More Common Retirement Questions

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Retirement QuestionsThis week’s newsletter is a continuation of a series on planning for retirement that I started early in the summer. There is a lot of information available about retirement planning but most people find the information confusing and often conflicting. I’ve kept track of some of the most frequent questions we hear and have been including them in this series.

See the other posts in the series here:

Now that I’m going to stop working, won’t my income taxes be lower?
Many retired workers are surprised to learn they will still be paying income taxes, often with little or no reduction in tax payments from their working years. Social Security benefits can be subject to income taxes depending on your other income. Distributions from retirement plans are subject to income taxes as is pension income. You may also be required to make estimated tax payments now that income taxes are not being withheld from your paycheck. One of the biggest causes of tax problems during retirement is the mistake of saving everything in a tax deferred account. This is why I wrote the New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning. The simple fact is you probably won’t be in a lower tax bracket unless you plan for it. The plan is outlined in my book.

What are my options for the money that is in my employer’s retirement plan?
All employer plans are required to offer you an income payout in the form of monthly income from your retirement plan. The amount of monthly payment will depend on the balance in the account and your age. When considering early retirement, the annuity payouts will be smaller, because you have a longer life expectancy. The payments are taxed as ordinary income and don’t qualify for any special tax treatment for federal income tax purposes.

In most cases, annuity payments aren’t eligible to be rolled over (transferred) to an IRA. Rolling over distributions from an employer plan to an IRA avoids taxation. The rare exception is if the annuity payouts are for a period of less than ten years. You may also have the option of rolling over the entire plan balance to an IRA. Rolling the plan balance directly to an IRA avoids taxation until the funds are withdrawn from the IRA. You will be able to control the amount of taxable income from the IRA until you reach age 70½ when minimum distributions will be required. When you’re asked to choose a payout option upon retirement, choose wisely! With most retirement plans, this is an irrevocable decision.

Why should I consider a rollover to an IRA?
Inflation is one of the biggest problems for most annuity payments. Retiring at age 65 with a $3,000 per month pension may be a comfortable income today. However, 3½% inflation would reduce the purchasing power to only $1,500 in 20 years. Your standard of living would erode significantly if you don’t have other savings to supplement your income. An IRA offers the possibility of higher returns and increasing income potential. Any remaining balance in your IRA at the time of your death can be rolled over tax-deferred to a surviving spouse with the remaining balance distributed to beneficiaries at the death of the spouse. Annuity payments generally only cover two lives – the employee and his or her spouse.

Should I rollover to an IRA when I can leave my pension or 401(k) balance in my account and not pay any expenses?
Some retirees do leave pension balances in a company sponsored account but most prefer an IRA for a number of reasons.

The choices in the company account are usually limited to a handful of investment accounts while an IRA offers an almost unlimited number of alternatives and the ability to make changes frequently and easily. Also, many retirees find the service from a former employer or from a voice menu reached via a toll-free number to be less than adequate service.

Consolidating all your retirement savings into one IRA account helps coordinate all your investments into one cohesive investment strategy. Making sure you have a well-diversified portfolio can’t be done as easily when you have several retirement accounts in different places. This is even more important when you reach age 70½ and required minimum distributions (RMD) begin. Each custodian will be asking you to take your RMD and you will be offered multiple calculations. It’s just one calculation when your retirement funds are consolidated in one place. This also makes tax withholding from an RMD easier to calculate.

See the other posts in the series here:

Rick’s Tips:

  • Your income taxes during retirement are unlikely to be lower unless you plan for it using the strategy outlined in the New Three-Legged Stool.
  • Choose carefully when electing a distribution option from your employer’s plan when you retire. These choices are usually irrevocable.
  • Inflation is one of the biggest enemies of a retiree. Just 3½% inflation will double the cost of living in 20 years.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

Get Personalized Answers
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437