A recent survey conducted for the American Association of Retired Persons (AARP)* found that baby boomers intend to be independent and self-reliant when it comes to their sources of retirement income. The majority was not relying on Social Security benefits, but rather on their own savings. Not surprisingly, as with many seniors today, boomers also expect to work part-time to supplement retirement income. When boomers were asked what they associated with the word "retirement," the overwhelming responses were: "having enough money" and "financial security."

*Source: Baby Boomers Look Toward Retirement, by Roper Starch Worldwide, 1998.

Copyright © 2002 Liberty Publishing, Inc. All rights reserved.

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  What is an IRA Rollover?

If you're about to change jobs or leave the workforce, an Individual retirement Account (IRA) rollover enables you to move retirement assets directly from a qualified plan to an IRA account without subjecting them to penalties or taxation. An IRA rollover allows you to preserve the tax-deferred earnings of your savings, and also enables you to personally manage your retirement plan assets. If all assets are transferred directly from the qualified plan to a traditional IRA, without your taking receipt of the funds, there will be no taxes withheld or penalties to pay. Be aware, however, if you have your plan administrator pay the money diretly to you, even if your intention is to invest the money in an IRA, he/she is required to withhold 20 percent of any distribution you elect to receive toward payment of potential income taxes. To avoid current taxes and potential early withdrawal penalties, you must reinvest the full value of the distribution into the IRA within 60 days of receiving the money.

This is not intended to be tax or legal advice. You should consult your own advisor regarding your specific situation.

Copyright © 2002 Liberty Publishing, Inc. All rights reserved.

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  Borrowing From Your 401(k) Plan

A majority of companies that offer 401(k) plans allow their employees to take loans from a portion of their balance under certain conditions. The upside to such a loan is that when repaying it, the employee is actually paying himself or herself the interest. But, if you’re considering such a loan, beware. Indiscriminately accessing your fund could void its tax-deferred status and result in penalties.

If the loan isn’t repaid within a certain period (usually five years), and in accordance with certain rules, the Internal Revenue Service may view the outstanding balance as a withdrawal, and assess both taxes and a penalty. If the employee voluntarily terminates employment, the company may demand full repayment of the loan. In that case, the 401(k) would be rolled over or broken up, and the borrower may owe taxes on the loan balance, and possibly a penalty. In both cases, penalties will be avoided if the employee is 59½ or older and can withdraw from the fund. In the case where an employee voluntarily terminates employment, penalties may be avoided if the balance is paid back into the fund within 60 days.

If you’re considering borrowing from your 401(k), it’s a good idea to check all of the rules and all of your options before moving ahead.

Copyright © 2002 Liberty Publishing, Inc. All rights reserved.

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  Pension Payout Options

Thoughts of retirement are often accompanied by images of the enjoyable ways you’ll spend your days. One thing you may not even consider, though, is that you may be faced with a very important decision come retirement day. If you participate in a company pension plan, you’ll have to decide how you want to receive your pension proceeds. For this reason, take the time now to consider your options, so, when the time comes, you can make the choice that’s right for you. Typically, most pension plans give retirees the following choices:

1. income for the rest of your life (single life option);
2. income for the lives of both you and your spouse (joint and survivorship option);
3. or a lump sum distribution.

At first glance, you might think your marital status will dictate which option is best for you. But, there’s a lot more to it than that. Let’s take a closer look at the options. The first two options (single life and joint and survivorship) provide you with a fixed income (usually in monthly installments) in exchange for your pension balance. While the third option (lump sum) allows you to take your entire pension balance so you can manage it yourself.

If you’re worried about outliving your assets, regardless of your marital status, you should take one of the two “income” options. It’s a simple way to ease your fears about running out of money. If you’re single, this choice is easy because you can only select the single life option. However, if you’re married, it’s a different story altogether because you can choose either income option.

The single life option pays a higher monthly income, but payments cease at your death. While the joint and survivorship option pays a lower monthly income, payments continue until the death of both you and your spouse. If you have other substantial retirement assets, or your spouse has his or her own pension, taking the larger income offered by the single life option is your best bet. On the other hand, if your pension is all you and your spouse have, the spousal security offered by the joint and survivorship option may make sense.

As you carefully review these two income options, keep in mind that there may be an actual “third” income option. This third option is really a combination of the first option—the single life option—and life insurance. By taking the higher income with the single life option and using some of that income to pay the premiums on a life insurance policy, in some cases you may be able to “net” more income than with the joint and survivorship option. All the while, your spouse will be protected by a potentially significant life insurance death benefit. After your death, the death benefit proceeds are received income tax free by your spouse and can be used to help fund his or her own retirement income. (Note: The success of this strategy—often called “pension maximization”—depends on an individual’s age, health, the type of insurance policy, and the schedule of premium payments. Your situation should be analyzed carefully with the assistance of a financial professional before proceeding with this strategy.)

As previously mentioned, selecting either income option requires that you give up your pension balance in exchange for income. In other words, you can’t just select a payout option one day and then decide at a later date that you’d like to receive your remaining pension balance in a lump sum. With this in mind, let’s turn our attention to the final payout option—the lump sum distribution.

Taking Control

If you want full control over your pension assets during retirement, then a lump sum distribution is the thing for you. You will give up the guaranteed retirement income, but will have the opportunity to make your own investment decisions. You can take a lump sum distribution in one of two ways. You can either roll it over into your own IRA (Individual Retirement Account) or you can receive the pension proceeds net of income taxes. Unless you plan on using your pension assets for something other than retirement, don’t even think about receiving your lump sum net of income taxes. The IRA rollover typically makes the most sense because you’ll continue to receive the benefits of tax-deferred accumulation and only be taxed when you take withdrawals from the IRA.

As you can see, before you relax into a comfortable retirement, you must make a difficult decision about your pension proceeds. This will require you to carefully consider several options. A review with a financial services professional and with your tax or legal advisor can help you determine which one best meets your financial needs and goals.

Copyright © 2002 Liberty Publishing, Inc. All rights reserved.

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  Mapping The Road To Retirement*

Periodically along the road to retirement, you need to be sure you are taking advantage of all possible sources to supplement your retirement income. You need to guard against exhausting your financial resources too quickly. However, the truth of the matter is that many people don’t save enough for retirement. The more you accumulate now, before retirement, the less you may need to worry about working after you “retire” in order to maintain your lifestyle. Consider these five steps to help map out your route to a more secure financial future:

1. Determine your retirement needs and resources. With people living longer than ever before, a sound retirement strategy may need to provide you with an income stream that can last anywhere from twenty to thirty years, or maybe more. Will your expected income be able to keep pace with inflation over this extended period of time? Even with a four percent annualized rate of inflation, the cost of goods and services will double in about 18 years. With this in mind, you can begin to assess the likelihood that your current assets and savings will meet your retirement income needs. If they appear insufficient, you need to fill in the gaps.
2. Don’t count on just Social Security. In the past, Social Security and a company pension have provided significant sources of retirement income. However, the days of “living off” a pension or Social Security have passed. In fact, the Social Security Administration (SSA) has reported that Social Security benefits replace about 40 percent of the average worker’s pre-retirement earnings, and only 24 percent of pre-retirement earnings for those who earned the maximum taxable amount. If you depend on Social Security alone, you may find your income is going to come up short.
3. Increase your personal savings. Even minor adjustments to your household budget that reallocate some cash to savings instead of consumption can make a difference.
4. Take full advantage of your company plan. If you are not already, consider contributing the maximum amount to your employer-sponsored retirement plan. This allows you to take full advantage of pre-tax contributions that accumulate on a tax-deferred basis. Taxes will be due when distributions begin. (Some additional penalties may apply for early distributions.) In addition, many employers match employee contributions, effectively providing a guaranteed return on a portion of your own contributions. Remember, if your employer matches 50 percent of your contribution, you immediately gain a 50 percent return on those contributed funds. This is one of the quickest ways to help narrow a retirement funding gap.
5. Make sound use of personal tax-advantaged alternatives. Individual Retirement Accounts (IRAs), and nonqualified plans can provide additional tax-deferred savings opportunities.

Retirement may seem a long way off, especially if you have immediate and pressing financial concerns. However, many people in their prime earning years neglect to build adequate savings. The sooner you begin taking advantage of all your retirement income opportunities, the better off you are likely to be when retirement ultimately dawns. Why not take a few moments to review your retirement strategy? If you begin fueling up on all of the potential sources of retirement income now, you’ll be in the best position to secure a comfortable future down the road.

*Securities offered through Registered Representatives of MML Investor Services, Inc., member SIPC.

Copyright © 2002 Liberty Publishing, Inc. All rights reserved.

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