Three Common Retirement Questions You Need To Ask
January 28, 2013Do you want to retire this year? Next year? Do you want to retire sometime soon?
When I throw this question out in the financial education workshops and financial wellness webcasts we do, it never fails that I get the answer, “Yes! Tomorrow!” No matter how many times I hear that, it always brings a smile to my face. When a more serious discussion follows, I am often asked, “How do I know if I am on track to retire?” as well as a few other questions. Here are some answers to the three most common retirement questions and some resources that can help you determine whether or not you are ready to retire, whether it is tomorrow or many years from now.
Do I have enough money to enjoy a nice lifestyle in retirement? – I hate to answer a question with a question but I would first want to know what “nice lifestyle” means to you. I live in a resort town with a wonderful shop downtown that carries $1,600 cowboy boots, which I think are extremely nice but I don’t personally own a pair. What is “nice” to you?
One way financial planners determine if you are on track to retire is to look at current income replacement. People typically plan to replace 70-90% of your current income when they retire. Why not 100%? Because certain expenses, such as payroll taxes, retirement contributions, commuting, debt, and raising children are expected to decrease once you retire. To see what percentage of your income you are currently on track to replace, use a financial calculator.
Resource: Retirement Plan Estimator
Should I take a monthly income from my pension or a lump sum? – If you have a pension from your employer, you often have a list of choices as to how to receive your funds – payments or a lump sum rollover to an IRA rollover account. In making your decision, consider how long you may live, how comfortable you are with market risk, and whether or not you like to leave a benefit for someone else. If no one relies on your income and you are looking for the highest monthly income without the possibility of outliving your money, then a single-life annuity may be the most appropriate option. If you are married or have a significant other who depends on your income and you would like him or her to receive a guaranteed monthly income for as long as they live, consider a joint and survivor annuity. If you are comfortable with market risk, and you plan to leave a benefit for heirs, perhaps a lump sum distribution (if available) is most appropriate.
Resource: Making the Decision: Which Pension Payout Option is Best?
Should I roll my 401(k) over to an IRA? – You can but you don’t have to. You might want to roll over your 401(k) to an IRA if you want to manage the funds yourself (since your investment choices are virtually unlimited) or you are working with a financial advisor and want them to manage the funds. Most employer plans allow you to leave the funds in your 401(k) — you just have to start taking mandatory annual IRS distributions at age 70 ½. The advantage of leaving the money in the employer plan is you can take retirement distributions without a penalty starting at age 55 (instead of 59 ½ with the IRA) as long as you worked at the company until then, and your total costs may be lower since plan fees are often lower than “retail” IRAs.
Resource: 7 Reasons Not to Roll Your Orphaned 401(k) to an IRA
Imagine how exciting it would be to actually be able to retire tomorrow – with all of your ducks in a row and plenty of funds to replace your current income stream for life. To me, it might be even better to walk into Burns Cowboy shop on Main Street in Park City, Utah and buy some special boots to mark the day. But that would be my dream. What is your dream and are you on track to get there?