POSTRETIREMENT BENEFITS PLANNING – VOLUME 2
Special Retirement Planning Bulletin
While you might not think of it as one, income is a benefit that you need to plan for and around during retirement. If you’re looking at your 401(k) or other defined contribution plan balance, you might be wondering how in the world to translate that balance into income. Luckily, there are solutions to this issue, as well as other sources of income you can draw from to enhance your postretirement comfort.
Sources of Income
Pension: If your employer provided a pension plan, then you may be able to get a steady, reliable income throughout your retirement. Talk to the pension administrator of your plan to find out when payments start, how to claim them, and how much they will be.
Annuities: Annuities are contracts issued by insurance companies that can be structured to guarantee a minimum income for life after the payment of a single premium. Annuities can be purchased both before and after retirement and are often a good solution for those who are concerned about creating reliable income.
Retirement accounts: From profit sharing plans to IRAs, 401(k)s to 403(b)s, there are a range of different retirement savings accounts you may be able to draw income from after you retire. Some, such as a Traditional IRA, may allow you to put your plan funds into an annuity that provides regular mailbox money, taking the stress out of distribution planning.
Social Security: Social Security can begin providing an income as early as age 62, but taking it this early locks you into a lowered payment for life. Your full payment isn’t reached until your full retirement age (66 years and 2 months for those born in 1955) and may continue to grow if you delay taking it even longer.
Work: Some seniors decide to continue working part time in retirement. Whether you do this for extra money, to maintain social contacts or because you simply enjoy working, you need to be aware of some of the potential Social Security and tax consequences outlined in the next section.
Life insurance: Depending on how your life insurance contracts are designed, you may be able to pull a tax-free income from the cash values while still providing a decent death benefit to your heirs.
There are some things you need to think about as you structure your postretirement income plan—and they don’t all revolve around your budget.
Taxes: The higher your income is, the more your taxes will be. Even your Social Security income can become taxable if your income from work, Social Security and/or taxable account distributions exceeds the annual limitations. Talk to your advisor about how to avoid or minimize this taxation.
Earnings test for Social Security: If you take your Social Security benefit before you reach full retirement age and you continue to work, then you may have some of your Social Security income withheld if you earn more than the set annual limits. Your advisor can help you determine what those limits are and how to avoid them.
In the next volume of the POSTRETIREMENT BENEFITS PLANNING series, we discuss nursing home benefits, who needs it and what options are available.