As retirement day approaches, your company's human resources department may prompt you about what to do with your retirement money. People will suggest a variety of options. But until you have a clear idea on how you see yourself sailing through your retirement years, avoid making irreversible decisions. Irreversible decisions are those that cause significant loss of your retirement money to taxes, or restrict how you can receive your money. It is just not necessary to make such decisions until you are comfortable with doing so, so that they fit nicely into your retirement plans.
A decision to simply cash out your company retirement money would probably rob a third of it from taxes. That is because a hefty savings amount would force you into a much higher tax bracket. Delay this decision. And realize when you do need that cash; there are less taxing ways to access it.
Annuitizing the retirement money too early is an irreversible decision. Not only does it eliminate access to your principal for other options, but results in a lower monthly payout than taking it later -because of your longer life expectancy when you begin. Again, hold off until you clarify your retirement plans.
You can forestall such decisions by rolling your retirement money directly into a new traditional IRA. Doing so will not trigger any taxation on your savings, will maintain full protection against creditor claims, and will give you the option to invest those savings in almost any way you choose. Your IRA may allow withdrawal options for your beneficiary - should you die unexpectedly - that your company plan does not offer. (Rollover to an IRA should also not be done with haste if you have company stock in your employer plan or if you qualify for 10 year averaging).
Lastly, be sure not to rush investing your IRA retirement money too conservatively. At 65, you have an average of 17 years of life expectancy (50% of people who reach age 65 die by age 82, 50% die after age 82). That's clearly a 'long term' investing time during which inflation can significantly cut into the value of your portfolio.
Rushing into a too conservative portfolio balance can rob you of the growth protection that, historically, equity investing can give you over the long run. You will need that growth to increase - or at least maintain - the 'after inflation' value of your portfolio. Note that no investment strategy can guarantee a hedge against inflation or profit, and investments with high return potential carry greater risk of loss.
Lay Out Your Plans
When worries of work and pressures of your imminent retirement subside, map out a reasonable course for your retirement money. Today, many people plan to slowly phase into full time retirement. Perhaps take a long vacation first to relax. Then try a part-time job or two to see what is enjoyable. Maybe develop a second career for a while.
It is best to try different options to help you clarify what you want to do, and what you can do. Doing so will give you a better idea of how much savings income you need to generate - and when.
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