Mining Three Sources of Retirement Income
Where is the income you need to sustain you through retirement going to come from? If you are like most people, there are three primary resources you will have to dig into.
1. Social Security benefits: Generally, the size of your retirement benefit is based on your earnings throughout your working years and the age when you retire. For instance, if you were born in 1950 and retire in 2012 at age 62, you will receive only 75% of the full amount of retirement benefits available to you at age 66. (For those born after 1937, the age when you are entitled to receive full benefits gradually increases from age 65 to age 67.)
You can obtain more details about your personal status from the Social Security Administration (SSA).The SSA will tell you what you will receive in Social Security benefits when you retire. Similarly, you can obtain an estimate of your spouse’s benefits, if you are married.
Note: If you continue to work during retirement, you may lose some of your Social Security benefits, based on the “earnings test.” For those attaining normal retirement age after 2012, the annual exempt amount in 2012 is $14,640. You forfeit $1 for every $2 over this limit. For those attaining normal retirement age in 2012, the annual exempt amount is $38,880. You forfeit $1 for every $3 over this limit.
2. Qualified retirement plans: One of the best ways to save for retirement is through a qualified retirement plan. Usually, the contributions accumulate earnings tax-deferred until the money is withdrawn. In addition, you can take advantage of favorable tax provisions for some distributions. These plans come in many different shapes and sizes. The list includes popular 401(k) plans, pension and profit-sharing plans, and plans targeted to small businesses like SIMPLEs (Savings Incentive Match Plans for Employees) and SEPs (Simplified Employee Pensions).
Be aware that the exact rules and contribution limits vary from plan to plan. Obtain expert advice with respect to your situation.
3. Individual savings: Assuming that your Social Security and retirement benefits are not enough—and there is a good chance they will not be—the balance of your retirement income may have to be supplied by savings and investments. For example, you may be able to “feather” a retirement nest egg by investing money in stocks and bonds, mutual funds, money market funds, annuities, real estate or other investment vehicles.
Do not overlook amounts you have stashed away in bank and money market accounts and U.S. Savings Bonds. In addition, you may continue to receive income from existing business interests. Depending on your situation, you also may be able to tap into the cash value of a life insurance policy (with certain limitations).
Finally, if you sell your house when you retire, you may benefit from a special tax exclusion. If you have owned and used the place as your principal residence for at least two of the previous five years, up to $250,000 of profit may be excluded from federal income tax ($500,000 for a married couple). A partial exclusion is available in limited circumstances.
Reminder: You should not put off saving for the future. The longer you wait, the harder it will be to fund a comfortable retirement.