You've decided to retire now. You know how much you're due from social security and any pension too. Then there's the lump sum from your defined contribution plan at work. What retirement planning tips can help you make the most of your lump sum?
In most cases, you want to do a direct rollover of the lump sum into a new IRA. This'll prevent paying any tax, keeps your earnings growing tax-deferred, and preserves protection of the funds from creditor claims (rollover funds kept segregated get better creditor protection than your contributory IRA--this is a little known retirement planning tip).
Another retirement planning tip on investing your rollover--don't commit these rolled over funds to any particular investment until you determent how much of it you'll need each year. Put it in a money market account until you decide. When considering specific investment options look closely at the fund fees; they can eat away at your compound return benefits. You won't get the straight story from anyone on mutual fund fees so please read John Bogle's book--Bogle on Mutual Funds.
Here's a retirement planning tip if you know you want top spend some of the money right away--you may be able to get at it tax free. Before you roll over your lum sum to an IRA, ask your comopany plan administrator is any of the funds were contributed post-tax. If so, this means you have already paid tax on some money which can be removed--BEFORE--you do a rollover.
Here's another retirement planning tip--if any of our plan is invested in shares of your company, you may be able to save income tax by using the special Net Unrealized Appreciation Rules. Ask your retirement advisor or tax counsel. This special rule allows you to convert ordinary income (taxed at up to 35%) to capital gains income (currently 15%).
Another retirement planning tip about your investment allocation--at age 65, your life expectancy is 18 years so 40% of your lump sum needs to go into growth-type investments to beat out inflation. You'll diversify your holding to include growth as well as income-producing investments. And be sure you maintain some of it in the money market account for emergencies.
Retirement planning tip about withdrawals form your lump sum--if you want its income but don't want to deplete your money, you should consider annual withdrawals of just 3% to 4% per year. Of course, you must make the IRS's minimum required distributions after turning 70½. If you do have funds outside a tax-deferred plan, it's more tax beneficial to use those up first so that your tax-deferred funds can keep growing at the higher compound rate that tax-deferring allows.
If you're worried about assuring yourself –and your spouse – a lifetime income beyond what social security (and any pension) is giving you, you might consider using all or a portion of your IRA to purchase an immediate annuity. This can ensure a lifetime income that- is either fixed or variable according to your choice--a good retirement planning tip for those who need more cash flow. Check monthly payments with the immediate annuity calculator.
Our final retirement planning tip--since there's a good chance that you may need long term care in the future, you may want to purchase a long term care insurance policy now. It can be expensive – so purchase it as early as possible. Direct costs of long term care can devastate your savings.