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«Smart Management of Retirement Income Table of Contents Introduction 1 Getting Ready for Retirement 2 Living Expenses in Retirement 2 Retirement ...»

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Smart Management of

Retirement Income

Table of Contents

Introduction 1

Getting Ready for Retirement 2

Living Expenses in Retirement 2

Retirement Timetable 2

Working with Investment Professionals 3

Sources of Retirement Income 4

Social Security 4

Defined Benefit Plans 5

Defined Contribution Plans 6 Home Equity 7 Reverse Mortgages 8 Selecting Payout Methods 9 Pension Payout Options 9 Defined Contribution Payout Options 11 Managing Investment Portfolios 13 Reassessing Risk 13 Asset Allocation 14 Income Investments 14 Growth Investments 15 Income from Selling Your Investments 15 Making Your Principal Last 15 Selling Your Investments 16 Fees & Expenses 16 Taxation of Retirement Income 17 Taxation of Social Security Benefits 17 Taxes on Tax-Deferred and Pension Income 17 Taxable Accounts 18 Planning for Gifts and Bequests 19 Keeping Up with Tax Changes 19 Working in Retirement 20 Social Security and Limits on Earned Income 20 Impact on Pensions and Other Retirement Plans 21 Jobs and Required Minimum Distributions 21 Long-Term Planning 22 Choosing Pension and Insurance Beneficiaries 22 Choosing IRA Beneficiaries 23 Power of Attorney 24 Living Wills 24 Health Care Costs 25 Health Insurance 25 Long-Term Care Insurance 25 Smart Management of Retirement Income 1 Introduction When you retire, you have more control over your time, and finally have enough leisure to do what you want. While taking control of your time may not require a lot of advance planning, taking control of your retirement finances does. You need income you can count on, year in and year out for a very long time.

This brochure offers you tips on the subjects listed below to help you manage your retirement income.

Getting Ready for Retirement Whether your retirement is fast approaching or years away, there are actions you can take now to maximize retirement when the time comes. It’s never too early or too late to start.

Sources of Retirement Income Managing retirement income starts with knowing what your sources of income will be—Social Security an employer-sponsored retirement savings account—and the rules that govern each income source.

Selecting Payout Methods When you retire, you begin to take income from your defined benefit pension or defined contribution plan. You may also take income from a Social Security account. You should learn about the payout options from each source and what each means for your personal situation.

Managing Investment Portfolios Retirement income management is all about making sure your retirement savings provide enough income for your needs, and that you don’t outlive your assets. This starts with setting up and managing a portfolio that’s right for you.

Taxation of Retirement Income When you retire, you leave behind many things—the daily grind, commuting, maybe your old home— but one thing you keep is a tax bill. In fact, income taxes can be your single largest expense in retirement.

Working in Retirement You’re retired, but you may want to go back to work. You should, however, understand exactly how working after retirement might affect your Social Security, pension benefits, and other retirement income.

Long-Term Planning Once retired, you may have questions about the future — particularly about how your spouse and family will cope financially if you become disabled or die and what will happen to the assets in your estate after your death. These valid concerns underscore the importance of solid long-term planning.

Health Care Costs Your plans for the future shouldn’t just be about what happens to your property or financial affairs.

The longer you live in retirement, the greater the likelihood that you will need to use health insurance or arrange for long-term care.

–  –  –

Getting Ready for Retirement

Before you retire, you’ll need to consider these questions:

What sources of income are you confident you’ll receive?

How much income will these sources provide each year?

–  –  –

In most cases, the longer you work and the higher your salary, the more retirement income you can anticipate. If your employer offers a traditional pension, the pension income you receive will depend on the years of service, your salary and the age when you stop working. On the other hand, tax-deferred retirement plans—including employer-sponsored retirement plans such as 401(k)s, 403(b)s, individual retirement accounts (IRAs) and annuities—provide income based on the amounts you put in them, the investment choices you made and the way those investments performed.

Living Expenses in Retirement Managing retirement income successfully starts with making sure your expectations for retirement are realistic. This requires that you have a clear picture of how much you’ll spend both on the everyday costs of living and on any special activities you’re planning.

Many retirement experts estimate you’ll need between 70 and 85 percent of your pre-retirement income to maintain your standard of living after you stop working. But that formula might be too simple, and possibly too low, to account for what you’ll actually spend. You’ll need more if you have expensive hobbies or plan to travel extensively. You may also need more if you’re in poor health and have substantial medical expenses.





Start by tracking what you actually spend now.

Remember that many costs will go up over time—likely candidates include healthcare, food, property taxes and travel. Costs that could go down include your mortgage, commuting (including the need for a second car), clothing and financial expenditures for your children and your parents.

Retirement Timetable

Wherever you are on the retirement timetable, it’s important to keep some critical ages in mind:

55: You can retire early. If you retire, quit or are fired from your job beginning in the year you turn 55, you might be able to withdraw from tax-deferred savings plans without owing a 10 percent tax penalty, as long as you qualify for one of the exceptions spelled out in the federal tax code. You may also be eligible for pension benefits from some employer plans if you have enough years of service.

Smart Tip: Create an Emergency Fund You can’t predict what might happen to your finances, but you can prepare by creating an investment or savings account equal to three to six months of living expenses, earmarked for emergencies.

You probably will want to keep this rainy-day money in accounts that protect their value, such as savings or money market accounts, or U.S. Treasury bills.

–  –  –

59½: You can generally withdraw money from your personal tax-deferred savings plans (IRAs, annuities) and from your employer-sponsored savings plans if you’ve retired from the job without owing a 10 percent tax penalty.

60: You can receive Social Security benefits if you are a widow or widower.

62: You may be eligible for full pension benefits from your employer, depending on the plan. You can begin to receive reduced Social Security benefits if you choose. Your Social Security benefits will increase, however, with every year you wait to collect them.

65: You can receive full pension benefits from most employers, as well as full Social Security benefits if you were born in 1937 or earlier. If you are a widow or widower, you can receive full Social Security benefits if you were born before January 2, 1940. If you were born later than 1937, when you reach what’s called full retirement age and are eligible for full benefits depends on the year of your birth. For those born between 1938 and 1942, it’s during the year after you turn 65. For those born between 1943 and 1954, it’s 66. For those born between 1955 and 1960, it increases annually from 66 and 2 months to 67. If you were born in 1961 or later, your full retirement age is 67. At 65, you normally also qualify for Medicare benefits.

70: You should begin to collect your Social Security benefits if you haven’t already, because your benefit has reached its maximum.

70½: You must begin withdrawals from your traditional IRAs, but not from Roth IRAs. You must also begin withdrawals from employee-sponsored retirement plans, such as a 401(k), unless you’re still working.

Working with Investment Professionals Many people who are approaching retirement or have recently retired turn to a professional to seek help planning for that event and managing their income. If you’re looking for that kind of help, you may need to shop around to find someone you like and trust. For information on different types of investment professionals and how to select them, read FINRA’s Selecting an Investment Professional. Always use FINRA BrokerCheck to learn about the licensing and background of the individuals you’re considering.

And if an investment professional says he or she has special credentials or designations, be sure to use FINRA’s Understanding Professional Designations tool to see whether the issuing organization requires continuing education, takes complaints or has a way for you to confirm who holds the credential.

! Caution: Look Before You Leave!

While early retirement is an alluring prospect, be advised that some early retirement strategies are in fact schemes designed to take your money. FINRA is aware of instances in which employees who had built up sizeable retirement savings have been misled—and financially harmed—by flawed, even fraudulent, early-retirement investment schemes. For more information about how to protect yourself, read the Investor Alert, Look Before You Leave: Don’t Be Misled By Early Retirement Investment Pitches That Promise Too Much.

Smart Tip: Allow Three-Months Lag Time When Appling for Social Security The Social Security Administration (SSA) recommends applying for retirement benefits three months before you want your benefits to begin. You can get an estimate of your future benefits at any time.

For more information, see the SSA’s Web page How should I prepare for retirement?

TOC Smart Management of Retirement Income 4

Sources of Retirement Income Social Security For many, Social Security will be a vital—and significant—source of retirement income. Unlike most sources of retirement income, Social Security benefits are adjusted periodically for inflation through automatic costof-living adjustments, or COLAs.

Perhaps the biggest decision you’ll make about Social Security is when to apply for your benefits. You can take reduced benefits at 62, wait until you’re eligible to receive your full benefits—which will depend on the year in which you were born—or postpone your first payment to qualify for a larger amount.

The SSA offers many tools and resources to help you understand your Social Security benefits and how best

to plan for the day when you will tap those benefits to help fund your retirement. Here are a few to explore:

Find Your Full Retirement Age When to Start Receiving Retirement Benefits Social Security Retirement Planner Life Expectancy Calculator Social Security Checklist When you apply for benefits, you’ll be asked to provide a number of documents. You must submit originals or copies certified by the issuing office, as the SSA does not accept photocopies. If you know what those documents are before you’re ready to apply, you’ll have a head start on getting them together.

Here’s a checklist of some documents you may need when you sign up for Social Security:

✔✔ Your Social Security card (or a record of your number) ✔✔ Your birth certificate ✔✔ Proof of U.S. citizenship or lawful immigration status if you were not born in the U.S.

✔✔ Your spouse’s birth certificate and Social Security number if he or she is applying for benefits based on your earnings ✔✔ Marriage certificate (if applying for spousal benefits) ✔✔ Your military discharge papers if you had military service ✔✔ Your most recent W-2 form, or, if you’re self-employed, your tax return Drawing Social Security Income If you and your spouse are both eligible for Social Security benefits based on your work histories, you’ll face a key choice. You must decide together whether to draw on your individual accounts or have one of you draw what are called spousal benefits.

If you and your spouse earned approximately equal amounts over your working lives, drawing on your individual accounts will provide the greatest benefits. But if one of you earned substantially more than the other, you’ll want to compare your alternatives. If you are eligible for both your own retirement benefit and for benefits as a spouse, SSA will always pay you benefits based on your record first. If your benefit as a spouse is higher than your retirement benefit, you will receive a combination of benefits equaling the higher spouse’s benefits.

If you have a minor child, you may be eligible for additional Social Security benefits.

TOC Smart Management of Retirement Income 5

Defined Benefit Plans If you have a defined benefit pension, you should know before you retire about how much pension income you’ll receive. This income is typically based on how long you worked at your company, what you earned and your age when you stopped working. But either way, as you approach retirement, you should check with your employer’s human resources office on a number of pension eligibility questions. And after you retire, the office should still be a valuable resource.

Start with the most important thing: verify that you are fully vested—that is, eligible to collect a full pension. Many private company employees become vested after five years of service, or gradually between years three and seven.

You should also ask your employer what happens to your pension plan benefits if you retire sooner than 65 or work past that age. Some companies might decrease the amount of pension you would otherwise receive if you stop working earlier or later than 65.

If you’re married and are part of a defined benefit plan, your employer is legally bound to pay some of your pension amount to your surviving spouse when you die. The amount may be set at 50 percent, but you may be able to increase it. If you don’t want your spouse to get any of your pension, your spouse must sign a written consent waiving rights to this income.



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