Let’s begin our discussion looking at the 3 basic investment questions folks near retirement typically ask.

1) Do I have enough money to last as long as I do?
2) Are my investments appropriate for retirement?
3) How do I take money out of my accounts to provide an ample income?

Since everyone’s situation is different I can’t give specific investment advice here, but there are 4 important principles that we can apply in answering those questions.

Principle #1 – You Can’t Invest Just for Income.

Advisors talk about two phases of investing; Accumulation while working and Distribution during retirement. At retirement the goal and strategies change from Growth to Income. Today people are likely to live much longer than they anticipate. Forget whatever the life expectancy number is; instead look at the IRS chart for mandatory distributions from an IRA. It says that for a 70 year old couple, one of them is likely to be taking IRA withdrawals at age 97. That’s a 30 year retirement and 20 years past life expectancy. Even with a modest inflation rate, the cost of living could more than double during retirement. So, your portfolio needs to have a Growth component.
Your investment goal should be a portfolio that is growing by at least the inflation rate after you’ve taken out what you need for retirement income, in order to provide future incomes that keep up with the ever increasing cost of living.

Principle #2 – Taxes are Likely Your Biggest Retirement Risk.

Many retirees are going to forfeit 20-30% of their investment returns every year to the IRS. That loss, however, can be reduced with proper planning. People should consider things like spending principle. It’s fax free. An immediate annuity, for example, provides a consistent and guaranteed income that is nearly income tax free by distributing both principle and interest over the life of the policy. Also consider spending already taxed investment like a CD and delaying as long as possible taking income from tax-deferred accounts like an IRA or deferred annuity. Spend taxable accounts first and let tax-deferred accounts grow. Remember, you’ll need growth to provide that larger income later. I’ve seen people who take money out of their IRAs and let bank accounts accumulate which means they are unnecessarily paying taxes on both and are consequently pushed into a higher tax bracket.

Principle #3 – Lifestyle Choices Make an Impact.

Too often we look just at the money side and ignore the really important question of, “What do I want my life in retirement to look like?” It’s only after you have a clear picture of what you want retirement to look like that you can figure out what it’s going to cost and consequently how to structure your investment portfolio. Also, look at your retirement budget and decide which expenses are mandatory, like the utility bill, and which are discretionary, like a Hawaiian cruise. Discretionary expenses can usually be put off until a year that your investments perform particularly well.

Principle #4 – Leaving a Legacy/Inheritance Changes Everything.

If it’s not important to you, follow the advice from the bumper sticker that says, “Spend your kid’s inheritance.” If it is important to you, you need to plan accordingly. Some people make provisions in their wills while others make gifts during their lifetime. It’s just something that you need to think about because if could affect your retirement income.

Remember, it’s always about planning.

Investors have the opportunity in 2010 to make a major change in their retirement plans by converting traditional IRAs to a Roth IRA. Previously, investors with more than $100,000 annual income were prohibited from making the conversion, but that restriction is waived in 2010.

Contributions to a traditional IRA are tax-deductible; distributions are taxed. The reverse is true of a Roth IRA; contributions are after-tax and distributions are tax-free. Converting to a Roth means subjecting your traditional IRA to taxes now in exchange for future tax-free distributions.

Two issues are particularly important in making the conversion decision.

First, who do you intend the IRA to benefit most, you or your heirs? A Roth IRA holds advantages for your beneficiaries if you are fortunate enough to not need income from the IRA during retirement.

Because a Roth has no required distributions at 70½, it can continue to grow until inherited, potentially an additional 10-20 years during which its value could more than double. A large, lifelong stream of tax-free income makes a wonderful inheritance.

The second issue, especially if you anticipate needing IRA income, is really a guess about future income taxes. Should you pay tax now on your IRA at a known and historically low tax rate to avoid potentially much higher rates in the future?

Even if tax rates go up, paying tax now to convert a large IRA could subject the IRA owner to a higher bracket than taking income in smaller amounts during retirement. And, there is always the risk that Congress will renege on its promise and tax the Roth IRA later.

Some investors are considering converting only part of their IRA to control tax costs now and enjoy some tax-free income later.

It is not an easy decision, but Congress has included an escape clause and a deal sweetener in its conversion offer. Individuals who convert are permitted to undo the conversion by “re-characterizing” all or a portion of the converted amount back into their traditional IRA by October 15 of the year following the conversion. It’s a rare tax do-over.

And even though the conversion occurs in 2010, half of the taxable amount can be reported in 2011 and half in 2012, stretching the tax burden over three years.

This is an important decision. Discuss it with a competent financial advisor experienced in IRA and tax planning

Psychologists and educators describe an “Ah-hah” moment. That’s when the universe pulls back the curtain of confusion and reveals in perfect clarity and total understanding the truth of the issue before you.
My favorite example of an ah-hah moment is from the cartoons when Wile E. Coyote realizes that he has just chased the road runner off the cliff. You can see in his expression, just before he plunges to the canyon floor that he clearly understands his predicament and is saying to himself – “oh snap, this is going to hurt.” That’s an ah-hah moment.
I’d like to help you have an ah-hah moment about finances. Are you ready?
It isn’t that your income during retirement is going to push you up into higher tax brackets, but rather that the government is going to pull higher tax brackets down to you!
Depressing isn’t it. With tax cuts expiring at the end of this year and congress unwilling to renew them, we are already starting to see this happen.
Even the news media is beginning to understand our economic predicament. A recent article from the Seattle Times stated, “Economist fear retreat when stimulus runs dry. Growing reluctance to add to deficit means there’s no where to turn.” Unfortunately, they fail to see what really should be done, a cut in spending. However, you and I know the U.S. government is unlikely to reduce spending anytime soon, so there is only one place left to turn – the U.S. taxpayer.
The U.S. government is already 13 trillion dollars in debt and will overspend and borrow another $1.5 trillion this year. Where are they going to get the money to pay it back? Taxpayers! According to Forbes magazine, there are 397 billionaires in the United States and their average net worth is roughly$3 billion each. If we were to confiscate all their money – not just tax their income, but take all of their money, it would only be enough to pay about 2/3 of this year’s (2010) budget shortfall. So next year, they would have to start looting millionaires until we run out of them and then go after the average income households. You see, this is not a problem of the rich not paying enough taxes, it is a problem of having too large of debt and spending more than you bring in.
The point is, no one is going to escape an increased tax burden, either in the form of more taxes paid or benefits reduced, like Social Security and Medicare.
We need to start planning now for the inevitable. Like my mom used to say, “Fore told is fore warned”. Either plan today or forfeit tomorrow.

The New York Times published an article, written by Danny Hakim, on June 11th which indicates the New York State Legislature and Governor have agreed on a plan to allow the state and municipalities to borrow money from the state pension plan to make contributions to the state pension plan. Yes, you read that right. New York has decided that in order to pay the state’s contribution to its own employee pension fund, they are going to borrow the money from the employee pension fund. Nearly $6 billion to be exact.

The best part of the plan, writes Hakim, “…that the pension fund, which assumes its assets will earn 8 percent a year, would accept interest payments from the state that would probably be 4.5 percent to 5.5 percent.” But don’t worry, the plan also has provisions that “the state and municipalities will have to make higher minimum payments…to help make up for the impact of market crashes.” So, if we look closely, the state gets to borrow the money from the pension fund to make the payment to the pension fund and because they need to make up ground lost to market declines the payments now have higher minimums.

Does this sound familiar? Can you say, Social Security. This is exactly how Congress has been dealing with Social Security for years, except they don’t actually ever make the payments. They simply write an IOU in the form of a “special” bond that has no market and can’t be sold.

New York is not alone in its budget struggle. Many states are facing similar situations of budget shortfalls. It seems these days state legislators nationwide are more comfortable borrowing money than cutting their spending habits.