Why Do We Call Them Golden Years?
Retirement is getting more complicated for millions of Americans.A lot has been written about longevity and how it can impact your retirement plans. It may cause you to work longer or accumulate more assets that produce income during your retirement years.
No doubt you have seen the headlines. 60% of Americans cannot afford to retire. More people are working into their 70’s in full and part-time jobs. Social Security will fail in the late 2020’s. Medicare is not far behind. Plus one or both spouses will be living much longer than their parents or grandparents.
Retirement can be called the Golden Years if you have good health and are financially secure. Extended retirement years can be a curse if you do not have good health and adequate assets.
The better the health of both spouses, the more assets you will need to fund the early, mid, and late stages of the Golden Years.
Sources of Retirement Assets
You have six sources of assets that can produce income during your retirement years:
- A company retirement plan
- A roll-over IRA
- Personal Savings
- Social Security
- Real Estate
Company Retirement Plans
Public and union employees are about the only two categories left that still receive distributions from defined benefit plans when they retire. Most corporate plans have been converted to defined contribution plans that distribute assets in rollover IRAs when employees retire. There are no guaranteed benefits. Employees are responsible for the investment of their assets in the plan and after they retire in the rollover IRA.
Most Americans will retire from companies that sponsor 401k plans. These plans distribute the assets of their employees when they leave the company to retire or change jobs.
Let’s say you have worked for the same company for 30 years and you retire with $1.5 million in the 401k plan. When you retire, that money is rolled into an IRA so there are no taxes and you have sole responsibility for investing your assets.
More conservative Americans will also be supplementing their retirement accounts with additional savings in IRAs and personal accounts.
Step one is to always maximize savings in accounts that have deferred taxes (401k plans, IRAs). If you still have discretionary income that can be saved you can also establish personal accounts that are taxable – income, capital gains.
You and your spouse may qualify for Social Security benefits after each of you retire. Like other retirement benefits, you have been paying into the system for most of your working life.
How solvent is Social Security? That is anyone’s guess, but at its core Social Security is a giant Ponzi Scheme – that is, the contributions from the current workforce are used to pay benefits to the people who are retired. There are no assets that back-up the payments to millions of social security recipients.
Notwithstanding the house of cards that is the Security System, you have to assume you and your spouse will receive your benefits. It would be a catastrophe if the federal government reduced your payments. It is more likely the government will keep extending the start date for the payments. Actuaries are probably working over-time to determine the future start date for maximum benefits.
There are real estate investments, but for most people, real estate holdings refer to their primary residence. This produces another source of retirement income when you down-size to a smaller home and invest the difference.
You maximize this opportunity when your current home is free and clear of any debt and you move to a location that has lower real estate prices. For example, you sell your 3,000 square foot home for $275 per foot and buy a 2,000 square foot home for $225 per foot. Not counting selling costs you have freed up $375,000 that can produce another $15,000 of income (assumes a 4% distribution rate).
Inheritance is the wild card. You don’t know when or if you may inherit certain assets and you may not know the value of the assets. We do know trillions of dollars are going to be transferred from one generation to the next over the next 30 years.
Therefore, inheritance is a viable source of assets for millions of Americans, but the transfer may occur after they are retired.