Retirement tips for late-career savers

Decision time

One of the hardest decisions concerning retirement is determining when to retire. Part of the difficulty lies in defining what retirement means to you. There could be stages of retirement, where in the first stage you "retire" from a first career only to take on a second career. You might decide to consult on a part-time basis, take a low level job to work for health care benefits while waiting for Medicare to kick in or start a career as a volunteer in your community.

No-brainer

• You love your work? Then why retire? • You hate your job? Then plan your exit.

The traditional mix of pension benefits, retirement savings and Social Security payments all have some combination of age, years of service and tax implications to consider in how you're able to access an income stream as well as the size of that income stream. Workers retiring in their mid-50s are likely to be most challenged. They may live by the motto "will work for health care" in the absence of employer sponsored retiree health care benefits. That allows them to finesse the cost of financing health care from retirement to Medicare eligibility.

The financial life planning component in deciding when to retire looks at how happy you are in what you're doing. You're less likely to want to retire at 55 from something you love to do than from something you're doing just to support the ones you love.

Money matters, but it's the means to financing your life goals, not the goal itself. A plan to live simply in retirement will require less money than a retirement goal to travel the world.

Estimating income

Estimating income requirements in retirement should be based on planned spending, not on some arbitrary percentage of income based on what you earned when you were working. What you earned pre-retirement doesn't drive what you'll spend in retirement. That becomes self evident if you've been saving 10 percent to 20 percent each year toward retirement.

The erosion of future purchasing power by inflation is a big consideration when looking at your income requirements. It's true that retirees don't spend their income on the same mix of goods and services as people who are still in the workforce, making changes in the consumer price index less relevant to them. Still, they face inflationary pressures, especially in health care costs.

Inflation consideration

What portion of your retirement benefits will adjust for inflation? Social Security will: The 2007 cost-of-living adjustment was 3.3 percent. What about your pension benefits? Maybe not.

A sustainable withdrawal rate from your retirement portfolio depends on investment selection, returns and inflation. The more conservative the investments, the less likely it is that the portfolio declines in value due to market downturns, but the more likely it is to suffer a decline in purchasing power. Purchasing income annuities with an inflation option makes sense for those people who expect to be receiving that income for many years.

Insurance review

By this point in your career, if you still don't have a long-term care (LTC) policy, it's time to seriously consider buying one. The very rich and the fairly poor aren't good candidates for this coverage, but for those not in either of those camps, it's worth a look. It's important because Medicare doesn't pay for this type of custodial care.

Long-term care is structured to assist people in the activities of daily living such as dressing, bathing and using the bathroom. LTC can be provided at home, or in assisted-living or nursing homes. Choosing an LTC policy that offers flexibility in where care is provided can be important. The need for long-term care can occur at any age, not just during retirement.

While you're at it, this is a good time to review all of your insurance coverage. If the kids are out of school and the house is mostly paid off, the amount of life insurance you need could have dropped dramatically. Depending on the coverage you have in force there can be some creative income options available. An umbrella liability policy is also an inexpensive way to protect the nest egg you've worked so hard to build.

New life insurance policies and annuities can finesse some income and tax issues for retirees. An irrevocable life insurance trust, for example, can be useful for estate planning purposes. Life insurance can be used to replace a payment stream that's lost if the pensioner chooses a single life annuity versus a joint life annuity. Or an income annuity can allow retirees to delay filing for Social Security benefits until they reach full retirement age.

Health care

Employer paid retiree benefits are becoming a rarity and an unexpected loss of these benefits can drastically change income requirements in retirement. Even if the retired employee has benefits, the question of benefits for a spouse who is not yet eligible for Medicare is important. After age 65, by one estimate, Medicare covers only about 60 percent of the cost of health care, so supplemental insurance coverage is needed.

What does all this mean? It means that in calculating the size of your retirement nest egg, you need to have a healthy reserve targeted for health care expenses. In recent years, Fidelity Investments has provided an annual estimate of medical costs in retirement for a 65-year-old retiring couple -- expressed as a lump sum. For 2007 the number is $215,000, a 7.5 percent jump from the previous year's $200,000 -- and that's for a couple that qualifies for Medicare. Health care costs can vary widely depending on where the retirees live, their health and life expectancies.

And don't confuse health care with long-term care. They're separate considerations and need to be funded separately. If you plan to retire before qualifying for Medicare at age 65, you will need to ramp up your retirement savings to provide for this additional funding need.

Income sources

Possible income sources in retirement:

• A defined benefit (traditional pension) plan • Defined contribution accounts such as 401(k), 457 and 403(b) plans • Deferred annuity accounts • Social Security • Personal savings

Social Security income can be accurately estimated using the statement sent out each year to workers over 25 by the Social Security Administration. Input the earnings history and the retirement calculator will provide you with a benefit estimate. Of course, these benefits may change for younger workers unless the issue of solvency gets resolved.

Pension benefits are based on years of service and salary history. Getting a copy of the summary plan description and an annual benefit statement should answer most questions about the expected retirement income from the pension.

When retirement portfolios held in tax-advantaged accounts switch from accumulation to distribution mode, managing how the accounts are tapped for income should be based on minimizing any tax impact and maximizing the longevity of the portfolio. Required minimum distributions dictate withdrawals for certain types of accounts.

It makes sense to at least consider annuitizing part of the retirement nest egg, which simply means converting part of it into an income stream that will last as long as you do. The decision to annuitize will be based in part on how much of the rest of your retirement income is an annuity. Social Security payments provide a regular income stream. So does an annuitized pension plan. The Social Security payment is also indexed for inflation, whereas the pension plan often is not. Inflation protection is an important component to preserving purchasing power.