» Spending Retirement Savings

The Long-Term Financial Strategy

admin — Sat, 11 Jul 2009 14:39:39 +0000

Now that People have reviewed the strategies, options, and tax rules, what seems like the best approach for People? It’s unlikely that one of the strategies presented will be exactly right for People. Based on their comfort zone, People should be able to combine elements of two or more into a plan with which People can live.

Income Tax

admin — Sat, 11 Jul 2009 14:39:08 +0000

Withdrawals from tax-deferred plans are taxed as ordinary income in the year received under federal and state income tax laws. A systematic withdrawal plan may reduce their tax liability in the long run by keeping People out of the top tax brackets in later years.

The Increasing Withdrawal Plan

admin — Sat, 11 Jul 2009 14:38:32 +0000

If People want to be sure something is left when People die, here’s a plan that will work for People. Harvard University’s endowment fund developed a spending guideline in 1973 to ensure a person wouldn’t prematurely run out of money. The rule assumes a balanced portfolio allocated half to stocks and half to bonds and cash equivalents. It limits the first-year withdrawal to four percent of the portfolio’s total value. Then, in each following year, increase this amount by the previous year’s rate of inflation.

Today’s computer technology makes it easy to combine this approach with one designed to deplete capital. With assumptions on inflation, rate of return, and longevity, a withdrawal schedule can be set up. Such a schedule will increase each year by their assumed rate of inflation and carry People through the specified number of years. With such a spending plan, it is imperative that People monitor their assumptions and make adjustments as required. One simple way to do this is to calculate a capital balance for each year into the future. Then, compare their actual balance to this figure.

The Constant Withdrawal Plan

admin — Sat, 11 Jul 2009 14:37:59 +0000

If their preferred strategy includes spending capital, a plan for judicious spending will allow People to supplement other income to provide an enjoyable retirement. People must work with a couple of unknowns—how long People will need income and what future rate of return People can expect—but sufficient data help People make educated guesses on these. Consider the following table.

Tools To Help Plan Their Spending

admin — Sat, 11 Jul 2009 14:37:25 +0000

How long will their money last? Running out of money is perhaps the biggest fear retirees have. This is understandable. People are retiring younger, living longer, and dealing with continually rising living expenses. Uncertainty over future inflation and investment returns only adds to the problem. Here are two tools to help People implement whichever strategy People choose to follow.

Sale-Leaseback

admin — Fri, 10 Jul 2009 15:30:57 +0000

Typically, in a sale-leaseback, People sell their home to someone at an agreed upon price but continue to live in it by paying monthly rent. The new owner becomes responsible for paying taxes, insurance, and maintenance. This arrangement gives People the value of their home to use for current living expenses without requiring People to move. Sale-leasebacks can be arranged with investors, family members, community organizations, churches, and charities.

Reverse Mortgage

admin — Fri, 10 Jul 2009 15:29:20 +0000

A reverse mortgage is a home equity loan. It can be granted only on homes that are mortgage free. Rather than making payments to the mortgage company, the mortgage company makes payments to People. As a result, People receive monthly income based on the value of their home as long as People live, or, in some cases, for a specified number of years. The money People receive is tax free since it is a loan rather than income. At the end of the term, or when People move or die, the loan must be repaid, including accumulated interest—usually by selling their home.

At this time, reverse mortgages are not available in all states. Check with their local
banker, if interested.

Sell and Rent

admin — Fri, 10 Jul 2009 15:28:08 +0000

The real estate market has changed to the extent that home ownership is not necessarily the best financial option. People may come out ahead by selling their home and renting either a house, apartment, or condo. This option frees all of their home equity for living expenses.

To calculate a financial analysis of owning versus renting, add up all the costs associated with home ownership. This includes the direct costs of taxes, insurance, and maintenance, plus the opportunity cost of earnings on the capital tied up in the home. Then, compare this figure to what it would cost People to rent adequate housing.

Trade Down

admin — Fri, 10 Jul 2009 15:27:25 +0000

Many people approaching retirement have experienced enormous appreciation in their home’s value. Selling such a home and buying a cheaper one can leave a substantial sum of money to meet current living expenses.

Tapping the Home Equity

admin — Fri, 10 Jul 2009 15:26:17 +0000

As people consider their retirement income needs, do not overlook the equity in their home as a source of income. There are four options for tapping the equity in their home. The first two require a move. The other two allow People to remain in their present home.