If you’re five to 10 years away from retirement, you’re probably asking yourself, “Will I be financially ready when the time comes?” Answering these questions can help you figure that out.
1. How Do I Want to Spend My Retirement?
If you haven't already done so, now is the time to start figuring out what you want your retirement to look like. You may want to keep working part-time, start a business or spend the next five years sailing around the Caribbean. Once you know where you want to go, you can put a plan in place and begin firming up the necessary finances. If you want to start your own business, for example, you'll need to figure out how much seed money the new enterprise will require and how that will affect your retirement budget, factoring in the effects of a changed tax picture. Even a plan to kick back at home has financial implications, particularly if you have philanthropic goals or want to pass wealth along to your heirs.
2. Do I Have a Retirement Plan That Can Provide Me with Income for Life?
As your retirement date grows nearer, you’ll have to put a plan in place to help you translate your savings into an income stream that fits your immediate needs yet allows your investments to continue to grow.
The Merrill Lynch Retirement Income Framework offers a good example of how to do this. It's a strategic retirement income planning approach that asks you to think of your portfolio as three different portfolios— short, medium and long term — each with a specific objective in mind. The short-term portfolio should include high-quality, fixed-income assets that may generate consistent income and liquidity to meet immediate expenses — say, two to seven years worth. The intermediate-term assets should seek to generate growth over a longer period to help you keep pace with inflation. You can use these assets to replenish your short-term holdings, if necessary, to avoid selling your longer-term, higher-growth assets when markets are down. (It’s important to remember that investments are not FDIC-insured, are not bank guaranteed, and may lose value.)
3. Am I Prepared for the Cost of Long-Term Care in the Event That I Need It?
Expenses for long-term care rose at nearly twice the rate of overall inflation during the five-year period from 2004 to 2008,1 and Medicare typically doesn't cover these costs. One possibility is to set aside money to pay for care. Another option is to buy a long-term care insurance policy. A third alternative is taking advantage of a change in IRS regulations and use a non-qualified annuity to fund long-term care insurance: As of Jan. 1, 2010, money withdrawn from an annuity that goes to pay for a long-term care policy is no longer subject to federal income tax.
4. Are My Spouse and I on the Same Page?
If you've worked for 40 years, you may want to take time to play golf and relax at home, whereas your spouse could be just hitting her stride in her career. The key is to open a dialogue early and have frank discussions about how each of you wants to spend your later years. Getting together on these important decisions now will definitely make you both happier in the long run.
Submitted by Jim Walsh - Financial Advisor - living in Ellington, CT
Written by William J. Hunter Director, IRA Product Management, at Merrill Lynch Wealth Management.
Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith (MLPF&S) and other subsidiaries of Bank of America Corporation. MLPF&S is a registered broker-dealer, Member Securities Investor Protection Corporation (SIPC), and wholly owned subsidiary of Bank of America Corporation.
1 Overall inflation, 2004 — 2008, annualized: 2.7%, Ibbotson SBBI 2009 Classic Yearbook; LTC inflation data from Genworth 2009 Cost of Care Survey. PDF available at http://www.genworth.com/content/genworth/us/en/products/long_term_care/long_term_care/cost_of_care.html;
inflation figures on page 3.
Any information presented is general in nature and is not intended to provide personal investment advice. The information does not take into account the specific person who may receive it. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transaction or arrangements that may have tax, accounting or legal implications with their personal professional advisors.
Long‐term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state.
Annuities are long‐term investments designed to help meet retirement needs. An annuity is a contractual agreement where a client makes payments to an insurance company, which, in turn, agrees to pay out an income stream or a lump sum amount at a later date. Early withdrawals may be subject to surrender charges, and taxed as ordinary income, and in addition, if taken prior to age 59 1/2 an additional 10% federal income tax penalty may apply.
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