also, making yourportfolio either more aggressive or moreconservative will affect its lifespan. A moreaggressive portfolio may produce higherreturns, but might also be subject to a higherdegree of loss. A more conservative portfoliomight produce steadier returns at a lower rate,but could lose purchasing power to inflation.

Tapping tax-advantagedaccounts--first or last?You may have assets in accounts that are taxdeferred (e.g., traditional IRAs) and tax free(e.g., Roth IRAs), as well as taxable accounts.Given a choice, which type of account shouldyou withdraw from first?

If you don't care about leaving an estate tobeneficiaries, consider withdrawing money

The higher your withdrawalrate, the more you'll have toconsider whether it issustainable over the longterm.


from taxable accounts first, then tax-deferredaccounts, and lastly, any tax-free accounts.The idea is that, by using your tax-favoredaccounts last, and avoiding taxes as long aspossible, you'll keep more of your retirementdollars working for you on a tax-deferredbasis.

If you're concerned about leaving assets tobeneficiaries, however, the analysis is a littlemore complicated. You'll need to coordinateyour retirement planning with your estate plan.For example, if you have appreciated orrapidly appreciating assets, it may makesense for you to withdraw those assets fromyour tax-deferred and tax-free accounts first.The reason? These accounts will not receive astep-up in basis at your death, as many ofyour other assets will.

But this may not always be the best strategy.For example, if you intend to leave your entireestate to your spouse, it may make sense towithdraw from taxable accounts first. This isbecause your spouse is given preferential taxtreatment when it comes to your retirementplan. Your surviving spouse can roll overretirement plan funds to his or her own IRA orretirement plan, or, in some cases, maycontinue the plan as his or her own. The fundsin the plan continue to grow tax deferred, anddistributions need not begin until after yourspouse reaches age 70½. The bottom line isthat this decision is also a complicated one,and needs to be looked at closely.

Required minimum distributions(RMDs)In practice, your choice of which assets todraw on first may, to some extent, be directedby tax rules. You can't keep your money intax-deferred retirement accounts forever. Thelaw requires you to start takingdistributions--called "required minimumdistributions" or RMDs--from traditional IRAsby April 1 of the year following the year youturn age 70½, whether you need the money ornot. For employer plans, RMDs must begin byApril 1 of the year following the year you turn70½, or, if later, the year you retire. Roth IRAsaren't subject to the lifetime RMD rules.

If you have more than one IRA, a requireddistribution amount is calculated separately foreach IRA. These amounts are then addedtogether to determine your total RMD for theyear. You can withdraw your RMD from anyone or more of your IRAs. (Similar rules applyto Section 403(b) accounts.) Your traditionalIRA trustee or custodian must tell you howmuch you're required to take out each year, oroffer to calculate it for you. For employerretirement plans, your plan will calculate theRMD, and distribute it to you. (If youparticipate in more than one employer plan,your RMD will be determined separately foreach plan.)

It's very important to take RMDs into accountwhen contemplating how you'll withdrawmoney from your savings. Why? If youwithdraw less than your RMD, you will pay apenalty tax equal to 50% of the amount youfailed to withdraw. The good news: You canalways withdraw more than your RMDamount.

Investment ConsiderationsA well-thought-out asset allocation inretirement is essential. But consideration mustalso be given to the specific investments thatyou choose. While it's impossible to discussevery option available, it's worth mentioninginvestment choices that might have a place inthe income-producing portion of your overallinvestment strategy.

AnnuitiesAn annuity is a contract between you and anannuity issuer (an insurance company); in themost general terms, you pay money (apremium or premiums) in exchange for theissuer's promise to make payments to you fora fixed period of time or for the rest of your

life. Annuities are able to offer somethingunique--a guaranteed income stream for therest of your life or for the combined lives ofyou and your spouse (although that guaranteeis subject to the claims-paying ability of theissuer). In return for this guaranteed incomestream, you generally give up control of yourfunds, so annuities are not as liquid as otherinvestment options; you get a fixed income,but you may not have the ability to withdrawextra cash if you need it. But some annuitieshave riders that can be added for a fee, whichprovide for lifetime income while retainingaccess to principal. Annuities often do notprovide as great a potential return as otherinvestment options--especially when fees andexpenses are factored in.

RMDs are calculated bydividing your traditional IRAor retirement plan accountbalance by a life expectancyfactor specified in IRStables. Your accountbalance is usuallycalculated as of December31 of the year preceding thecalendar year for which thedistribution is required to bemade.


BondsA bond portfolio can help you addressinvestment goals in multiple ways. Buyingindividual bonds (which are essentially IOUs)at their face values and holding them tomaturity can provide a predictable incomestream and the assurance that unless a bondissuer defaults, you'll receive the principalwhen the bond matures. (Bear in mind that if abond is callable, it may be redeemed early,and you would have to replace that income.)You Investment Considerations also can buybond mutual funds or exchange-traded funds(ETFs). A bond fund has no specific maturitydate and therefore behaves differently from anindividual bond, though like an individualbond, you should expect the market price of abond fund share to move in the oppositedirection from interest rates.

Dividend-paying stocksDividend-paying stocks, as well as mutualfunds and ETFs that invest in them, also canprovide income. Because dividends oncommon stock are subject to the company'sperformance and a decision by its board ofdirectors each quarter, they may not be aspredictable as income from a bond. Dividendson preferred stock are different; the rate isfixed and they're paid before any dividend isavailable for common stockholders.

Other options worth noting• Certificates of deposit (CDs)-- CDs offer a

fixed interest rate for a specific time period,and usually pay higher interest than aregular savings account. Typically, you canhave interest paid at regularly scheduledintervals. A penalty is generally assessed ifyou cash them in early.

• Treasury Inflation-Protected Securities(TIPS)-- These government securities paya slightly lower fixed interest rate thanregular Treasuries. However, your principalis automatically adjusted twice a year tomatch increases in the Consumer PriceIndex (CPI). Those adjusted amounts areused to calculate your interest payments.

• Distribution funds- Some mutual funds aredesigned to provide an income stream fromyear to year. Each fund's annual payment(either a percentage of assets or a specificdollar amount) is divided into equalpayments, typically made monthly orquarterly. Some funds are designed to lastover a specific time period and plan todistribute all your assets by the end of thattime; others focus on capital preservation,make payments only from earnings, andhave no end date. You may withdrawmoney at any time from a distribution fund;however, that may reduce future returns.Also, payments may vary, and there is noguarantee a fund will achieve the desiredreturn.

Health-Care ConsiderationsAt any age, health care is a priority. When youretire, however, you will probably focus moreon health care than ever before. Stayinghealthy is your goal, and this can mean morevisits to the doctor for preventive tests androutine checkups. There's also a chance thatyour health will decline as you grow older,increasing your need for costly prescriptiondrugs or medical treatments. That's whyhaving health insurance can be extremelyimportant.

If you are 65 or older when you retire, you'remost likely eligible for certain health benefitsfrom Medicare. But if you retire before age 65,you'll need some way to pay for your healthcare until Medicare kicks in. Generousemployers may offer extensive healthinsurance coverage to their retiringemployees, but this is the exception ratherthan the rule. If your employer doesn't extendhealth benefits to you, you might need toconsider other options, such as buying aprivate health insurance policy or extending

your employer-sponsored coverage throughCOBRA, if that's a possibility.

MedicareMost Americans automatically become entitledto Medicare when they turn 65. In fact, ifyou're already receiving Social Securitybenefits, you won't even have to apply--you'llbe automatically enrolled in Medicare.However, you will have to decide whether youneed only Part A coverage (which is premiumfree for most retirees) or if you also want topurchase Part B coverage. Part A, commonlyreferred to as the hospital insurance portion ofMedicare, can help pay for your home healthcare, hospice care, and inpatient hospitalcare. Part B helps cover other medical caresuch as physician care, laboratory tests, andphysical therapy. You may also choose toenroll in a managed care plan or privatefee-for-service plan under Medicare Part C(Medicare Advantage) if you want to pay fewerout-of-pocket health-care costs. If you don't

The bottom line is thatannuities may be seen as afull or partial solution, sincethey can offer stable,predictable incomepayments, but they're notright for everyone.

These are just a few of theoptions worthconsidering--there are manymore. You should not investin any of these optionswithout a full understandingof the advantages anddisadvantages the optionoffers, as well as anunderstanding of how anyearnings are taxed.

Before investing in a mutualfund, carefully consider theinvestment objectives, risks,charges, and expenses ofthe fund. This information isavailable in the prospectus,which can be obtained fromthe fund. Read it carefullybefore investing.

Medicare won't pay forlong-term care if you everneed it. You'll need to payfor that out-of-pocket or relyon benefits from long-termcare insurance or, if yourassets and/or income arelow enough to allow you toqualify, Medicaid.


already have adequate prescription drugcoverage, you should also consider joining aMedicare prescription drug plan offered inyour area by a private company or insurer thathas been approved by Medicare.

Unfortunately, Medicare won't cover all of yourhealth-care expenses. For some types of care,you'll have to satisfy a deductible and makeco-payments. That's why many retireespurchase a Medigap policy.

MedigapUnless you can afford to pay for the thingsthat Medicare doesn't cover, including theannual copayments and deductibles that applyto certain types of care, you may want to buysome type of Medigap policy when you signup for Medicare Part B. There are severalstandard Medigap policies available. Each ofthese policies offers certain basic corebenefits, and all but the most basic policy offervarious combinations of additional benefitsdesigned to cover what Medicare does not.Although not all Medigap plans are availablein every state, you should be able to find aplan that best meets your needs and yourbudget.

When you first enroll in Medicare Part B atage 65 or older, you have a six-monthMedigap open enrollment period. During that

Long-term care and MedicaidThe possibility of a prolonged stay in a nursinghome weighs heavily on the minds of manyolder Americans and their families. That'shardly surprising, especially considering thehigh cost of long-term care. Many people lookinto purchasing long-term care insurance(LTCI). A good LTCI policy can cover the costof care in a nursing home, an assisted-livingfacility, or even your own home. But if you'reinterested, don't wait too long to buy it--you'llgenerally need to be in good health. Inaddition, the older you are, the higher thepremium you'll pay.

Many people assume that Medicaid will payfor long-term care costs. You may be able torely on Medicaid to pay for long-term care, butyour assets and/ or income must be lowenough to allow you to qualify. Additionally,Medicaid eligibility rules are numerous andcomplicated, and vary from state to state. Talkto an attorney or financial professional whohas experience with Medicaid before youmake any assumptions about the roleMedicaid might play in your overall plan.

time, you have a right to buy the Medigappolicy of your choice from a private insurancecompany, regardless of any health problemsyou may have.


Disclosure Information -- Important -- Please Review

March 21, 2012Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012

Forefield Inc., the author of this article, does not provide legal, tax, or investment advice. All contentprovided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to itsmaterials, or for the accuracy of information provided by other sources.Hourly, fee-only financial planning and investment advisory services are offered through Cole FinancialConsulting, LLC, an investment advisory firm registered in New Mexico and Colorado. Material presented isbelieved to be from reliable sources and we make no representations as to its accuracy or completeness. Allinformation and ideas should be discussed in detail with your advisor prior to implementation. This documentshall in no direct or indirect way be construed or interpreted as a solicitation to sell or offer to sell investmentadvisory services to any residents of any state other than the states in which Cole Financial Consulting, LLCis registered or eligible to provide advisory services under applicable de minimis rules.

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