Reaching your retirement goal

May 2019

Howard Abrams

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Q.I’m possibly a year away from retirement. My wife has already retired. I don’t know if I have enough money on hand to maintain my lifestyle, and I’m nervous and losing sleep. What do I have to do to assure myself that I can retire?

A.The first and most important is to figure out how much you spend annually. You need to know how much your annual expenses will be, including taxes, to maintain your lifestyle. That, in itself, provides a dollar amount that your retirement will have to fund throughout the years of your retirement. Therefore, you must establish what your fixed expenses are going to be, including housing, food, medical, transportation, insurance and so forth. You should add to that any discretionary spending, such as vacations and entertainment. You also will need to know how much annual taxes will be once you do not have earned income. You will need to allow for inflation. Recap your expenses for the prior two years to find how much you spend annually.

 

Q.What if I cannot earn enough money from my retirement savings to support my life expectancy?

A.That’s a great question. In today’s low-interest environment, it is impossible to just put money in a bank savings account and earn any kind of meaningful income. Depending on how much you have in your retirement account and its expected earnings, plus your expected Social Security income and any other income you may have, when compared to your annual expenditures you may be short of funds. In that case you have to ask yourself some questions. Do I have enough in savings to draw from to maintain my lifestyle, and will it last throughout my life expectancy? How much can I safely withdraw? You may have to seek out a professional, such as a financial planner.

 

Q.What can a financial planner tell me?

A.He or she can help work out a plan to show you a way. Based on your financial needs as per the above, they can help determine when you should start collecting Social Security, how much you can safely withdraw from your savings, the rate of return your savings must earn to support your withdrawals, and even recommend someone who can advise you on investments you may need to make to create the income you will need.

You will also need to decide whether you’re OK drawing down your savings vs. leaving inheritance for someone. Keep in mind your future money requirements will change as you age, and the funding now needed to maintain your lifestyle will change.

 

Q.I have heard that once I hit age 70 I have to take money out of my retirement plan. What’s the story on that?

A.Yes, that is true. Once you achieve age 70½ you will have to withdraw from your retirement plan a minimum amount based on your life expectancy. There are IRS tables that determine the percentage of withdrawals of the value from your retirement account. The withdrawals are called required minimum distributions. You must make the withdrawals every year or pay huge penalties. Of course, you can take more than the required minimum distribution.

 

Q.I hear a lot about IRAs and Roth IRAs. What are the differences?

A.Most taxpayers are not sure whether they should make a contribution to an IRA, which is deductible, and pay the taxes when a distribution is made, or make a nondeductible contribution to a Roth IRA. With a Roth IRA, you can compound the earning and get the money out tax-free.

If you are going to contribute to an IRA well over five years, it is probably more beneficial to put the money in a Roth IRA providing you are investing in stocks or mutual funds. Please consult with a financial planner before deciding on a regular or Roth IRA.

Note: There are other retirement plans, such as a 401(k) and SIMPLE IRA for the self-employed, that may yield a higher contribution limit. LL