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Baby Boomers Gain Access to Retirement Accounts

Baby Boomers Gain Access to Retirement Accounts Most people stopped celebrating half birthdays when they were children. But this year baby boomers turning 59 & have a reason to celebrate. July 1, 2005, marked the day the first baby boomers have access to their IRAs, some 401(k) plans and other retirement accounts money without incurring early withdrawal fees.

Although boomers have access to this money, it should not be a time for a spending spree. They should revisit their financial goals and consider some of the potential risks they face in retirement including:
  • Outliving assets
    Even the most carefully designed retirement income plan - one that manages inflation, investment and withdrawal risk - can be negatively impacted by the greatest unknown of all - longevity. Boomers are living longer and healthier lives, and that increases the possibility of outliving their assets.

  • Taxes
    IRA and 401(k) withdrawals will be subject to income taxes. As most boomers continue to work into their 60s, accessing the money at an earlier age could push many into a higher tax bracket.

  • Inflation
    Inflation reduces purchasing power and affects the "real value" of investments. Health care costs in particular continue to rise at rates well above the rate of inflation. Investment strategies need to beat inflation over the next 20 - 30 years.

  • Investment risk
    Even though today's retirees are likely to live longer, they may not be able to rely on the luxury of time to recover from market volatility. Yet, an overly conservative investment strategy can expose investors to the risks of outliving their assets.

  • Unforeseen events
    Poor health or a former employer's discontinuance of retirement benefits rank high on the list of risks faced by those planning for retirement.
Whether you're planning to shift into low gear or pursue an active retirement, your savings will need to last throughout your lifetime. Boomers may need to make investment decisions now to create their own paycheck in retirement.

There are options available to help you preserve assets and generate income for retirement. The following are helpful tips for creating a retirement paycheck from accumulated assets:
  • Maintain a long-term investment strategy.
    Don't underestimate life expectancy. Americans in their early 60s, on average, can expect to live another 20 years past retirement age, according to Congressional Budget Office estimates, so an investment strategy needs to account for these years. The longer you keep your savings invested, the better. Tax-deferred compounding is a powerful way to keep invested money growing, since any earnings are not taxed until withdrawn.

  • Withdraw no more than 4-5 percent.
    The best defense against outliving assets is to adopt a conservative annual savings withdrawal rate of no greater than 4-5 percent of retirement assets. Withdrawing too much income from a portfolio, especially in the early years of retirement or in a down market, can cause greater risk of running out of money. (Keep in mind, however, that withdrawals prior to age 59 & may be subject to an additional 10 percent IRS penalty).

  • Create a cash "bucket."
    Fill the bucket with cash needed for the next two to three years, and keep the rest of the portfolio invested for growth. Every six to 12 months, re-balance the portfolio by trimming from the best performing assets to replenish the cash.

  • Keep the portfolio working.
    An overly conservative investment strategy can be just as unwise as investing too aggressively. A well-diversified, balanced portfolio that has the potential to produce current income and growth for future needs is vital for a long retirement.

  • Prepare for the unexpected.
    It's always wise to create a financial strategy that accounts for life's little ' and big ' surprises: a serious health setback, the early death of a spouse, a change in or discontinuance of employer-sponsored retirement benefits.

  • Annuities can help.
    Consider using part of a portfolio to buy an immediate annuity, which provides a guaranteed income stream for life. Keep in mind that guarantees are based on the claims paying ability of the issuing company and do not apply to the performance of the separate accounts.
Having the option to withdraw retirement money early can be exciting. However, boomers need to make sure they have a steady stream of income in retirement that will last through their lifetime. If you are celebrating your 59th birthday this year or want to be in a better financial position for retirement, consider meeting with a professional financial advisor who can help you create a personalized financial plan that will look at your individual savings, withdrawal risks and investment options for retirement.



This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation.

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