Four Risks to Your Retirement Future

Because younger retirees typically are planning for a time horizon of 20 years or more, it is important that their portfolios include a source of growth that is likely to exceed inflation over the long term.

As Americans live longer, the task of managing money after retirement gets more complex. A retiree in his or her mid-60s typically has a different risk profile than an individual approaching 90. It may be helpful to look at various types of risk from the vantage point of how they affect retirees at different life stages. Here are four key risks to consider.

1. Investment Risk -- Balancing risk and return takes on a different meaning for individuals as they age. A negative rate of return during the early years of retirement could leave an individual with a significantly smaller nest egg when compared with negative returns later in the retirement life cycle. Your financial advisor can help you craft an investment mix with the goal of smoothing out returns over the long term and increasing the chances that your assets will last throughout your lifetime.

2. Longevity Risk -- Withdrawing too much from a portfolio during the early years of retirement may heighten the chance of depleting your assets during your later years. For this reason, many financial advisors recommend limiting annual withdrawals to 5% or less of a portfolio's value, adjusted for inflation, to make assets last as long as possible.

3. Inflation Risk -- Because younger retirees typically are planning for a time horizon of 20 years or more, it is important that their portfolios include a source of growth that is likely to exceed inflation over the long term. To complement this potential growth, many retirees rely on more conservative investments that may generate income and help to balance risk and potential return.

4. Health Care Risk -- It is not unusual for medical costs to increase as retirees age, and it may be prudent to plan for these costs before the need is immediate. Preretirees and younger retirees may want to explore options for medical insurance that supplements Medicare, as well as long-term care insurance, to reduce the possibility of dipping into personal assets to finance illness- or accident-related expenses. Also, remember that those who retire before age 65 need to find an alternate source of medical insurance prior to becoming eligible for Medicare.

Reviewing these and other challenges associated with retirement planning with your financial advisor may increase your confidence that you have considered all scenarios. While it may not be possible to prepare for every situation, planning ahead may help you cope with financial issues that come your way.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

June 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by James P Ellman, ChFC and Barry Mendelson, CFP  local members of the FPA.

Late Retirement and Minimum Distributions

The IRS offers a frustrating lack of guidance on how to tell whether someone is 'retired.' by Natalie Choate 06-09-11 |

Certain people who are still working after age 70 1/2 get to postpone the "required beginning date" for required distributions from their retirement plans. What can be frustrating is the lack of IRS guidance about how to tell whether someone is "retired."

Question: "Joe" is leaving his job this year, at age 79. He does not now own and has never owned any stock of the corporation he works for. When must he start taking distributions from the company's retirement plan? If he goes back to work for this company later, can he suspend taking those minimum distributions until he retires again?

Answer: Because Joe has never had any ownership interest in the employer, it's easy to figure out when he must start taking distributions. His "required beginning date" for distributions from his employer's retirement plan(s) is April 1 of the year following the later of the year he reaches/reached age 70 1/2 and the year he "retires." He reached age 70 1/2 several years ago, so the "later of" year is this year, the year he retires. Accordingly, 2011 is his "first distribution year," and he can take that first year's minimum required distribution anytime in 2011, or in 2012 (on or before April 1).

If he owned an interest in the employer (now or in the past), we would have to take more steps to verify that he would not be considered a "5-percent owner." A 5-percent owner, unlike other employees, is not entitled to postpone the start of minimum distributions past age 70 1/2, regardless of whether he is "retired."

Unfortunately, the plan apparently cannot suspend minimum distributions if he goes back to work for the company. The statute and regulations key the start of minimum distributions to the year the employee "retires," and there's no mention of any way to stop minimum distributions once they start. If Joe rolled his company plan benefits into an IRA, then went back to work for a different company, and rolled the IRA into his new employer's plan, that might do the trick--because he would not yet be "retired" under the new company's plan!

 Question: "Chris" is receiving deferred compensation from the company he used to work for. He is not and never has been a "5-percent owner" of that company. He is completely retired as far as I can tell, but he would like to postpone taking any minimum required distributions from the company's qualified retirement plan. He thinks he is entitled to such postponement because the nonqualified deferred compensation he is receiving is reported to the IRS on Form W-2. Because Form W-2 is reporting his income to the IRS as "wages" (W-2 is the "Wage and Tax Statement" form), he says the IRS would not regard him as "retired," therefore he is not subject to minimum required distributions yet. Is his argument valid?

Answer: "Chris" is not going to be making this decision all by himself. The plan administrator of the company retirement plan and the person who prepares Chris' federal income tax return both also have a stake in getting the right answer here.

The plan administrator of the qualified plan is responsible for making sure the plan stays "qualified." One element of qualification is complying with the minimum distribution rules. If the plan is required to distribute to Chris because he is (1) over age 70 1/2 and (2) retired, then the plan had better make the distribution or risk disqualifying the entire plan. If the plan administrator has done the necessary research and/or gotten an IRS ruling that Chris is not "retired," then Chris and the plan and Chris' return preparer can all rest easy with Chris' decision to postpone distributions.  

However, contrary to Chris' belief, there is no authority supporting the position that a person is not "retired" so long as he is receiving compensation that is reported on Form W-2. It's true that Form W-2 is used to report compensation for current services. But it is also used to report certain types of deferred compensation--and believe it or not, the IRS is aware of that fact! A Form W-2 that reports no compensation other than deferred compensation does not support the position that the individual is still working--in fact it supports the opposite conclusion, namely, that the person is retired.

We have something analogous we can look at--namely, the question of what constitutes "compensation" for services for purposes of supporting a contribution to an IRA. "Compensation" for this purpose "does not include any amount received as deferred compensation." Rev. Proc. 91-18, 1991-1 C.B. 522, recognizes that amounts reported on Form W-2 generally constitute "compensation for services" for purposes of supporting an IRA contribution, and accordingly the IRS will accept the "compensation" amount shown on Form W-2 as a "safe harbor" with respect to supporting an IRA contribution--unless the amount is also shown as deferred compensation.

Box 1

of Form W-2 ("Wages, Tips, and Other Compensation") reports the individual's total compensation for services during the year.

Box 11

of the 2010 Form W-2 ("Nonqualified Plans") reports how much of the

Box 1

amount is deferred compensation. Have a look at Chris' W-2. See whether the amount reported as total W-2 compensation for the year (Box 1) is also reported in

Box 11

. If it is, the IRS is unlikely to be fooled into thinking that Chris is not "retired."

If Chris fails to take a minimum required distribution, such failure must be reported on Form 5329 attached to his personal income tax return, with the attendant 50% penalty carried over to line 58 of the Form 1040 ("additional tax on IRAs, other qualified plans, etc."). The preparer of Chris' federal income tax return needs to consider this issue when preparing his return.

Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits.


The views expressed in this article are the author's.

Three Step Retirement Planning Strategy for Couples

It's important for you and your partner to evaluate all of your portfolios at the same time to see whether the overall investment mix is well diversified.

Communication is one of the foundations of a successful relationship. It also can help you and your partner structure a solid retirement planning strategy.

Planning for two can be more complex than planning for one. It's not unusual for two individuals to have very different plans and financial resources -- for example, one may have more money set aside or may be eligible to collect retirement benefits significantly earlier than the other.

If you're part of a dual-income couple, be sure to review the following considerations.

Step One: Talk About the Future

If you and your partner expect to retire at different times or need to negotiate priorities regarding how you'll spend time and money during retirement, it's important to start talking about the future now.

First, make sure your planned retirement dates are realistic. Next, estimate your combined retirement income needs as well as the amount of money you're each likely to have accumulated by retirement. If it looks like you may be facing a shortfall, try to contribute as much as possible to your employer-sponsored retirement plan while you still can.

Step Two: Make Sure You Are Properly Diversified

Within a single portfolio, diversification involves spreading your money among different types of investment options so that any losses in one area may be offset by potential gains elsewhere.1 With two or more retirement accounts, the same theory applies. It's important for you and your partner to evaluate all of your portfolios at the same time to see whether the overall investment mix is well diversified. For example, if you and your spouse have similar investment portfolios, your overall level of risk could be higher than you realize, since a decline in one portfolio would likely be accompanied by a similar decline in the other. If that's the case, you might want to rebalance your asset allocation by shifting money that's already in your accounts to different asset classes (stock funds, bond funds, or cash investments) or by directing future contributions to the under-represented asset classes.¹

Step Three: Get on the Same Page

When laying the groundwork for a financial future that includes your significant other, ask yourselves the following questions:

•                      Do you understand each other's "financial personality"? It's never too late to have an honest discussion about financial habits and objectives. Try to look past your differences and focus on shared goals.

•                      Have you calculated how much money you are likely to need to fund a financially secure retirement? Do both of you think this amount is realistic? It's tough to work together toward a shared goal if the two of you have different ideas about what exactly that goal is.

•                      Have you consulted a financial professional? Making a date to discuss your entire range of goals may put you in a stronger position financially to survive unforeseen circumstances.

Regardless of your particular situation, a little advance planning can make the transition to retirement much more pleasant for both you and your better half.

¹Diversification and asset allocation do not ensure a profit or protect against a loss in a declining market.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

May 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by James P Ellman, ChFC and Barry Mendelson, CFP,  local members of the FPA.