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4 Ways to Botch Your Retirement Income Security

4 Ways to Botch Your Retirement Income Security

Financial security in retirement is a concern for many Americans. According to LIMRA, seven out of 10 retirees and pre-retirees name “having enough money to last their lifetime” as a top priority. LIMRA also reports 67% of retirees and pre-retirees say “remaining financially independent” is another retirement objective.

With these expectations, the importance of ensuring sufficient income for retirement can’t be overstated. But even with careful retirement planning, there are a number of pitfalls which could put income security at risk. Here’s a look at some challenges which may disrupt your financial security if they’re neglected.

Common Hazards for Retirement Income

Early withdrawals from retirement accounts. According to IRS rules, withdrawals from a retirement account before age 59.5 are subject to penalty. On top of income tax on your withdrawn funds, you have to pay a 10% penalty fee. From that standpoint, early withdrawals erode the amount of retirement income you would otherwise have later on.

Once you turn 59.5 years old, withdrawals from your IRA or 401(k) plan are penalty-free. However, there are some exceptions in which the 10% penalty doesn’t apply. A few exceptions are disability, an IRS levy, and other exceptional circumstances. In some cases, people turn to early withdrawals due to unforeseen events or emergencies. One way to be ready for such a situation is to maintain some liquidity in your personal finances.

Not having a suitable plan for distributions. Another important “retirement milestone” is age 70.5. When you reach this benchmark, required minimum distributions kick in. If you don’t start taking RMDs by this date, the IRS can impose a 50% excise tax on the amount you’re supposed to take out – which can be a substantial sum. Note that distribution rules differ for IRAs from 401(k) plans, particularly in the timing of when distributions must start.

Aside from providing the benefit of guaranteed, permanent income, annuities can help offset the rigors of preparing for this stage. But it’s important to choose the right annuity strategy. If an immediate annuity is purchased within an IRA, care should be taken to ensure payments will start no later than when the buyer turns age 70.5. The benefit is an immediate annuity within an IRA is calculated in the same manner as required minimum distributions are, based upon actuarial variables such as longevity.
In the case of deferred annuities, a number of options are available, including qualified longevity annuity contracts, which are designed to meet IRS mandates. Note, though, that this type of annuity contracts is subject to different rules than traditional deferred annuities are.

Under-planning for inflation. From 1999 to 2015, inflation ranged from 0.1% to 4.1%. In recent years, inflation has been low, but this doesn’t mean it won’t eat into the buying power of your retirement savings. Under-planning for inflation can be detrimental to your retirement later on. It might mean a shortfall in income over the long term.

Consider, for instance, the effects of cumulative inflation on health costs. From 1984 to 2013, just the cost of prescription drugs increased 338%. And retirees also face a unique challenge in healthcare inflation. According to the Employee Benefit Research Institute, a couple aged 65 desiring a 90% chance of having enough money for retirement lifetime health costs should have $392,000 saved up. EBRI research also shows that from age 65 to 74, average out-of-pocket health costs consume about 11% of aggregate household spending, but once you move past age 74, health costs skyrocket. The Centers for Medicare and Medicaid report that health costs will increase almost 6% per year until 2024 – a pace that is twice the rate of overall inflation at present.

Underestimating longevity. Life expectancies are on the rise, which gives us a longer time horizon to plan for. Research data shows retirement today can last for 20 years or longer. According to the National Center for Health Statistics, a 65-year-old man has an average life expectancy of another 17.9 years. A 65-year-old woman could anticipate an average life expectancy of another 20.5 years. This increased time horizon means more years to plan to have sufficient income for, along with accounting for other variables: market volatility, cumulative inflation, and more.

Concluding Thoughts

The point is it’s important to have a financial plan that balances all of these factors. A retirement strategy should include measures for how you’ll meet monthly living costs as well as spending on retirement goals and more specialized expenses as you age – house repairs, healthcare, and other factors. It’s also important to take heed of the retirement milestones we discussed prior and to minimize tax liability.

If you’d like to supplement income from Social Security or another vehicle, many seniors and retirees have found income security in annuities. They offer the benefit of giving income for up to as long as you live, bound by contractual guarantees backed by the issuing insurance company.

If you're ready for determining whether an annuity makes sense for your income strategy, or another insurance strategy does, can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

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