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"While not a full-blown retirement planning strategy, we're
offering these tips with one goal in mind: helping Americans achieve
a more secure retirement," says Robert Fishbein, a tax planning
expert at Prudential Financial, Inc.
1. Don't think of your home as a retirement asset.
Whether you are a new homeowner or near retirement, you should
not think about your home as a retirement asset, for these reasons:
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A home is, first
and foremost, a place to live, and you will always need a place
to live.
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Your home is an
inherently un-diverse investment.
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A home may be
subject to debt, which means it is less valuable than it appears
and could be an ongoing expense when living in retirement.
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Relying on a home as retirement savings
tends to discourage other saving.
2. Don't think maximizing investment return is a savings plan.
Maximizing investment return is an important focus of retirement
planning. However, sometimes we fall into the trap of seeking
outsized returns to compensate for our failure to save consistently
over time. There is no substitute for disciplined and regular
saving.
3. Do maximize Roth assets.
A Roth IRA or 401(k) can provide tax-free income, if you hold the
account for 5 years and have attained age 59 1/2. Roth IRAs also
have the added benefit of being exempt from the tax rules requiring
distributions starting at age 70 1/2.
Prior income limits on converting a traditional IRA or 401(k) to
a Roth IRA were eliminated in 2010, which makes these unique
retirement planning products more broadly available. Of course,
converting a non-Roth retirement asset into a Roth retirement asset
triggers recognition of the tax gain on the converted value.
4. Do have a retirement income plan.
Some financial professionals suggest 80 percent of your
pre-retirement income is a good retirement income goal. With this
goal you can then compare your expected monthly retirement income
from Social Security and any pension plan to your target monthly
retirement income amount. Any shortfall is the amount you will need
to make up each month by tapping your other savings. Also consider
an annuity contract from a life insurer to provide additional
guaranteed lifetime income, which will both cover more of your
target retirement income and manage the risks that you invest poorly
or live longer than expected.
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5. Do plan for inflation and increasing health care costs.
Inflation and health care costs are twin traps that can erode the
value of your retirement plan if you do not consider and plan for
them. One strategy is to calculate a more modest income at the
beginning of retirement and then increasing the income amount each
year by the inflation rate (or a rough proxy such as 3 percent).
6. Do maximize Social Security as insurance protection.
For most Americans the decision to defer Social Security payments
as long as possible is an important action to ensure not outliving
one's assets. Social Security is typically a large source of
retirement income, and its value is enhanced because it is
government guaranteed and provides inflation-adjusted payments.
7. Do stress test your retirement plan.
The 2008 economic recession gave rise to bank bailouts and, in
turn, the stress testing of banks to ensure ongoing viability. This
thinking can and should also be applied to your retirement planning.
For example, how would your retirement plan work if your investments
grow at 3 percent a year instead of 8 percent? What if your income
declines over time?
Stress testing your retirement plan could suggest you change your
planning assumptions. You might decide to work longer, which reduces
the number of years that you will need your retirement assets to
support you. Other adjustments that you can make include saving more
now, changing the risk profile of your investments, and buying
products with a lifetime income guarantee so you are less exposed to
market risk and the risk that you will live longer than expected.
National Retirement Planning Week is April 9-13.
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