How-to Guides

Although many Americans now plan for a retirement of up to 20 years, there is evidence that the average retirement may last much longer. Half of those currently aged 65 will live to be older than 83 years, according to the National Center for Health Statistics. What's more, the latest U.S. Census found that the fastest-growing segment of the U.S. older population (those at least 65 years old) is the 85 years and older group.

In other words, living nearly a century may someday soon be almost commonplace. As a result, rather than thinking of retirement as the final stage of life, a more realistic approach may be to view it as a progression of phases, such as early, middle, and late. This involves taking a fresh look at retiree expenses and income, as well as withdrawal and estate planning strategies.
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Traditionally, retirees were advised to project income needs over the length of time of retirement, add on an annual adjustment for inflation, and then identify any potential income shortfall. But the planning required may not be that linear. For example, research suggests that some retirees' expenses -- other than health care -- may slowly decrease over time (see table).

Keep in mind that adding employment earnings to your retirement "paycheck" requires careful planning because it may impact other sources of retirement income or bump you into a higher tax bracket. For example, retirees who collect Social Security before the year of their full retirement age would see their benefits cut $1 for every $2 earned above $12,960 in 2007. Also, depending on adjusted gross income, you might have to pay taxes on up to 85% of benefits, according to the Social Security Administration.

The need to potentially stretch out income over a longer period than previous generations also means that some people may not want to tap Social Security when they're first eligible. Consider that for each year you delay taking Social Security beyond your full retirement age until age 70, you'll receive a benefit increase of 6% to 8%, depending on your age. One caveat: If you do decide to delay collecting Social Security, you may want to sign up for Medicare at age 65 to avoid possibly paying more for medical insurance later.

Also plan ahead as to how you'll pay for health care costs not covered by Medicare as you age. On average, health costs will increase an estimated 3.2% per year through 2030 and out-of-pocket health care costs may nearly triple, eating up a projected 35% of a retired couple's after-tax income -- versus 16% in 2000. Remember that Medicare does not pay for ongoing long-term care or assisted living and qualifying for Medicaid requires spending down your assets.

If you have accumulated assets in qualified employer-sponsored retirement plans, now may be the time to decide whether to roll that money into a tax-deferred IRA, which could make managing your investments easier. A tax and financial pro can also help you decide which accounts to tap first at this point in your post-retirement planning -- a situation that could significantly affect your financial situation.

Finally, don't overlook any pension assets in which you may be vested, especially if you changed employers over the course of your career. Pensions can supply you with regular income for life. Annuities may also play a role in helping you generate steady income.
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By April 1 of the year after you reach age 70 1/2 , you'll generally be required to begin making annual withdrawals from traditional IRAs and employer-sponsored retirement plans (except for assets in a current employer's retirement plan if you're still working and do not own more than 5% of the business you work for). The penalty for not taking your required minimum distribution (RMD) can be steep: fifty percent of what you should have withdrawn. Withdrawals from Roth IRAs, however, are not required during the owner's lifetime. If money is not needed for income and efficient wealth transfer is a goal, a Roth IRA may be an attractive option.

Now might also be the time to take an objective look at your living situation. Does it make sense to downsize to a smaller, more inexpensive residence -- especially if you've built up substantial equity in your current home? Depending on your preferences, you may spend less time and money on upkeep and have extra money to support your retirement income needs. Keep in mind that under current federal tax rules, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains if you've lived in your primary home for at least two years.

Also, consider reviewing the asset allocation of your investment portfolio. Does it have enough growth potential to keep up with inflation? Is it adequately diversified among different types of stocks and income-generating securities?
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Review your financial documents to make sure they are true to your wishes and that beneficiaries are consistent. Usually, these documents include a will and paperwork governing brokerage accounts, IRAs, annuities, pensions, and in some cases, trusts. Many people also draft a durable power of attorney (someone who will manage your finances if you're not able) and a living will (which names a person to make medical decisions on your behalf if you're incapacitated).

You'll still need to stay on top of your investments. For example, an annual portfolio and asset allocation review are important. Keep in mind that a financial advisor may be able to set up an automatic rebalancing program for you. And finally, be aware that some financial companies require that you begin taking distributions from annuities once you reach age 85.

Preparing for a retirement that could encompass a third of your lifespan can be challenging. Regularly review your situation with financial and tax professionals and be prepared to make adjustments.
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