Avoid Irreversible Decisions Before You Create a Good Retirement Plan
By Shane Flait © 2011

Irreversible decisions are those retirement options you choose that cause significant loss of your money to taxes or restrict how you can receive your money.  Don’t make such decisions until you’re comfortable with how you’ll move through your retirement years. This article points out what to watch out for.

 

As retirement day approaches, your company’s human resources department may prompt you about what to do with your retirement plan money. They may suggest a variety of options. But if you’re unsure of how you want to handle your retirement years, avoid choosing options that are irreversible.

 

For example, to cash out your company retirement savings, i.e. those tax-deductible and tax deferred contributions plans, would cause you to lose a third of it to taxes. That’s because a hefty savings amount would force you into a much higher tax bracket. Delay this decision and realize that you can get that cash in ways that are less taxing.

 

Annuitizing your savings is an irreversible decision. It eliminates access to your principal for other options you may want to preserve for later. Annuitizing too early also lowers the monthly payout you can get because of your longer life expectancy when you begin. So, hold off on annuitizing anything until you clarify what retirement path you’re going to be comfortable taking.

 

You can always directly rollover your defined contribution company plan funds into a new traditional IRA. Be sure to create a new IRA account for them and not mix those funds with your other IRA accounts. The direct rollover won’t trigger any taxation on those savings and will maintain full protection against creditor claims against you. Also, your investment options within your own IRA are generally greater than what your company plan can offer. Lastly, your own IRA may allow withdrawal options for your beneficiary if you die unexpectedly that your company plan doesn’t offer.

 

Don’t invest your IRA money too conservatively. At 65, you have about 20 years of life expectancy. That’s clearly a ‘long term’ investing time during which inflation can significantly cut into the value of your portfolio. Rushing into a too conservative portfolio balance can rob you of the growth protection that, historically, equity investing can give you over the long run. You’ll need that growth to increase – or at least maintain – the ‘after inflation’ value of your portfolio. Start with at least 45% of your portfolio in equities.

 

Layout your plans

When your normal working pressures subside, take more aggressive steps to map out a reasonable course for your retirement years. Many people plan to slowly phase into full time retirement. Perhaps you should take a long vacation first to relax your mind. Then you might try a part-time job or two to see what’s enjoyable. You might even try to dabble in a second career for a while.

 

It’s best to try different options to help you clarify what you want to do, what your comfortable with, and what you can actually do. Doing so will give you a better idea of how much savings income you need to generate – and when.

 

 

 

 

 

 

 

 Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com