This is an important consideration, because many retirees choose to work during retirement. Based on 2002 figures:
Under age 65, a worker can earn $11,280 with a reduction
of $1 in benefits for
every $2 earned over the $11,280 limit.
Social Security recipients 65-69 no longer have earnings limits.
For couples filing a joint tax return:
If your “income” is less than $32,000, your benefits are not taxable.
Between $32,000 and $44,000, 50% of your Social Security is included in taxable income.
Above $44,000, 85% of Social Security is taxable.
For single taxpayers:
If your “income” is less than $25,000, your benefits are not taxable.
Between $25,000 and $34,000, 50% of Social Security is included in taxable income.
Above $34,000, 85% of Social Security is taxable.
See your tax advisor for complete details, including the definition of “income” as it relates to the taxability of Social Security income.
One way is to continue to defer income not needed, through investments such as IRAs or single-premium tax-deferred annuities.
Investments should be coordinated with an investor’s individual need for income, growth of income, safety of principal and liquidity. Only after careful planning should investments be recommended to a retiree.
In general, however, many retirees have the need for three kinds of investments: Short term investments like Money Market Funds, CDs and Treasury Bills are useful in meeting needs for cash within the short term. Fixed income investments like municipal and government bonds can meet intermediate need for income, for periods beyond a year but not more than 8 to 10 years. Long-term investments like real estate, stocks, and stock mutual funds can be used to potentially increase a portfolio and the income it produces in years to come.
Since 1940, the average return of the largest companies, the Standard and Poor’s 500 Index, is around 13%. From 1940 to 2002, the S&P 500 has increased in value 47 years out of 63 years, and decreased in value 16 years. In other words, about three out of four years the market rises.
Moreover, in the 47 “up” years, the average return was a gain of around 20%. The 16 “down” years the average loss was about 9 1/2%. Because of these historical facts, most financial planners and advisors recommend that investors with a long-term perspective consider substantial investments in stocks or stock mutual funds. Source: Salomon Smith Barney Consulting Group
Some investors maintain a short-term perspective, buying only on good news (when the share prices are high) and quickly selling on bad news (when prices are low). There are no guarantees with stock ownership. Yet many patient investors have enjoyed very attractive returns over 10- and 20-year holding periods. Because most retirees have at least 10 or 20 years to leave a portion of their money invested, stocks are an excellent investment for a portion of their retirement investments.
Following basic planning principles:
First, we determine a cash reserve amount and set that aside for use in the next 12 months and to meet emergency expenses. Next, we arrange fixed-income investments to produce income for a period of, say, eight years. The balance could be positioned in several growth investments, each employing different approaches to investing, thereby diversifying the portfolio. Using this strategy, we expect that income will be available each year for a number of years and that unguaranteed but higher potential growth investments can be left untouched for eight years or longer.
Fixed-dollar investments with short maturities, such as CDs, do offer stability of principal and should be one component of nearly every retired investor’s portfolio. The income, however, can and does fluctuate widely from year to year. According to the Federal Reserve Board, during the 10 year period ended December 2001, the highest average interest paid on 6-month CDs was 6.7% (in 2000); the lowest was 1.9% (in 2001). So while the principal may be stable, it is not really safe to rely on the interest for steady retirement income.
CDs are FDIC insured up to $100,000 per depositor, per institution. All rates are subject to change and availability.
Real estate investments may be appropriate because of their growing income and appreciation potential. But real estate properties may require hands-on management, which can grow into an unwelcome chore during retirement years.
Many investors choose to participate in real estate investments called Real Estate Investment Trust (REITs). REITS offer exposure to real estate investments for growth and income, and are liquid because they are actively traded like stocks.
Many retired workers are surprised to learn that they will still be paying income taxes, often with little or no reduction in tax payments from their working years. You need to plan carefully, and you should consider using some tax-advantaged strategies. Start by determining your taxable retirement income and your marginal tax bracket.
Most investors should consider a number of alternatives including:
* Municipal bonds that pay tax-exempt interest
* Proper planning with IRAs, Roth IRAs, and annuities can offer tax deferral of earnings and tax advantaged income
* Quality common stocks that appreciate with tax deferred growth
Usually there are four broad choices, each with different advantages and disadvantages:
1) Leave it invested in the company plan
2) Annuitize and receive an income for life
3) Withdraw the account balance, pay taxes and then invest the funds
4) Rollover to an IRA or other pension fund, paying no taxes and continue to defer the income tax
An IRA offers the capability of higher returns and increasing income potential. The account can be rolled over tax free to a surviving spouse with the remaining balance distributed to beneficiaries at the death of the spouse.
While many investors do leave pension balances in a company sponsored plan, many individuals prefer an IRA for a number of reasons.
First, the choices in the company plan are usually limited to a handful of investment accounts while an IRA offers an almost unlimited number of alternatives and the ability to make changes frequently and easily.
Second, many retired investors find the service from a former employer or from a voice menu reached via a toll free number to be less than adequate service.
Perhaps the most important reason retired investors choose an IRA is the personal attention and advice offered by a Financial Consultant that is knowledgeable about the investment markets, financial planning, and the needs of the retiree.
By the end of the first quarter of the year following the year that you become 70 ½ years of age, you must make your first “Required Minimum Distribution” (RMD) withdrawal from your IRA.
The Internal Revenue Service has issued proposed regulations substantially simplifying the calculation of minimum required distributions from qualified plans, IRA’s and other related retirement savings vehicles. The calculation is based on the following factors:
1. The value of your IRA account at the end of the previous year.
2. Your age and a single table based on the concept of a uniform lifetime distribution period.
Consulting with a tax and/or estate planning advisor and financial planner is extremely important for many investors when determining who should be named as your beneficiary and what methods should be elected in calculating the required minimum distribution.
Usually not. Typically, you can leave money in annuity contracts to compound tax deferred until age 85.
The penalty is 50% of the “under withdrawal” the difference between what you withdrew and what you should have taken out to meet the Required Minimum Distribution.
Your IRA custodian firm should have systems in place to assist you in determining the dates and amounts you should withdraw from your IRA.
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