Will You Run Out of Money?

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The stress of the recent market meltdown with the corresponding devastating news throughout the economy is particularly difficult for retirees or readers nearing retirement. Clients and readers have the same concerns: Do I have enough money to live comfortably for the rest of my life? How can I make my money last? Is there something that I should be doing now to protect my retirement?

The good news is that you don't have to just sit idly by while the market continues to spin. You can take action. Here are some practical steps that you can take now to ensure that you are still going to have a secure retirement.

Safe withdrawal rate: Determine your safe withdrawal rate and multiply that times your investment assets. The old rule of thumb of 4% for a thirty year retirement is probably on the conservative side, but that is a starting point. For example, if you have investments of $1,000,000, that gives you a safe withdrawal rate of $40,000. If all that money is in an IRA or retirement plan, that $40,000 would be before, not after taxes. That, plus social security and other forms of income or potential income from other sources of wealth would be a reasonable amount of money to spend. A word of caution: even though I consider this a critical area of planning, I have not seen authoritative analysis on whether we should reevaluate the safe withdrawal rate based on the economy today.

Spend the right monies first: This is critical! A mistake here could leave you broke. Subject to some exceptions, first spend your after-tax (non IRA) assets, then your IRA and retirement plan assets, and last spend your Roth IRA dollars.

Annuitize: An immediate annuity guarantees that you'll have a source of income for the rest of your life. Unfortunately, we face a new issue before not considered crucial: will the insurance company that we purchase the annuity from be stable enough that we don't have to worry about default of payments?

Roth IRA Conversion: If your Modified Adjusted Gross Income (MAGI) does not exceed $100,000, you can convert a traditional IRA or more likely a portion of your traditional IRA to a Roth IRA now. However, in 2010, there is no limitation on your MAGI so high income earners will be eligible for Roth IRA conversions. This is a huge advantage for most readers, but especially high income taxpayers. Although you will have to pay the tax on the conversion upfront, your money will then grow income tax free for the rest of your life, your spouse's life, your children's lives and even your grandchildren's lives. I have been a fan of Roth IRA conversions for most readers for years even in "normal" markets. If you think the market will at least partially recover, then a Roth IRA conversion will be particularly attractive. If the investment tanks after the conversion, consider recharacterizing the Roth IRA by October 15th of the following year.

One-person 401(k): If you have self-employment income, you can open a one person 401(k) plan and make contributions. Then, you could rollover your existing IRA into the newly created one person 401(k). Benefits include expanded Roth IRA conversion possibilities with after-tax dollars inside your IRA or retirement plan, better protection from creditors than traditional IRAs, and the ability for your heirs to make a conversion to an inherited Roth 401(k) after you are gone, something they could not do with an inherited IRA.

Rebalance: The old adage "don't put all of your eggs in one basket" applies here. A diverse portfolio reduces your risk of running out of money. Unfortunately, it seems all the major sectors are down and that classic advice rings somewhat hollow today.

Increased FDIC limits for bank accounts: All accounts are now insured for $250,000 per depositor, per bank but the insurance coverage for all accounts other than IRAs and certain retirement accounts will be reduced to $100,000 on January 1, 2010.

Consider "in trust for" and Revocable Trust accounts to maximize FDIC: To insure higher amounts, consider using "in trust for" or Revocable Trust accounts that are insured up to $250,000 per beneficiary named on the account. The insurance amount will be reduced to $100,000 per beneficiary on January 1, 2010.\

Continuing contributions to retirement plans: "Retirees" often generate self-employment income through part-time or consulting work. This provides an opportunity to make continued payments to your retirement plans.

Will, trust, and IRA beneficiary designation review: A periodic review of your Will as well as your life insurance is probably a prudent thing to do. This is especially true if you have the traditional A/B Will.

With the exception of safe withdrawal rates and rebalancing, all of these and many other strategies -reflecting recent tax-law changes - are discussed in great detail in the 2nd edition of Retire Secure! (Wiley, February 2009). Please be on the watch for when you can get your copy of the second edition of Retire Secure!

James Lange is a tax attorney and CPA with a thriving retirement and estate planning practice in Pittsburgh, Pennsylvania.  He focuses on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, and his articles are frequently published in Financia PlanningKiplinger's Retirement Report and The Tax Adviser.  For more informaiton please visit www.rothira-advisor.com

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