It's time for your hard work to work hard for you.
Not long ago, “retirement” for many people meant living on a combination of Social Security and a fixed pension. Today, retired people are living longer and better, and many plan to enjoy their golden years. The problem is that those fixed pensions, for many, have disappeared – which has put much more emphasis on the importance of pre-retirement planning (which, for our purposes here, refers to a plan for an individual’s transition to retirement).
Today, many people transition into retirement gradually over a period of months or even years. Unfortunately, for many, this transition occurs abruptly and unexpectedly, through either a layoff or disability. Few can predict with certainty which day will be their last on the job.
In the absence of predictable retirement dates, many people put off the serious planning that should take place before retirement. Instead of planning for the changes in their lifestyle that their changed financial circumstances may require, they wait until it’s too late to properly plan. This can lead to hasty, ill-conceived decisions, and a rocky start to their golden years. As a general rule of thumb, it’s a good idea to start serious retirement planning at least one year before the transition period begins. This allows adequate time to obtain professional help, understand the many choices available, and make well-thought-out decisions.
What issues and decisions should you evaluate in this pre-retirement planning process? Consider the following:
Choose carefully, since the old saying “actions have consequences” definitely applies here. For example, before you accept a check for your entire account balance, be sure you understand the tax implications of that choice – as in most cases, any federal (and, if applicable, state) taxes you owe on your money will be due all at once – for the year in which you received your payment. This usually means that you’ll pay much more in taxes than if you chose another option.
On the other hand, if you choose the monthly income option, make sure you carefully consider the kind of payments you’d like to receive, particularly if you are married or have a partner to consider.
Finally, with the rollover, even if you meet the rollover deadline (60 days), your current plan provider will withhold 20 percent of your account balance in the form of withholding taxes if you receive the money directly (i.e., if your money is not transferred directly from one retirement plan provider to another, but you receive the check instead). To avoid paying taxes on that 20 percent for the year – as well as a possible 10 percent penalty – you must use your own funds to replace that sum by depositing the same amount into your new IRA within the 60-day deadline.
Don’t wait until you’ve reached the point where you feel pressured to make major retirement decisions. Be sure to obtain the information and guidance you need to calmly consider all your choices well ahead of time. Competent financial and legal professionals can help you chart a course for retirement, as you try to project the levels of income and assets you’ll need to maintain your desired lifestyle. In pre-retirement planning, you will make some of the most important financial decisions of your lifetime. Don’t make them in haste – or on your own.
¹Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses or is surrendered, any loans considered to be a gain in the policy may be subject to ordinary income taxes. Dividends are not guaranteed.
Prepared by The Guardian Life Insurance Company of America. The information contained in this article is for general, informational purposes only. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.