Make the Right Decisions at Retirement

September 16, 2008
Louis M. Bell, CIMA

,
Marc S. Levitt, CIMA

Physician's Money Digest, May 15 2003, Volume 10, Issue 9

For many physician-investors, retiring is achallenging financial transition. Not onlyare you faced with a number of importantlifestyle decisions, but you're also going to be dealingwith the most money you've ever had to manage.To avoid making costly mistakes in retirement,here are a few planning suggestions.

TAKE AN INVENTORY

Before making any decisions, it'simportant to take a step back and assessyour entire range of assets, including savingsand checking accounts, stocks,bonds, mutual funds, IRAs, employerretirement plans, Social Security, and, insome cases, your residence. For a completepicture, any outstanding debtshould also be tallied and subtractedfrom your asset total.

By calculating your net worth, you'llbe able to create realistic financial objectivesand a budget that can improve yourretirement readiness. This information isalso useful in evaluating your asset allocationand in planning an investmentstrategy that will enhance retirement.

Finding a comfortable balance ofstocks, bonds, and cash for your portfolioduring retirement will help you meetyour financial needs while safeguardingyour savings from market volatility.

For many years, experts agreed that when youretire, all your assets should be shifted to low-risk,fixed-income products. The guaranteed regularincome of these investments was often expected tocover day-to-day expenses through a short retirement.But retirees are now living longer lives.Therefore, retired investors who implement afixed-income-only strategy today may be at seriousrisk of not being able to combat inflation and maintaintheir current standard of living.

To avoid financial hardship duringyour golden years, you should plan for aretirement of 20 to 30 years, dependingon age and health. Given this length oftime, devoting a portion of your assetsto equities, a more aggressive investmentvehicle than fixed-income products,is often recommended. A financialadvisor can help you develop a plan thatis tailored according to your own objectives,age, health, and assets.

Just as each employer retirementplan has its own rules for participation,rules for distribution also vary. In mostcases, a retiree can elect to receive alump sum payout, rollover the amountinto a traditional IRA, or elect toreceive the money via periodic paymentsover a specified period of time.

There are several important factorsto consider before deciding whichdistribution option is most advantageous.Variables such as age, health,other savings, and your current taxsituation should be carefully evaluated beforemaking this decision. You should also take aclose look at the money you would receive fromeach option before making this choice.

Another important decision for retirees is whatto do with assets in an IRA. If you're between theages of 59½ and 70½, you can withdraw as muchor as little from your traditional IRA as you wantwithout penalty. The withdrawal will be subject toordinary income tax, and the amount remaining inyour IRA will continue to grow tax-deferred.

By April 1, following the year in which youreach age 70½, you must begin to take a minimumrequired distribution based on your lifeexpectancy. If you fail to begin taking this distribution,a penalty of 50% on the amount youshould have taken is assessed.

Unlike a traditional IRA, the Roth IRA does notrequire a minimum distribution at age 70½.

PLAN YOUR ESTATE

If you don't already have a well-conceived estateplan at retirement, it's not too late. An estate planis essential to ensuring that your wealth is passedalong exactly as you intended, and with minimaldelay and erosion by federal and state taxes.

Because estate taxes can consume a significant portion of an inheritance, it's a good idea towork closely with a financial advisor when craftingan estate plan. Depending on your assets andtax situation, there are a number of differentstrategies that can be implemented to reducetaxes (eg, gifts and trusts).

These are just some of the major financial decisionsthat you'll face when you retire. To learn moreabout managing your assets for a rewarding retirement,contact your financial advisor.

Louis M. Bell, financial advisor, andMarc S. Levitt, financialadvisor, are a team at Prudential Securitiesspecializing in financial advisory and investmentmanagement services for individuals, medicalpractices, foundations, and trusts. They welcomequestions or comments at 212-303-8724,marc_levitt@prusec.com, or louis_bell@prusec.com. E-mail cannot be used for trade instructionsor anything requiring your signature. Past performance is no guaranteeof future results.