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Practical advice for every life stage — actionable insights and tactical strategies, forecasting tools and calculators, along with world-class investments and retirement solutions — so you can build a better retirement.
Whether you're years away from retirement, planning on retiring, or already retired, it's important to have a plan.
Retirement may seem far away, but early planning is crucial. It's true that some of your expenses may decrease when you retire, but others, like health care, travel, and leisure activities, may rise. And with life expectancies increasing and the power of inflation, you want to make sure you don't outlive your assets.
Social Security is the most common source of retirement income, with 88% of retirees saying they rely on the steady stream of payments and 55% calling Social Security a major source of their retirement income. With the future of Social Security in jeopardy, it's extremely important to save and invest on your own. The earlier you start, the more money you can accumulate and the greater chance you'll have of reaching your goals.
By starting early and saving moderate, even small amounts each year, you'll be better prepared to live comfortably in retirement. If you wait, you'll have to save much higher amounts each year in order to save the same amount, and you run a greater risk of not having enough money to retire at the age you'd like. It's never too late, though. Even if retirement is in your near future, you can still take steps now to save and invest.
One of the most challenging aspects of retirement income planning is making a reasonable estimate of life expectancy. Investors building their retirement plans around average life spans may risk outliving their nest egg, while investors who are less conservative with their life expectancy and hope to live well past the average may fare better in the long run.
If an investor's nest egg is large enough, or if their income needs are small, life expectancy may never enter into the equation — investment income alone may be sufficient to meet expenses, and the investor may be able to rely on income year after year without ever tapping investment principal. Of course, such cases are all too rare.
More commonly, investors will need to draw down their principal gradually in order to meet income needs while safeguarding their income stream. The key in achieving this balance may be a less conservative estimate of life expectancy.
The old adage tells us to "hope for the best, but plan for the worst." But retirees might be wise to plan for the best – a long, healthy life – in order to help avoid the worst-case scenario of outliving their retirement income streams.
The average life expectancies for those at age 65 are well established. Men live an average of just over 17 years after their 65th birthday, while women live an additional three years on average more than men. Based on these statistics, a 65-year-old woman with a $500,000 nest egg might conclude that, if her investments grew 6% per year, she could withdraw $44,000 per year and still have a small amount left for her heirs upon her death at age 85.
There are several flaws in this line of reasoning, but perhaps the most egregious is the assumption that the investor will have an exactly average life expectancy. In reality, the typical 65-year-old has a 50-50 chance of living longer — in some cases, far longer — than the average. This means that retirees building an income plan based on the average may draw on their investments too aggressively. The investor in the example above, for instance, may find herself in serious financial straits if she lived to age 85 or beyond, something which is quite possible.
A careful examination of life expectancy figures reveals that the average retiree has a fair chance of living well beyond the average, a fact that should influence any retirement income plan.
It's best to talk with your financial advisor about your individual situation. If you don't already have one, call us at 1-800-896-2645 for assistance.
One of the first factors to consider is that most strategies designed to extend the life of your retirement savings portfolio come with trade-offs. Accordingly, the secret lies in understanding the various options available so that you can identify the strategy that provides the type of trade-offs with which you are most comfortable.
One of the first steps you can take when addressing the ability of your portfolio to go the distance is to review your overall portfolio allocation strategy to ensure that it is appropriate for your current age, risk profile, and retirement income objectives.
This may be best done in partnership with your financial advisor who has the knowledge and expertise in constructing portfolios for purposes of generating retirement income. The skill set needed to construct a portfolio strategy for retirement income is more robust than the skill set typically needed to construct a portfolio strategy for accumulation. Simply put, there are more variables to consider when planning for retirement income.
Even the experts don’t always agree on what is the best portfolio construction for retirement income. While conventional wisdom typically has called for a major shift towards fixed income as one nears retirement, a contrary school of thought has taken root in recent years as some financial experts argue that a greater degree of equity exposure is warranted in retirement if one wishes their income to keep pace with inflation over a retirement horizon that can easily extend beyond 25 or even 30 years for some households.
For most retirees, setting up a retirement income stream from a portfolio of investments requires a plan for identifying how much you can afford to withdraw from your portfolio on a monthly or annual basis. While selecting a reasonable withdrawal level at the time you start taking withdrawals is critical, it is only the first step.
One of the surest ways to deplete your portfolio prematurely is failing to devise a method for monitoring your withdrawal rate in the future to determine if, and when, adjustments may be warranted (either upward—to keep pace with inflation or in response to positive market conditions, or downward—to proactively adjust your withdrawal rate in response to poor market conditions).
While few people like to contemplate the prospect of giving themselves a “pay cut” in retirement, a small adjustment downward (or even simply taking a pass for a year or two on your annual cost-of-living adjustment) can be far more palatable than finding yourself in a situation where drastic reductions are necessary in the future.
When it comes to determining how you will monitor your withdrawal rate (and make midstream adjustments, if necessary) the alternatives, as you might suspect, vary. Talk to your financial advisor to see what approach he or she recommends. Consider factors such as your spending habits and personal disposition, and then settle in on a strategy that feels right for you. Even in the event you elect to change your mind down the road, you’ll be miles ahead simply due to having implemented some type of formalized process for monitoring your withdrawal rate on an ongoing basis.
Given that the life expectancy for today’s average retiree is greater than the life expectancy for his or her counterpart 30 years ago, concern about outliving retirement savings is a legitimate concern that warrants attention. Fortunately, there are proactive strategies available to reduce this risk and reduce the corresponding stress that often accompanies the risk.
While the best strategy will vary for each individual, the fundamental strategy of being proactive—vs. reactive—is appropriate for all.
Diversification and asset allocation cannot ensure a profit or protect against a loss in declining markets.
Withdrawals are taxed at then-current income tax rates. Consult your tax advisor to assist with a withdrawal strategy. Contact your BNY Mellon Advisor for more information and to review your individual investment plan.
If you want to retire early and start a new business or are faced with a job loss and need income, your advisor can help you determine if taking 72(t) distributions may be right for you. You should also consult with your tax or legal advisor before taking any distributions from a retirement plan to determine if the distributions meet the requirements for the exception to the premature distribution tax.
Generally, taking distributions from a Traditional IRA before age 59½ will result in an IRS early withdrawal tax penalty. Under Section 72(t), the 10% IRA premature distribution penalty is waived for IRA distributions that are:
Any variation from the calculated distribution—taking more or less—will result in a 10% premature distribution tax penalty, plus interest, on all past distributions unless the account owner dies, becomes disabled or the account is depleted. State tax implications may also apply. However, if you selected either the fixed amortization or fixed annuitization method, you are allowed a one-time, irrevocable switch to the RMD calculation method without incurring penalties.
While you can take 72(t) distributions from Roth IRAs, it may not be necessary because Roth IRA contributions can be withdrawn free of federal taxes or penalties at any time. In addition, amounts that were converted to a Roth IRA can also be distributed federal tax and penalty free as long as the Roth IRA was held for five years. 72(t) distributions would apply only to earnings in a Roth IRA, which would be taxable and incur a 10% penalty if the account was not held for five years and the owner is younger than 59½ (or other exceptions apply).
You should discuss the financial impact of taking 72(t) distributions with your tax or legal advisor. The following example shows the monthly distribution amounts for the three different calculation methods.3 Additionally, there are three different life expectancy tables that the IRS allows you to use when calculating your substantially equal periodic payments with the Fixed Amortization or the RMD methods.
If you need to set up 72(t) distributions, a rollover IRA can help you consolidate assets from any former employer’s plan and provide a more holistic picture of your retirement assets. You may want to also consider allocating your overall retirement investments to two IRAs, one for taking 72(t) distributions and one that can continue to grow tax-deferred. This may allow you to maintain maximum flexibility and take distributions from the second IRA as needed in the future.
You should consult with your tax or legal advisor before taking any distributions from a retirement account. While 72(t) distributions provide one of the most advantageous ways to access IRA assets early, dipping into retirement savings can have serious consequences and should be done only if necessary. Early withdrawal reduces the growth potential of your overall retirement portfolio and increases the risk of outliving your income in retirement. You should also consider whether you may return to the workforce in the future, which affects the size of the distribution you can take and the calculation method you use. Your advisor can help you identify any potential risks to your retirement strategy.
There are fees, expenses, taxes and penalties associated with IRAs. Taxable amounts withdrawn prior to age 59½ may be subject to an additional 10% penalty tax.
1Any variation from the calculated distribution amount—taking more or less—will result in a 10% tax penalty, plus interest, retroactively applied to all past distributions through the end of the year of the modification unless the account owner dies, becomes disabled or the account is depleted.
2Account owners who have selected either the fixed amortization or fixed annuitization methods are allowed a one-time, irrevocable switch to the RMD method without incurring penalties.
3For illustrative purposes only. You must choose a life expectancy table, but you must continue taking distributions based on the life expectancy table you initially chose. There are three different life expectancy tables that may be used for calculating substantially equal periodic payments. Example assumes that distributions occur for the five-year period, ending on the fifth anniversary of the first distribution until age 59½.
4The maximum interest rate cannot be more than 120% of the federal mid-term rate as published monthly by the IRS.
5The RMD Method is recalculated each year. This amount is for year one, and subsequent years will vary.
6This method of calculation determines a fixed distribution amount. The amount is calculated in the first year and that amount is taken for subsequent distribution years.
If you withdraw money from a Traditional IRA, Rollover IRA or a SEP-IRA, you must pay income taxes on the money. You'll also be assessed a 10% federal penalty tax unless you meet the special criteria below. This penalty tax applies only to the taxable amount of the distribution, not the amount attributable to non-deductible contributions.
If you withdraw money from a Roth IRA and you are under age 59½, you will not be taxed or pay a penalty on the contributions you withdraw, but your earnings will be taxed as income and you will pay a penalty tax on the income, unless you own the account for at least five years and you meet one of the exceptions listed below.
Under Section 72(t) of the Internal Revenue Code, you can avoid the 10% penalty tax that applies to early distributions from an IRA if you:
Please contact your tax advisor before making any distribution decisions.
After you reach age 59½, you can take money out of a Traditional, Rollover IRA or SEP-IRA whenever you want for any reason without any early distribution tax penalty. However, you must pay ordinary income tax on any tax-deductible contributions you previously made and on all accumulated earnings that are included in your distribution.
If you're age 59½ and you've owned a Roth IRA for at least five years, you can withdraw funds tax-free. If you've owned a Roth IRA for less than five years, you will pay income taxes on the earnings, but no penalty tax.
As with other tax-deferred retirement savings vehicles, you are required to take at least a minimum distribution from your Traditional IRA, Rollover IRA, and SEP-IRA each year beginning with the year you turn 70½. (There is a 50% penalty tax on amounts that are not distributed.) The distribution for the year you turn 70½ may be delayed until April 1 of the following year. The distribution for each year after you turn 70½ must be taken by December 31. If you wait until April 1 to take the first distribution, you will have to take two distributions in the same year.
It is a requirement that 10% of your Traditional, Rollover and Sep-IRA distributions be withheld for federal income tax purposes unless you elect not to have taxes withheld. This withholding applies to the total amount of each distribution even if part of it is attributable to nondeductible contributions.
If you opt out of withholding or do not have enough tax withheld, you may have to pay taxes and you may incur penalties if estimated tax payments are insufficient.
If you are entitled to receive a distribution from a retirement plan, the plan administrator is required to provide you with a detailed notice explaining the applicable tax rules. For more specific information about distribution rules — including information on the required minimum distribution regulations and how they apply to your particular situation — contact your financial advisor, and/or tax professional.
Steps you can take now — organize your files, add or update beneficiaries to your accounts, create a will — can help make things a bit easier for your survivors. We can help. Call 1-800-896-2645 to receive our Wealth Transfer Kit or download the kit components listed below.
If you have any questions regarding adding a beneficiary to your account or if you would like the Transfer on Death Registration form mailed to you, please call us at 1-800-896-2645. If you are a Brokerage Account client, please call us at 1-800-843-5466.
Guides to help you prepare for and live in retirement. Contact a BNY Mellon Funds Representative at 1-800-896-2649 for additional information or assistance on how this information may fit into your financial plan.
Call to learn more about how a Traditional IRA, Roth IRA, SEP IRA and/or a Rollover IRA can help you meet your retirement plans.
Call to learn more about an Individual 401(k) or SIMPLE IRA.
Call us to speak with a Retirement Specialist to learn more about the 403(b)(7) plan.
This information is general in nature and is not intended to constitute tax or estate-planning advice. Please consult your tax and/or estate-planning advisor for more detailed information and advice on your specific situation.
There are fees, expenses and penalties associated with different types of retirement plans.
Since 2006, certain retirement plans have been permitted to allow participants to designate some or all of their deferral contributions as "Roth deferral contributions." Roth contributions may only be rolled over to a Roth IRA.