If you're one of the
millions of baby boomers turning 59½ this year, 2007 will be a financial
milestone of sorts. This is the year you'll be old enough to start spending,
without penalty, the money you've faithfully stashed away in your IRAs and
other retirement-savings accounts through the years.
It may not feel like cause for a huge
celebration, but it is a good time to take stock of savings, pensions, Social
Security and all the other financial issues that seemed totally meaningless
just a few years ago when retirement was an eon away. Now you are only a
handful of years from 65 and those years will go by faster than you think.
1. The gold watch and other
benefits. Ask the human resource
department or the accounting department to figure out what, if any, money or
insurance you'll be entitled to when you retire. If part of it is in the form
of company stock or options, ask what can be done to ensure that you'll be
eligible to sell the stock and pay taxes at the 15 percent capital gains rate
instead of regular income tax rates.
2. Hunt for missing money. Make a list of all the past employers for which you
worked for more than a year. Call the human resource departments and ask if you
are entitled to any retirement benefits. If you are, make sure that the employer
has your current address and marital status -- unless you really want your
ex-spouse to have a claim. If the plan calls for naming a beneficiary, update
that information.
If your former employer has gone out of
business or for some other reason has ended its defined-benefit plan, you still
may be entitled to money. The Pension Benefit Guarantee Corp., a federal
corporation created by the Employee Retirement Income Security Act of 1974, or
ERISA, will help you find it. You can search for missing pensions at
Pension Benefit Guaranty Corporation's Web site.
Likewise, if you left your 401(k) plan with a
former employer and lost track of its whereabouts, try looking for it at the
new National Registry of Unclaimed Retirement Benefits
search site.
3. Maximize Social Security. Social Security is under the microscope, and there
could be changes. But no matter what happens, it's probably safe to say that
the longer you work and the more you earn, the more you will get. Right now,
Social Security calculates the amount you'll receive based on earnings over the
35 years in which you earned the most. If you have worked fewer than 35 years,
then it will factor in zeros for those years. Working more to wipe out the
years in which you made little or nothing can raise your payment significantly.
Each year, a few months before your birthday,
Social Security sends you an estimate of benefits. It includes your earnings
record. Look this over closely and make sure there are no blank spaces for
years in which you know you were employed. If there are, or if there appear to
be other errors in the amounts listed, contact Social Security toll-free at
(800) 325-0778 or through its
Web site.
The same form shows a calculation of annual
benefits once you start collecting. It's worth the trouble to compute your own
benefits just to make sure that Uncle Sam didn't get his thumbs crossed. The
government offers
calculators
to help you. Using one of these also will let you figure out how much you'd
make if you earned more or worked longer.
4. Maximize your savings. Conventional wisdom has said that people a few years
from retirement should move money out of stocks and into something safe, such
as bonds. These days, with interest rates averaging less than 4 percent, this
advice seems too conservative, increasing the likelihood that you'll run out of
money. So for many savers, that means making a new plan. Jeff Gage, a
Washington, D.C.-based financial adviser and president of FCA Rochdale, urges
his clients to create a spending plan that calculates not only what they will
need to live, but also what the potential tax bite is likely to be along the
way. "Just changing one variable can make a dramatic difference over 30
years of retirement," Gage says.
Calculating the tax bite may require
sophisticated advice, but a good place to start is by dividing your savings
into three pots: money on which the taxes have been paid, money on which only
capital gains will be due, and money on which ordinary income taxes will be
owed. Gage says breaking down your savings in this way makes it easier to
decide a number of things, including whether paying taxes now and moving money
into a Roth IRA makes sense.
5. Roth or regular? Roth IRAs, and the new Roth 401(k)s, which are now
available from some employers, are funded with after-tax dollars, but they grow
tax-free. They also don't require minimum distributions at age 70½. Tax laws
let you pay the taxes owed at your current tax rate and convert the assets in a
regular IRA to a Roth IRA in a process called a Roth conversion. Generally,
converting to a Roth is a good idea if you anticipate that your income won't
fall much after you retire.
Until now, many people couldn't have Roth
IRAs because of their strict income limits, but Roth 401(k)s allow high earners
to escape that limitation. "This can be a huge advantage," says
Michael Hatlee, manager of retirement services with the Chemung Canal Trust
Co., in Elmira, N.Y.
In 2007, all workers over 50 whose companies
offer the plan will be entitled to contribute up to $20,500 to a Roth Roth
401(k). Roth 401(k)s also will be available to self-employed individuals.
Plenty of financial Web sites help you determine whether a Roth makes sense for
you, including one at dinkytown.net.
6. How much will it take? Look hard at your budget and calculate how much you're
likely to spend after you're no longer working full time. Bankrate's budgeting
calculator can help you figure out your future expenses. Don't forget to add in
extra health costs. In 2005, the average 65-year-old spent $4,193 annually on
health care, according to the Bureau of Labor Statistics.
7. Take complete inventory. Compute the total amount that you're likely to have
to fund your retirement. With the time so close, it's not just a wild guess
anymore. There are some calculators that will help you do this, including
Bankrate.com's 401(k) retirement savings calculator. It not only estimates
savings and Social Security, it also allows you to factor into your plan
one-time windfalls such as inheritances and lump-sum pension distributions. And
you can calculate how much working at a part-time job will extend your
retirement savings. If these calculators don't do the job, talk to your
employer. Some employers have access to extremely sophisticated planning tools,
so ask your personnel department if you can use one.
