Newly Retired? Fresh Ideas for Managing Your Retirement Income

As a new retiree, you may be wondering how to manage your retirement income.  Last month, president of Charles Schwab, Carrie Schwab-Pomerantz, published an article titled “Newly Retired?  Fresh Ideas for Managing Your Retirement Income”.  This article hits key points of 1) Which accounts and investments you could draw from first, 2) Options for rebalancing your portfolio once you start to withdraw, and 3) Considering taking your required minimum distributions to avoid penalties (if 70 ½ or older).  Click here to read the entire article, or continue reading for a summary below.
 
Before jumping into the discussion of possibile ways to manage your retirement income, keep in mind the following essentials:
 

• At the point of retirement, you may want give very careful thought to your asset allocation.  Mainly, you may not want to take on as much risk in your investments as you did when you were younger and still working.
• Aside from your Social Security, a pension, real estate investments, or other sources of income, you may want to figure out how much money you could need to withdraw from your retirement accounts.
• Your most tax-efficient investments may need to be kept in taxable accounts, and your least tax-efficient investments may need to be be kept in tax-deferred accounts.
• Maintaining well-diversified portfolios of many types of investments including stocks and bonds could possibly help protect against inflation over your many years of retirement.

Listed below are the strategies outlined in the article “Newly Retired? Fresh Ideas for Managing Your Retirement Income”, in order of which you could consider first.  Please read the full article for more complete descriptions of each strategy:

1. Draw Down Principal from Maturing Bonds and CDs:  The first strategy you could use would be to create a short-term ladder of bonds or CDs, and then you could tap the principal of each bond as it matures.
2. Take Your RMDs if You’re 70 ½ or Older:  Once you reach 70 ½, the IRS requires you to take a yearly distribution from many retirement accounts, known as a Required Minimum Distribution (RMD).
3. Sell Overweighted and Lower-Rated Investments from Your Taxable Accounts:  Since withdrawals from taxable accounts are taxed as capital gains rather than ordinary income, these could be the next accounts from which to draw retirement funds.
4. Sell Overweighted and Lower-Rated Investments from Your Tax-Deferred Accounts:  Generally, your tax-deferred accounts could be the last place to look for retirement income.

Please note:  This post is for informational purposes only and is not intended as advice.  Since everyone's situation is different, please consult a professional before changing your portfolio.

The "Backdoor Route" to Roth IRAs

High earners may run into issues trying to contribute to IRAs or trying to receive tax deductions for IRA contributions.  If you fall into this category, watch this video from WSJ.com to find out the "Backdoor Route" to contributing into a Roth IRA to help save for your retirement.

IRA Quiz

What is the difference between a traditional IRA and a Roth IRA?  How long do you have to make 2013 contributions to your IRA?  How much can you contribute to your IRA?  Take this quiz to find out these answers and more about the basics of IRAs!

 

1) What does IRA stand for?

a. Initial Retirement Adjustment
b. Individual Retirement Account
c. Internal Revenue Association

2) A traditional IRA is a retirement account which...

a. Allows contributions from before-taxed income, so withdrawals in retirement are taxed.
b. Allows contributions from after-taxed income, so withdrawals in retirement are not taxed.
c. Is not taxed at all.

3) A Roth IRA is a retirement account which...

a. Allows contributions from before-taxed income, so withdrawals in retirement are taxed.
b. Allows contributions from after-taxed income, so withdrawals in retirement are not taxed.
c. Is not taxed at all.

4) What is the deadline for making 2013 annual contributions to either a traditional or Roth IRA?

a. December 31, 2013
b. April 15, 2014
c. August 1, 2014

5) What is the maximum annual amount the account holder 49 years and younger can contribute to either a traditional or Roth IRA for 2013?

a. $2,500.00
b. $5,500.00
c. Any amount

6) What is the maximum annual amount the account holder 50 years and older old can contribute to either a traditional or Roth IRA for 2013?

a. $6,500.00
b. $10,000.00
c. Any amount

7) What is the minimum annual amount the account holder (any age) can contribute to either a traditional or Roth IRA?

a. Any amount, up to the maximum
b. $1,000.00
c. $5,000.00

8) At what age can the account holder start making contributions to either a traditional or Roth IRA?

a. Any age, as long as he/she is earning income
b. 18 years old
c. 21 years old

9) At what age must the account holder stop making contributions to a traditional IRA?

a. 50 years old
b. 70 1/2 years old
c. There is no age limit

10) At what age must the account holder stop making contributions to a Roth IRA?

a. 50 years old
b. 70 1/2 years old
c. There is no age limit

11) What does RMD stand for?

a. Rollover Money Discount
b. Roth Maximum Disbursement
c. Required Minimum Distribution

12) At what age is the original account holder required to take an RMD from a traditional IRA?

a. 50 years old
b. 70 1/2 years old
c. There is no age requirement

13) At what age is the original account holder required to take an RMD from a Roth IRA?

a. 50 years old
b. 70 1/2 years old
c. There is no age requirement

14) What is the deadline for taking an initial RMD for 2013?

a. December 31, 2013
b. April 1, 2014
c. August 15, 2014


Answers:
1) b 2) a 3) b 4) b 5) b 6) a 7) a 8) a 9) b 10) c 11) c 12) b 13) c 14) b

Please visit the Official Website of the IRS for more information.

HOW TO: Save Money and Pay Off Debt

By Olivia Sandham

Although the two don’t seem to logically go hand-in-hand, saving money while also paying off debts is certainly possible.  With a few simple adjustments to your lifestyle and budget, you can create a comfortable and debt-free future.

 

The first step to saving while paying off debt could be to create a household budget that trims unnecessary expenses.  This budget will only be feasible if it allows for some discretionary spending to avoid feeling trapped or “broke”.  Examples of areas that could easily be trimmed without too much lifestyle shock include eating out one less night a week, consuming one or two less high-priced beverages (such as cutting back on a latte or cocktail), and switching groceries to generic brands.  Think about how much you could save each week by making these changes, then multiply that by 4-5 times per month!  These small changes can certainly impact the amount of additional money you will have to put toward paying off debts and increasing your savings.

 

The second step to saving while paying off debt is to consider designing a debt payoff strategy that best suits your needs.  Paying off debts utilizing the “snowball” effect is a popular method of paying your debts in a specific order.  You could choose to either 1) Pay off the smallest balance first, which can be motivating in a short period of time because you see the number of debts you owe drop, or 2) Pay off the highest interest rate first, which makes the most sense from a pure financial approach, since you will keep more of your money in the long-term.  Choosing the best debt payoff strategy will be a personal choice so that you find a strategy that you will want to maintain over the long-run.

 

The last step to saving while paying off debts is to build your emergency fund and future investments.  Once you have designed a trimmed budget and chosen your debt strategy, you can plan to have additional money placed into an easy-to-access emergency savings account.  Although this account will not produce much (if any) interest, there will be no penalty for taking the money out should you absolutely need it.  However, once you are able to build your savings to a sufficient amount (three to six months of expenses is typically recommended), you can then start to invest part of your monthly additional money into accounts that will produce higher return rates, such as an investment account or an IRA holding diversified mutual funds.

No retirement for lazy savers

In the recent Wall Street Journal article "Workers Saving Too Little to Retire", Kelly Greene and Vipal Monga present survey results predicting retirement crisis for both U.S. workers and employers. 

A few facts from the article:

• Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes.
• 28% of Americans have no confidence they will have enough money to retire comfortably.
• While Americans are living longer, the extended life spans will make it tougher for workers trying to stretch retirement savings and put additional strains on pension plans.
• The percentage of workers who have saved for retirement plunged to 66% from 75% in 2009.
• Many people are struggling to make sure they don't run out of money in retirement, said Jack VanDerhei, research director at EBRI, a nonprofit in Washington, D.C.

Put simply, we suggest that if you want to live more freely and enjoy more in retirement, spend less and save more now while you still have the opportunity. 

The key to retirement?

Save more and spend less.  It may seem obvious and simple, yet many of us fail to live by these important principles, resulting in insufficient retirement savings.  Recently published in the Wall Street Journal, Kelly Greene's "The Key to Retirement: Spend Less, Save More" presents staggering statistics:

79% of 1,008 U.S. adults surveyed in February said that they have committed a money mistake – and of those, 26% reported not having saved enough for retirement as their No. 1 problem.

20% of workers saying they need to save between 20 and 29% of their income to achieve a financially secure retirement, and 23% saying they need to save 30% – or more.

Job uncertainty and making ends meet were the most pressing financial issues faced by both workers and retirees.

So how do you catch up or get ahead while you still have the opportunity?  Follow those two simple principles: save more and spend less.  Adjust your budget to live more modestly and bulk up contributions to your retirement accounts.  You'll be glad you did.

7 Reasons to Roll Over Your 401(k)

Joe Udo of U.S. News & World Report, in his article "7 reasons to roll over your 401(k)," lists many reasons why it is often beneficial to roll over your old employer retirement plans, explaining the following:

1) Cashing out is a bad idea
2) Lower fees
3) 401(k) changes
4) More control
5) Employer stock
6) Better investment choices
7) Consolidate and simplify

To read the full article, visit http://money.msn.com/retirement/7-reasons-to-roll-over-your-401k.

2011 IRA contributions still accepted

Reminder:

It's not too late to make IRA contributions for 2011, but please be aware that it must be deposited to your account on or before April 17, 2012.

2011/2012 Maximum IRA Contributions:
Under Age 50: $5,000.00
Age 50+: $6,000.00

401(k) or IRA: Which do you fund first?

Sure, we would all like to max out our annual contributions to both our IRA and company retirement plan. But for those times that you can't, a recent MSN Money article suggests 10 questions to ask when you're not sure which retirement account to fund first:

1) Do you get an employer match?
2) Do you plan to stay with your employer?
3) Will you really save on your own?
4) How much do you want to save?
5) Which option offers the investments you want?
6) What are the costs?
7) Which offers better protection?
8) Are you planning to retire early?
9) Will you want to borrow from your savings?
10) Are you (or your spouse) not working?

Click here to read the full article.

Family Net Worth

A family statement of net worth (balance sheet) is a powerful financial tool. A statement is easy to compute, updated quickly, and offers a great way to evaluate decisions.

First, to build your family’s statement, start by listing the honest resale value of all things you own. List all houses, cars, boats, household goods (the national average for families is around $30,000), collectibles, and anything else of value. Next, add financial assets. Include bank, brokerage, or mutual fund accounts. Include IRA accounts or retirement plans from work. Include the cash surrender value of insurance policies. In short, this list should include everything you own with the current value.

The second half is -- hopefully -- a much shorter list. Here, list everything you owe with today’s payoff value. Start with the mortgage. Then, add any car, student, or consumer loans. List the balances on credit cards or money you owe family members. Don’t forget loans on insurance policies or money owed to a company retirement plan.

Simply, Family Net Worth (FNW) is the difference between what you own and what you owe. It’s the liquidation value of your financial life. If you sold and liquidated everything you own and paid off all debts, what would be left in your wallet?

Knowing this number helps you financially. It’s a running tally of financial progress. Update the numbers occasionally and see if your FNW is rising or falling. A rising number indicates progress; one that slips requires attention. (Of course, there are life stages where FNW is expected to fall -- college years for children is one.)

It’s also a spectacular decision-making tool. Say, you’re trying to decide whether to replace a car or start a mutual fund account. Consider what will happen to your FNW five years from now. Estimate the future worth of the car and the mutual fund in 2004. Does this help decide? Similar processes can help decide between two cars (which will have better resale value?) and houses (ditto).

Not every family decision is reached on the basis of finance. But, finance should be considered as part of any major decision. Understanding FNW helps all of us make better choices.