Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 19, 1995 TAG: 9506220013
SECTION: BUSINESS PAGE: 8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
IF APPROACHING RETIREMENT is the case for you, you still have some work ahead in the form of financial planning. You must think about how you are going to live for 20 or 25 years - or longer if you are leaving the job before usual retirement age - because it's not at all unusual these days for people to see their 85th or 90th birthdays.
Andrew M. Hudick of Fee-Only Financial Planning in Roanoke offered a checklist for people who are nearing retirement, plus some encouragement for those who still lack sufficient savings but have only a handful of years to go.
He told the story of a client who just retired from his job as a factory worker. With his Social Security, pension, Individual Retirement Account and other savings, his retirement income will equal his earnings on his job. And because he plans to work part time as a means of keeping active, he will actually have more money in retirement than he had before.
Yet he had saved very little money when he first consulted Hudick seven years ago. In the meantime, he was able to work out a budget so that he could save and invest $3,000 to $4,000 a year, and his employer partially matched contributions to his 401(k) plan. Because his investments have performed well, he has a net worth of more than $100,000 in liquid assets, which is cushioning his retirement.
The first item on Hudick's retirement checklist is:
SOCIAL SECURITY
Contact the Social Security Administration at least two or three months prior to your retirement date, Hudick said. That presumes you will have checked the Social Security records periodically over the years to see that your work record is up to date. The contact closer to retirement is to determine exactly what your benefits will be and when they will start.
Most people can count on between $900 and $1,000 a month from Social Security against a maximum of about $1,200, Hudick said.
EMPLOYEE BENEFITS
Your next visit is to the employee benefits coordinator at the place where you work. Determine the amount of your pension, Hudick said. Find out if it includes a benefit that rises with the cost of living. Many pensions are static.
INSURANCE
One of the main points you must settle, Hudick said, is what will happen to your health and life insurance coverage when you're no longer an active employee. Many employers no longer pay for insurance for retirees and, since health insurance is essential for financial as well as physical security, replacing this coverage can become a major expense after retirement.
Discontinue your disability insurance coverage since you are no longer depending on a salary check, Hudick said. And reevaluate the amount of life insurance coverage you need in light of your reduced responsibilities. This will include a calculation of the amount of Social Security and pension benefits that would be paid to your survivors in case of your death.
CASH & CREDIT
While you are still working is the time to obtain a home equity line of credit, because a bank will be more amenable to extending credit while you're employed, Hudick said.
You hold, but don't spend, the home equity line. Hudick said the second mortgage against your home is a source of emergency cash in case you need a new car in a few years or if you have big medical bills. You use the credit as you need it in the future for major problems, and the interest will be tax deductible.
TAXES
Income taxes are also on the checklist because you should calculate the figures with your retirement benefits so you know how much you will owe and whether you must make quarterly payments to the IRS. For workers who have had money withheld from paychecks to cover income tax bills, this could represent a major change.
Presumably you have an IRA, a 401(k) or similar plan at work and probably other savings and investments. Hudick said you should sit down and determine which of these, if any, you will use to supplement your retirement income. If you don't need the extra income now, you might wait until you are required by law to tap into the retirement accounts, at the age of 701/2.
One decision you must make, if you are eligible, is whether to use five or 10-year forward averaging to pay taxes on your retirement plans or if it is better to pay taxes as you go along. Once you make this decision, you cannot change it, and considerable tax differences could be involved, depending on your tax situation. You may need a planner or tax professional to help you make this decision.
Hudick said people who don't need the money now can postpone this decision in connection with a 401(k) plan if they have the option of leaving the money untouched in the employer's program.
ESTATE PLANNING
Hudick said people should write or update their wills, and they should determine whether the estate is large enough to justify estate planning. The taxable level is an estate of $600,000 including your home and life insurance. Remember that the second spouse to die might more easily reach that level.
INVESTMENTS
Finally, Hudick said, consider the rising cost of living, which at present inflation rates could double by the time you reach the age of 85 or 90. He said at least some of your investments should be in stock mutual funds and the like that have potential for future growth.
by CNB