Baby boomers — the 76 million-strong generation of Americans born between 1946 and 1964 — will soon begin retiring.
Expectations about retirement vary, but according to a study conducted last year by global consulting firm Towers Perrin, most employees expect to rely heavily, though not exclusively, on income from employer retirement programs like pension and 401(k) plans. For the last 15 years the trend in corporate America has shifted financial planning onto the employee through 401(k) plans, which include mostly employee contributions (often matched with contributions by the employer).
Chances are, if you’ve been gainfully employed before retirement, you have savings in one — or sometimes both — of these types of retirement plans. Boomers born closer to 1946 are more likely to have a traditional pension plan, one that kicks in at a certain age and provides a fixed amount of money each month for the rest of your life.
When you retire you have options as to what to do with this pretax money you’ve saved. It’s tempting to immediately start rolling over accounts, spending or reinvesting money, but the first step should be to put down in writing a list of the retirement assets you will be able to use during retirement. Then create a financial plan that will enable you to live the way you want to after retirement, advises Robert Hagmaier, a partner at Durig Capital in Lake Oswego, Ore., and the firm’s director of retirement planning. You should also include how you plan to achieve your goals.
Once you have a picture of your ideal retirement life, it’s time to make decisions. If you have a traditional pension plan, you will have about six options for receiving your money. Your decisions affect not only how much you receive each month but how much your spouse will get if you die, so it’s important to look at all possible scenarios when making your choices.
Robert Reby, founder of wealth management and retirement planning firm Robert J. Reby & Co. in Danbury, Conn., and the author of “Retire Without Worry,” says many companies with pension plans are moving toward giving their retirees their money in a lump sum that can be rolled over to an IRA (individual retirement account) or another retirement plan.
“In my opinion, 90 percent to 95 percent of the time the lump sum is the best option,” says Reby.
Having all your money at once gives you the freedom to grow it — you can decide how much to invest and in what.
“If you don’t feel highly skilled in managing money, get a financial advisor to help you,” says Reby. “Most people who come to us for advice know this is a crucial decision in their lives and don’t want to mess it up. It’s irrevocable.”
If your retirement savings is tied up in a 401(k), you can keep it there for a period of time (some companies will even allow you to do it permanently); you can liquidate the fund and get the cash, although you will have to pay a hefty tax bill since the money is tax-deferred income; or you can do what most do — transfer that money into an IRA. And that, says Reby, gives you the most flexibility and control over your financial future.
“You direct the investments — whether it’s stocks, bonds, CDs, mutual funds — and you control the income spigot, how much money you take out and when,” he says.
Most retirement experts strongly advise retaining the services of a knowledgeable financial advisor. Considering you’ve spent most of your life saving for retirement, the 1 percent fee you will likely pay for advice is well worth it.
Reby’s firm, like most others, designs a portfolio to suit an individual retiree’s needs, taking into consideration expenses, age, health, family needs and other factors. Generally your money will work for you if you preserve capital — not investing all your savings in risky tech stocks, for example — yet investing a sizable portion in equity that gives you more than a 3 percent return.
“You want income from your money because you aren’t getting a paycheck anymore,” says Reby. “Planning properly will allow you to enjoy retirement, even as the cost of living rises.”