The trillion dollar floodgates haven't opened yet, but soon the 76 million baby boomers will want their money back from the retirement accounts they so carefully fed.
They'll have many questions: What are the mechanics for making that money last? How can they live on it for 25 or 30 years and still leave something for their kids? How can they
manage the interplay of taxes, retirement accounts, Social Security benefits and housing decisions to make the most of their cash and their lives?
The financial services industry is starting to help, with the introduction of new products ranging from withdrawal-focused mutual funds to new annuities. Some of these are more helpful than others, and folks who are coasting toward retirement should put at least as much effort into planning their withdrawals as they did when they planned their contributions.
It's a big topic, but here's a smattering of information, and ideas that can get you started.
- Consider hiring a personal actuary to crunch all of your numbers. Investment advisers can tell you what stocks to buy, but they typically don't have the grasp of Social Security rules, life expectancies, taxes and pension law that an actuary will. Furthermore, actuaries work only for hourly or project fees and won't have their recommendations clouded by commissions or by the desire to manage your nest egg.
You can find an actuary at http://www.actuarialdirectory.org/ or by searching your local yellow pages. Call a few, ask if they've had clients with similar needs to yours and get references. You can ask them questions about when to start claiming social security, how much to withdraw from your tax-deferred, taxable, and tax-free accounts every year, and more.
- The way that Social Security benefits are taxed can add a real burden, says Ron Gebhardtsbauer of the American Academy of Actuaries. You can find the calculations, in all their complexity, at the Web site of the National Center for Policy Analysis. But the short version of it is this: Once your retirement income, including half of your benefits, crosses the $25,000 mark for singles ($32,000 for couples), you'll be paying taxes on some of your benefits. Once your income, including half your benefits, is $34,000 (singles) and $44,000 (couples), your tax burden gets even heavier; as much as 85 percent of your benefits will be taxed. If you're in the 25 percent tax bracket and subject to that top tax threshold, it means your marginal rate will be 46.25 percent. With most of your retirement income coming from tax-deferred accounts like 401(k)s or IRAs, you can expect to be pushed into a taxable situation. It makes some offbeat strategies -- like converting from a traditional IRA to a Roth IRA, or liquidating your taxable retirement accounts early -- seem more sensible.
- You'll live longer than you think. Perhaps you've seen tables putting your life expectancy at 80 or 85 years old. But, as any actuary would tell you, that only means that you have a 50-50 chance of dying before then. A couple in which both partners are 65 years old today have a 58 percent chance of at least one of them still being alive at 90, and a 28 percent chance of one of them making it to 95. If you need your money to last forever, you probably can't take more than 4 percent a year out of your nest egg.
- Annuities can help. Putting some of your cash into an immediate annuity will often increase your spending power. Because annuities pool risk, they can afford to pay out more than that 4 percent level you're stuck with because of your own uncertainty about life expectancy, says Dan DeKeizer of MetLife Retirement Strategies Group. A 62-year-old woman could buy an annuity that would pay her 4.7 percent for life; a man could get 5.2 percent. But you can't put all of your money into annuities, 'lest you need large chunks of it for medical emergencies or your grandchild's college tuition.
Mutual funds can help, too. Both Vanguard Investments and Fidelity Investments recently introduced new mutual funds aimed at retirees. The funds are diversified and designed to yield regular retirement income.
They automatically pull a predetermined percentage from your account every month and mail you a check (or automatically deposit it in your checking account). Most fund companies will
put any of your other mutual funds on autopilot for withdrawals, just like they did for deposits. Don't use up your whole annual draw in monthly installments, or you'll not have enough money the next time you want to buy a car or need a new roof.