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Moving smoothly into retirement

Retirement is on the horizon. You've planned diligently for the day you can quit working and start enjoying your post-employment lifestyle. But the actual mechanics of moving from collecting a paycheck to retiring on your savings and, for some lucky retirees, a pension, is more complicated than you might think.

Which assets do you tap first? How much money can you withdraw? Where do you get medical coverage? Finding the answers to these questions can befuddle the most conscientious retiree wannabe.

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Kevin O'Fee, managing director of Retirement Planning Services at New York Life Investment Management in Parsippany, N.J., likens retirement planning to the Mona Lisa and transitioning into retirement to a Picasso abstract. Da Vinci's signature portrait is well-defined and structured, while Picasso's abstract works are just as beautiful, but more difficult to interpret.

Retirement timing
The first question to answer as you head toward retirement is when should transition planning begin? Most experts say to start preparing and researching at least a couple of years before you intend to leave the workforce. The more time you leave for preparation, the easier it will be to meet your goals.

"You need to take as much of the mystery out of your retirement as possible," says Jim Bell, president of Bell Investment Advisors in Oakland, Calif.

Once you decide your timetable, then it's time to look at three specific retirement areas and how you plan to meet them:

1. Income needs: What income streams can you expect? Do you have a pension? How much is it and will the amount vary on when you retire? Also look over your personal retirement accounts. This includes 401(k) plans, individual retirement accounts, both traditional and Roth IRAs, as well as your savings and stock investments.

2. Expected expenses: Conventional wisdom is that a retiree needs 80 percent of his salary to retire comfortably. However, the actual amount can vary considerably depending on what type of life you're going to lead.

If you're planning to travel widely, that could increase what you'll need beyond the 80-percent mark. On the other hand, if you plan to work part-time for a while after your official retirement, you might not need as much cash upfront. Similarly, if you sell the family home and downsize to a condo, that could lower your retirement income needs. The living expense difference could be even more dramatic if you move to a small home in another region with a lower cost of living. The point is to make a realistic appraisal of how much money you'll need.

3. Life expectancy: Back when Social Security was instituted, people were lucky to live to 65. Now many of us are living into our late 70s, 80s and even 90s. Remember that annual life expectancies are medians, not averages. If you're healthy, you could live way beyond your age group's life expectancy. How long you anticipate living will impact how much money you will need for retirement. Obviously, the longer your life, the more years you'll be retired and the more income you will need.

Your answers to the questions raised in these areas should give you a reasonable idea of whether your planned retirement schedule is doable. If so, then it's time to look at some specifics to move from working to retiring.

Insurance requirements
Financial responsibilities can lessen during retirement, reducing or eliminating the need for certain kinds of coverage, particularly life insurance. For most retirees, the kids are no longer financial dependents and your spouse will inherit your retirement income upon your death. That means you may be able to get by without a life insurance policy. Don't overlook your home and auto coverage. You may be able to cut back here, too.

But those premium reductions might be offset if you purchase a long-term care policy. New York Life representative O'Fee is an advocate of such insurance. "For some people, it is the right thing to do," O'Fee says. "I just bought some and I just turned 47."

Steve Vernon, however, believes that such insurance is a bad investment since it requires you to spend enormous sums for coverage you might not need. Vernon, author of "Live Long and Prosper: Invest in Your Happiness, Health and Wealth for Retirement and Beyond," recommends skipping the long-term care policy and saving what you spend on insurance premiums, between $1,000 and $2,000 annually. That way, he says, if you do require long-term care, you can just tap that savings account and the money will belong to you no matter what.

-- Posted: Dec. 7, 2004


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