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Moving smoothly into retirement -- Page 2

Rx for retirement health care
One insurance area where retirees generally need more than their still-working colleagues is health care coverage, including prescriptions. You'll be eligible for Medicare at age 65. If you quit working before then, check with your employer to see if as a retiree you can get continued company health benefits. Married retirees might be able to get health-care coverage as part of a still-employed spouse's company provided plan.

If there's a health-care gap, consider buying catastrophic health insurance with a high deductible, says Vernon, who also is the Los Angeles retirement consultant for Watson/Wyatt. The monthly premiums are low enough so you'll be able to afford this coverage and if a catastrophic illness such as cancer strikes, it won't wipe you out financially, he says.

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Decide which income stream to tap first
Choose which income source you want to initially draw from based on how you can maximize that income or eliminate any potential penalties. For example, put off tapping Social Security until your 70s. That will give you the largest check from Uncle Sam. Just be sure to run the numbers to make sure waiting really works for you.

As you wait for your government money, you may be able to start accessing your 401(k) without incurring any early-withdrawal penalties if you've turned 55. Don't forget the other tax implications. Whether you take your pension in a lump sum or in monthly payment could make a difference in how much tax you pay, says Jonathan Sard, a certified financial planner with Financial Alternatives of Atlanta.

Also examine which other funds that are not in retirement accounts, such as stocks or mutual funds, that you can cash in and pay only long-term capital gains taxes, which are lower than regular income rates.

Since individual circumstances vary greatly, it makes sense to go over your accounts, retirement and otherwise, with a financial adviser who is familiar with your unique situation.

Don't withdraw too much too quickly
"You'll need a critical mass of investment to ensure a steady income," says Wells Fargo's Guthrie. If there's a gap between income and expenses in your early retirement years, she recommends bridging the gap by means other than withdrawing excessive amounts from your retirement funds in your early days of retirement.

Guthrie says a financially strapped retiree also could tap a home equity line or try a reverse mortgage, although she's not a big fan of either. If the numbers don't look good, Guthrie says the best thing is to postpone retirement for a couple of years and ensure your nest egg is large enough to carry you through your nonworking years.

Re-examine your asset allocation
Since we're living longer and our retirement funds must last longer, it's no longer prudent to switch all your funds from high-risk, high-yield investments such as the stock market to low-yield investments with guaranteed returns in the early years of retirement. That said, your financial planner may wish to tweak the make-up of your retirement investments, and these should be re-examined as you age.

You also might want to consolidate retirement funds to increase your returns or examine switching to annuities. This can guarantee a set income stream, but take note of how it may increase or decrease your return and what administrative fees apply.

Update or create an estate plan
In addition to determining how to make your money last the length of your retirement, you also need to look at what happens afterwards. If you haven't looked at your will in a while (or don't have one), reassess its provisions now. It's also a good time to draw up a living will.

In addition, make sure you've named beneficiaries for all the assets that require them. Be sure all these changes reflect any changes that might have been brought on by your retirement.

Easing into nonworking status
Many financial experts say the "soft" side of retirement, how you plan on keeping yourself occupied once you are retired, is just as important as the financial logistics. For a lot of people, going cold turkey by stopping work entirely at age 65-plus isn't practical, from either a financial or a satisfaction perspective. Studies show that retirees who are active tend to live longer and be happier.

"Figure out how you will spend your time. Retirement can be a big emotional change for people," says Louisa Guthrie, senior vice president and regional manager of Wells Fargo's Private Client Services in Chicago.

California financial adviser Bell urges his clients to test drive retirement first. "It's good to start practicing while you're still working," Bell says. "Volunteer at the senior center. Go fishing. Find out whether you're going to get quickly bored or will really enjoy your retirement."

Working part-time through the early years of your retirement also will boost your income (just make sure it's not so much it also ups your tax bill, too) and still give you more free time than when you worked full-time, says Vernon.

Jenny C. McCune is a contributing editor based in Montana.


-- Posted: Dec. 7, 2004


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