Retirement Financial Planning—what is the difference in perspective?

The earlier you start to save and plan for retirement, the better.  Your initial financial planning revolves around investing as much as possible into your retirement accounts—401 (k), traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, Keogh plan, etc.

Accumulation vs. Distribution Phase of Financial Planning

As you get closer to your actual retirement date, you change your perspective from just accumulation of savings and type of investment used to distribution of those assets.  Now you must plan to invest your savings/investments in a way to make your assets provide an income for as long as possible, hopefully comfortably for the rest of your life.  Financial advisors have differing philosophies on how to accomplish this, but a financial planner who specializes in retirement financial planning definitely looks at your potential expenses/budget in retirement and develops a plan to try to produce as adequate an income stream for as long as possible.

Younger Workers

The younger you are, with a lower starting income and the more time to accumulate savings, the better case for a Roth IRA or 401 (k).  You must pay income taxes on the investment as you make it, but you can withdraw the investment and earnings later with no tax liability.  If you are in a lower income bracket as a young employee, you have lots of time for the money to grow and take it out later without taxes even though you hopefully are in a higher income tax bracket at that time.  The closer you are to retirement, the more you need to consult a financial advisor to decide if a traditional or Roth IRA makes more sense in your specific situation—income level, years to retirement, projected income in retirement.

Taxes on Retirement Assets

During the accumulation phase when you are working and saving for retirement, you can enjoy the tax advantages of retirement accounts.  However, when you are retired and start to withdraw the money from those tax-deferred accounts (traditional IRA, non-Roth 401 (k), etc), you must start paying income taxes on the investment and all subsequent earnings.  So entering retirement, it is always nice to have some savings /investments outside of those tax-deferred accounts.  Then you can choose which type of account is most advantageous at the time according to your income, relative value of the investment and tax consequences.

Also remember that depending on your income, your Social Security benefits could be taxable up to 85%.  So far we have been discussing federal income taxes.  Remember that states tax retirement income differently.  Some states do not tax retirement income at all—worth a look!

Required Minimum Distribution (RMD)

If you are in the enviable situation where you have not had to withdraw from your tax-deferred retirement accounts before you reach the age of 70 1/2, at that time you will have to start withdrawing an amount equal to the total of these accounts divided by your life expectancy.  (For the life expectancy divisor table, see page 102 of IRS publication 590—IRAs Use this link:  http://www.irs.gov/pub/irs-pdf/p590.pdf

This has just touched on areas of retirement financial planning, but it gives you a place to start your New Year’s review if you have not considered these issues previously.  Good luck!