MONEY IRAs

This Simple Move Can Boost Your Savings by Thousands of Dollars

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Last-minute IRA savers and those who keep their money in cash are paying a procrastination penalty.

Individual Retirement Account contributions are getting larger—an encouraging sign of a recovering economy and improved habits among retirement savers.

But there is an “I” in IRA for a reason: investors are in charge of managing their accounts. And recent research by Vanguard finds that many of us are leaving returns on the table due to an all-too-human fault: procrastination in the timing of our contributions.

IRA savers can make contributions anytime from Jan. 1 of a tax year up until the tax-filing deadline the following April. But Vanguard’s analysis found that more than double the amount of contributions is made at the deadline than at the first opportunity—and that last-minute contributions dwarf the amounts contributed throughout the year. Fidelity Investments reports similar data—for the 2013 tax year, 70% of total IRA contributions came in during tax season.

Some IRA investors no doubt wait until the tax deadline in order to determine the most tax-efficient level of contribution; others may have cash-flow reasons, says Colleen Jaconetti, a senior investment analyst in the Vanguard Investment Strategy Group. “Some people don’t have the cash available during the year to make contributions, or they wait until they get their year-end bonus to fund their accounts.”

Nonetheless, procrastination has its costs. Vanguard calculates that investors who wait until the last minute lose out on a full year’s worth of tax-advantaged compounded growth—and that gets expensive over a lifetime of saving. Assuming an investor contributes the maximum $5,500 annually for 30 years ($6,500 for those over age 50), and earns 4% after inflation, procrastinators will wind up with account balances $15,500 lower than someone who contributes as early as possible in a tax year.

But for many last-minute savers, even more money is left on the table. Among savers who made last-minute contributions for the 2013 tax year just ahead of the tax-filing deadline, 21% of the contributions went into money market funds, likely because they were not prepared to make investing decisions. When Vanguard looked at those hasty money market contributions for the 2012 tax year, two-thirds of those funds were still sitting in money market funds four months later.

“They’re doing a great thing by contributing, and some people do go back to get those dollars invested,” Jaconetti says. “But with money market funds yielding little to nothing, these temporary decisions are turning into ill-advised longer-term investment choices.”

The Vanguard research comes against a backdrop of general improvement in IRA contributions. Fidelity reported on Wednesday that average contributions for tax year 2013 reached $4,150, a 5.7% increase from tax year 2012 and an all-time high. The average balance at Fidelity was up nearly 10% year-over-year to $89,100, a gain that was fueled mainly by strong market returns.

Fidelity says older IRA savers racked up the largest percentage increases in savings last year: investors aged 50 to 59 increased their contributions by 9.8%, for example—numbers that likely reflect savers trying to catch up on nest egg contributions as retirement approaches. But young savers showed strong increases in savings rates, too: 7.7% for savers aged 30-39, and 7.3% for those aged 40-49.

Users of Roth IRAs made larger contributions than owners of traditional IRAs, Fidelity found. Average Roth contributions were higher than for traditional IRAs across most age groups, with the exception of those made by investors older than 60.

But IRA investors of all stripes apparently could stand a bit of tuning up on their contribution habits. Jaconetti suggests that some of the automation that increasingly drives 401(k) plans also can help IRA investors. She suggests that IRA savers set up regular automatic monthly contributions, and establish a default investment that gets at least some level of equity exposure from the start, such as a balanced fund or target date fund.

“It’s understandable that people are deadline-oriented,” Jaconetti says. “But with these behaviors, they could be leaving returns on the table.”

Related:

 

MONEY 401(k)s

Stock Gains (and Saving) Push 401(k)s to Record Highs

Staying the course has rarely paid off so well as average retirement account balances soar.

The financial crisis is so yesterday. Retirement savings accounts have never been plumper, according to a new survey of 401(k) plans and IRAs at Fidelity Investments.

At mid-year, the average 401(k) balance stood at a record $91,000, up nearly 13% from a year ago. The average IRA balance stood at $92,600, also a record, and up nearly 15% from the previous year.

These figures include all employees in a plan, even those in their first year of saving. Looking just at long-time savers the picture brightens further. Workers who had been active in a workplace retirement plan for at least 10 years had a record average balance of $246,200—a figure that has grown at an average annual rate of 15% for a decade.

Over the past year, the resurgent stock market accounted for 77% of the higher average balance in 401(k) plans, Fidelity said. Ongoing employer and employee contributions accounted for 23% of the gain. The typical worker socks away $9,590 a year—$6,050 from her own contributions and $3,540 from an employer match.

Of course, the financial crisis still weighs on many Americans. Employment has been an ongoing weak spot and wage growth has been all but non-existent. Meanwhile, those in or nearing retirement may have fallen short of their goals after losing a decade of market growth at just the wrong point in their savings cycle. Many had to sell while prices were down.

But the Fidelity data reinforces the value of steady savings over a long period. By contributing through thick and thin, savers were able to offset much of the portfolio damage from the crisis. They not only held firm and enjoyed the market’s robust recovery but also were buying shares when prices were low. They earned a spectacular return on new money put into stocks the last five years. In calendar year 2013 alone, the S&P 500 plus dividends rose 32%.

Despite continuing contributions, savings balances did not rise as fast as the S&P 500 due to plan fees, cash-outs and broad plan exposure to lower-return investments like bonds and cash. Roughly a third of job switchers do not roll over their plan savings; they take the money, often incurring taxes and penalties. The average 401(k) investor has 33% in fixed-income securities.

Related:

 

MONEY retirement planning

The Amazing Result of Actually Trying to Save Money

Many Americans aren't saving for retirement, but those who are making a real effort are tantalizingly close to hitting their mark.

The retirement savings crisis in America is real. But it is also skewed by vast numbers of people who have saved next to nothing. Looking only at those who are making a serious effort to put something away reveals a more encouraging data set.

Pre-retirees working full-time and who have both a 401(k) plan and an IRA are tantalizingly close to securing sufficient retirement income—and their situation has improved in the past 12 months, a recent study by investment firm BlackRock found. These savers can likely close the gap with a few simple adjustments.

We are all familiar with the doomsday statistics about retirement savings: A third of workers have less than $1,000 in savings and investments that could be used for retirement, and roughly two-thirds have less than $25,000. So large numbers of people will be stuck working longer than they like and counting on Social Security for nearly all their retirement income.

BlackRock weeded out less serious savers by looking only at those with a balance in both a 401(k) plan and an IRA. The typical working 55-year-old meeting this criterion has $264,000 saved and earns $58,000 a year. That level of savings will produce $19,000 a year in guaranteed lifetime income at age 65, based on calculations from the firm’s CoRI index. (This benchmark estimates the amount of annuity income a pre-retiree would be able to purchase at retirement.) Coupled with $21,000 a year from Social Security, this saver is on track to a secure retirement income equal to 69% of final salary.

Most financial planners believe that replacing 70% to 80% of final household income is the mark savers need to hit. So this typical 55-year-old saver is just about there and can close the gap by saving a little more, spending a little less, or working just another year or two. And if market conditions remain favorable, the pre-retiree may get over the hump without changing a thing. A year ago, the typical 55-year-old saver was on track to replace just 64% of final earnings. But the stock market soared, giving savers additional funds to purchase guaranteed lifetime income when they retire.

Of course, what the market gives it can also take back. This is a moving target. But stocks usually rise over a 10-year period, and if interest rates rise over the next 10 years—most believe that will be the case—it will have the effect of boosting replacement income even further because products like immediate annuities will offer a higher return.

The picture is less rosy for older pre-retirees. The typical 60-year-old saver is on track to replace 64% of final earnings and the typical 64-year-old saver is on track to replace just 59% of final earnings. The poorer preparedness of these groups probably stems from their getting a later start saving in 401(k) plans and IRAs, says Chip Castille, head of the BlackRock Retirement Group. The working years of this age group overlapped the transition between defined-benefits plans, which began to disappear, and the rise of defined-contribution plans. They didn’t react right away and missed years of growth.

In general, the retirement readiness picture in the U.S. remains bleak. Even regular savers are falling well short of the more aggressive retirement income replacement goals. But clearly those who have taken action are much better positioned, and with only modest spending adjustments, they can easily hit the lower range of what planners advise.

MONEY Taxes

The Moves to Make Now So You Can Cut Taxes Later

A financial adviser explains that to maximize income, you need the right kinds of investment accounts, not just the right investments.

In my work with financial planning clients, I can see that people understand the merits of having a diversified mix of securities in an investment portfolio. Investment advisers have done a good job of explaining how diversification can improve clients’ risk-adjusted returns.

What can be a little harder for advisers to explain and clients to understand, though, is the value of “tax diversification” — having investments in a mix of accounts with different tax treatments. By having some securities in taxable accounts, others in tax-deferred accounts, and still others in tax-free accounts, people can maintain the flexibility that makes it easier to minimize their taxes in retirement.

The benefits of traditional tax-deferred retirement accounts, such as IRAs and 401(k)s, are easy for participants to see. Contributions reduce people’s current tax bills. And the benefits continue to compound over the course of the investors’ careers, since none of the income is taxable until withdrawals are made.

Yet what clients don’t often grasp is the price they’ll wind up paying for this tax benefit later in life. Distributions from tax-deferred accounts are treated as ordinary income. It can be more expensive to spend money from a traditional IRA than from a taxable account, since dividends and long-term capital gains in taxable accounts are taxed at more favorable rates. And IRS-mandated required minimum distributions from traditional retirement accounts can force a retiree to generate taxable income at times when he or she wouldn’t want to.

So how do you get clients to understand that traditional IRAs and 401(k)s may cost them more than they think? Sometimes it’s a matter of being blunt — saying that the $1 million they see on their account statement isn’t worth $1 million; they may only have $700,000 or less to spend after paying taxes.

Once clients understand that, they also understand the appeal of Roth IRA and Roth 401(k) accounts, since current income and qualified distributions are never taxable. Another advantage: The IRS also does not require distributions from Roth IRAs the way it does for traditional retirement accounts. For many high income taxpayers, $700,000 in a Roth IRA is more valuable than $1 million in a traditional IRA.

But Roth IRAs and 401(k)s aren’t perfect and shouldn’t be a client’s only savings vehicle either. Participants don’t receive any upfront tax benefit. And it’s conceivable that future legislation may decrease or eliminate the benefits of Roth accounts. If the U.S. or certain states shift to a consumption-based tax system, for example, a Roth IRA will have been a poor choice compared to a traditional IRA.

And it’s useful to have money in taxable accounts, too. People need to have enough in these accounts to meet their pre-retirement spending needs. In addition, holding some stock investments in taxable accounts allows people to take advantage of a market downturn by realizing capital losses and securing a tax benefit. You can’t do this with a retirement account.

Given that each type of investment account has advantages and disadvantages, advisers should encourage all their clients to keep at least some assets in each retirement bucket. That way, retirees have the flexibility to choose the source of their spending based on the tax consequences in a particular year.

In a low-income year, retirees may want to pull some money from their traditional IRAs to benefit from that year’s low tax bracket. Depending on the retiree’s income level, some traditional IRA distributions could escape either federal or state income tax entirely. In a high-income year, when investments in a taxable account have a lot of appreciation, it may make sense for the retiree to spend from a Roth account instead.

Since we don’t know what a client’s tax situation will look like each year in the future, diversification of account types is just as prudent as investment diversification.

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Benjamin Sullivan is a manager at Palisades Hudson Financial Group, where he helps the firm’s high-net-worth clients with their personal financial planning, investment and tax planning needs. He is a certified financial planner certificant, an IRS enrolled agent, and a member of the New York chapter of the Financial Planning Association.

MONEY 401(k)s

Do I Really Need Foreign Stocks in My 401(k)?

Foreign stocks are supposed be a great way to diversify and get better returns. But these days? Not so much.

It’s long been a basic rule of retirement planning—allocate a portion of your 401(k) or IRA to international stocks for better diversification and long-term growth. But I’m not really sure those reasons hold up any more.

Better diversification? Take a look at the top holdings of your domestic large-cap or index stock fund. You’ll find huge multinationals that do tons of business overseas—Apple, Exxon, General Electric. Investing abroad and at home are close to being the same thing, as we saw during the financial crisis in 2008, when all our developed global markets fell together.

As for growth, we’ve been told to look to the booming emerging markets—only they don’t seem to be emerging much lately. Even as the U.S. stock indexes have been reaching all-time highs, the MSCI emerging markets benchmark has had three consecutive sell-offs in 2012, 2013 and 2014, missing out on a huge recovery. That’s diversification, but not in the direction I want for my SEP-IRA that I’m trying to figure out how to invest. (See “My 6 % Mistake: When You’ve Saved Too Little For Retirement.”)

Some market watchers have pointed out that after two decades, the countries that were once defined as emerging—China, Brazil, Turkey, South Korea—are now in fact mature, middle-income economies. If you’re looking for high-octane growth, you should really be considering “frontier” markets, funds that invest in tiny countries like Nigeria and Qatar.

That’s all well and good. But when it comes to Nigeria, I don’t really feel confident investing in a country where 200 schoolgirls get kidnapped and can’t be found. As for Qatar, it’s awfully exposed to unrest in the Middle East. (Dubai shares just tumbled, triggered by escalating violence in the Iraq.)

Twenty years ago, I was more than game for emerging markets and loved getting the prospectus statements for funds listing then exotic-sounding companies like Telefonas de Mexico and Petrobras. But I just don’t think I have the stomach, or the long time horizon, for it anymore.

My new skittishness around international stocks may be signaling a bigger shift in my investing style from growth to value, the gist of which is this: since you can’t always predict which stocks will grow, the best thing you can do is to focus on price. Quite simply, value investors don’t want to pay more for a stock than it is intrinsically worth. (Growth investors, by contrast, are willing to spend up for what they expect will be larger earnings increases.) By acquiring stocks at a discount to their value, investors hope profit when Wall Street eventually recognizes their worth and avoid overpriced stocks that are doomed to fall.

As Benjamin Graham, the father of value investing, wrote in his 1949 classic, “The Intelligent Investor,” “The habit of relating what is paid to what is being offered is an invaluable trait in an investment.” (Warren Buffett, among many others, consider “The Intelligent Investor” to be the investing bible. ) “For 99 issues out of 100 we could say that at some price they are cheap enough to buy and some other price they would be so dear that they should be sold,” Graham also wrote. And he famously advised that people should buy stocks the way they buy their groceries, not the way they buy their perfume, a lesson in price sensitivity that I immediately understand and agree with.

Looking at the international question through a value vs. growth lens, my choice is seems more clear—at least on one level. If emerging markets are down, now is probably a good time to buy. But the biggest single country exposure in the MSCI Emerging Markets Index is China, at 17%, and it might be on the brink of a major bubble.

It seems a bargain-hunting investing approach isn’t always that much safer, and I’m wondering if it might be worth paying more at times to avoid obvious trouble. Still, I’ve only just discovered my inner value investor. I’m going to keep reading Benjamin Graham and will let you know.

Ruth Davis Konigsberg, a fortysomething journalist and consultant to Arden Asset Management, writes weekly about retirement planning.

MONEY Social Security

Surprise! Even Wealthy Retirees Live On Social Security and Pensions

Older Americans with six-figure portfolios rely on old-fashioned programs for half their income.

Where do affluent retirees get their income? Portfolios invested in stocks and bonds, you might think—but you’d be wrong. Turns out many are living mainly on Social Security and good old pensions.

That’s the surprising finding of new research from a surprising source: Vanguard, a leading provider of retirement saving products like individual retirement accounts and 401(k)s. Vanguard studied the income sources and wealth holdings of more than 2,600 older households (ages 60-79) with at least $100,000 in retirement savings. The respondents’ median income was $69,500, with median financial assets of $395,000. (The value of housing was excluded.)

The researchers were looking for answers to a mysterious question about the behavior of wealthier retirement account owners: Why do few of them draw down their savings? They found that nearly half the aggregate wealth of these households comes from the two mothers of all guaranteed income programs, Social Security (28%) and traditional defined-benefit pensions (20%).

The median annual income for these households is $22,000 from Social Security, with an additional $20,000 from pensions. Tax-deferred retirement accounts came in third among those who have them, at $13,000 (11%).

“Only a small number of the people who have 401(k)s and IRAs are really relying on them as a regular source of income,” said Steve Utkus, director of the Vanguard Center for Retirement Research. “There’s a lot more income from pensions than we expected,” he adds.

That last finding may seem surprising, given all the publicity about shrinkage of defined-benefit pensions. Although most state and local government workers still have pensions, only a third of private-sector workers hold a traditional pension, down from 88% in 1975, according to the National Institute on Retirement Security. And NIRS data points to a continued slide in the years ahead.

“Will this look different 10 years from now—will we have less pension income and more from retirement savings accounts? I think so,” Utkus says.

Another interesting finding: 29% of affluent retirees get some income from work, with a median income of $24,600. And the rate of labor force participation was even higher—40%— among households more reliant on retirement accounts.

“That’s only going to jump dramatically over the next few years,” Utkus says. “All the surveys show there’s a real demand for work as a structure to life. People say they can use the money, or they want to work to get social interaction.”

The findings are all the more striking because the big buzz in the retirement industry these days is about how to generate income from nest eggs. That includes creation of income-oriented portfolios, systematic drawdown plans and annuity products that act as do-it-yourself pensions.

Yet few retirement account holders actually are tapping them for income. The Investment Company Institute reports that just 3.5% of all participants in 401(k) plans took withdrawals in 2013. That figure includes current workers as well as retirees; the numbers are higher when IRAs are included, since those accounts include many rollovers from workplace plans by retired workers. With that wider lens, 20% of younger retired households (ages 60-69) take withdrawals, according to a study for the National Bureau of Economic Research and the Social Security Administration’s Retirement Research Consortium.

The income annuity market has been especially slow to take off. One option is an immediate annuity, where you make a single payment at the point of retirement or later to an insurance company and start getting a monthly check; the other is a deferred annuity, which lets you pay premiums over time entitling them to future regular income in retirement.

Deferred annuity sales doubled in 2013, to about $2 billion, according to LIMRA, the insurance industry research and consulting group. But that’s still a drop in the bucket of the broader retirement products market. And the Vanguard survey found that just 5% of investors surveyed held annuity contracts.

“The theme of translating retirement balances into income streams is emerging very slowly,” Utkus says.

The Vanguard study also underscores the importance of smart Social Security claiming decisions, especially delayed filing. “There’s been a sea change over the past year,” Utkus says, with more people recognizing that delayed filing is one of the best ways to boost guaranteed income in retirement. Vanguard is “actively discussing” adding Social Security advice to the services it offers investors, he says.

 

 

MONEY 401(k)s

Should I Rollover My 401(k) Into An IRA?

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Robert A. Di Ieso, Jr.

Q: I left my job, and I’m looking for a new one. Am I better off rolling over my old 401(k) to a new employer’s 401(k) or to an IRA? I am being sold hard on the latter option by the firm in charge of our life insurance. — Dawn Deschamp, Lakewood, CO

A: You’re probably better off rolling into an IRA. But steer clear of investments pitched by your employer’s insurance company.

First, a quick recap of your options. When you leave your job, you can keep your 401(k) at your old employer, as long as the balance is $5,000 or more. (If your balance is smaller, employers are allowed to return the money to you.)

You can also roll over your balance into an IRA, which is often the best choice (and it’s what you should do if you have a small-balance account that is being returned to you). “With an IRA, you will have a wide array of choices, and you can often choose funds that charge lower fees than a 401(k),” says financial adviser Allan Roth of Wealth Logic in Colorado Springs.

Make sure you to set up your rollover as a trustee-to-trustee transfer, which moves your 401(k) balance directly to the IRA provider. Don’t let your employer write you a check, or 20% of your balance will be withheld until tax time.

Another option, when you get a new job, is to move your 401(k) account into your new employer’s 401(k). (Not all plans permit this.) Doing so may make sense if the new plan offers good, low-cost investment options, since with a single portfolio, you can more easily track your asset mix and rebalance.

(Of course, the final option is to simply cash out your account, but that would be such as bad decision, we won’t go into it—except to point out that you would trigger taxes plus a 10% penalty for early withdrawal if you’re under age 59 1/2.)

The best way to choose among these options is to compare the investments you want to own and the fees you would pay. At brokerages, such as Schwab and Fidelity, you can invest in low-cost ETFs and index funds, often with expense ratios of 0.10% or less. Some large-company 401(k) plans, with their negotiating power, can match those low fees, but many cannot. If your 401(k) charges more than, say, 0.8% for a stock fund, you probably should look elsewhere.

High fees are a key reason to avoid investing your IRA with your former employer’s insurance company. Funds offered by insurers often charge sales loads or carry high expenses. And insurance products, such as variable annuities, are typically complicated and costly. “Insurance and investing are best kept separate,” says Roth.

 

MONEY 401(k)s

Whoops! I Forgot to Rollover My 401(k)

The hidden costs of keeping a retirement plan with a former employer.

Up until recently I had two old 401(k) plans from former jobs, one that I haven’t contributed to since leaving the company 10 years ago. I used to have three such dormant accounts, but then I started having anxiety dreams about “losing” one of them—I felt like someone who had too many children to keep track of at an amusement park. So I converted the 401(k) account from my first job into a Roth IRA long ago.

As for the other two accounts, I had kept them in place because I liked the investment options, they performed well, and there seemed to be no reason to do otherwise. In fact, I was always a bit wary of the rollover marketing letters that would arrive after leaving a job—suspicious that if I left the corporate plan, with its bargaining power, I would fall prey to higher fees. And I felt kind of savvy knowing that I didn’t have to rollover.

It turns out that sense of savvy was actually semi-informed inertia. Yes, it’s true that no-load and low-fee funds have now become standard at all the IRA platforms, thanks in part to a fierce rivalry between Fidelity and Vanguard, the top 401(k) providers. But companies have actually become less generous about continuing to house former employees in their employee-sponsored 401(k)s and have begun passing on administration fees.

And yet people are still a bit more likely to leave their money in plans with their former employers than they are to rollover, according to a survey of job changers over 50 published last month by the Employee Benefit Research Institute. More than 27% left money in their old 401(k)s vs 25% who rolled over. Only 0.5% transferred the money to a new employer’s plan—but I don’t have that option as I’m freelancing at the moment. (Some 26% elected to start receiving benefits since they were retiring, and 17% withdrew the money, which, in case you don’t know, is a VERY BAD IDEA.)

You might be very surprised to learn that you may be paying administration fees for the record-keeping and custody of your dormant plans on top of the costs of the underlying investments. I certainly was. As soon as I got that tip-off, which I found in an investing book, I quickly called the retirement benefits offices for my two dormant accounts to find out if I was being charged.

The first, a large media company, acknowledged that it cost me $42 dollars a year for the privilege of keeping my money in the account that they sponsor through Fidelity, whereas I could roll over that money into a Fidelity IRA invested in the exact same funds with no administration charges. That $42 was a stealth fee (or at least, I hadn’t noticed it), and while not large, it deeply offended my sense of transparency and disclosure.

Can you guess whom I called next? 1-800-FIDELITY. It only took a few minutes to arrange for the rollover. The money was available in a few days to invest, at which point I created a similar portfolio, with some rebalancing between domestic and international equity funds, which was probably a good idea anyway.

The second company, also a large media conglomerate, told me that there are custodial costs for administering their plan through T. Rowe Price but that I was not being billed for them. My hunch is this company, being privately owned, has not been under quite as much pressure to cut benefits costs. Or perhaps it’s because I signed up for the plan in 1998, and as such I have been grandfathered into a more generous version. I’m leaving that 401(k) in place for now. There’s no way of really knowing why one employer bills dormant account holders and another doesn’t, but I have a feeling that I won’t have many more jobs where they won’t.

Ruth Davis Konigsberg, a fortysomething journalist and consultant to Arden Asset Management, writes weekly about retirement planning.

 

 

 

MONEY retirement income

Retirement Income: Five Steps to a Sound Plan

You want to be sure that your income will last throughout retirement. A financial planner offers key guidelines.

The moment you announce your retirement is a big deal. Few voluntary life transitions—besides marriage or having children—can match it. So before you tell your boss that you’re calling it a career, it’s important to make sure your retirement income plan is really ready.

My advice is based on the growing body of research about generating a sustainable retirement income. Some of this is my own published research, including the first-ever study to show how higher safe withdrawal amounts are possible—if you can be a bit flexible in your spending following years with especially poor investment returns.

And I’ve also learned a lot from watching dozens of our clients implement this advice to achieve a comfortable retirement. Based on this research and experience, I’ve come up with five guidelines to help you get ready to tap your nest egg:

1) Set a sustainable income target. To meet your core expenses, including health care and taxes, you’ll need a regular stream of payments that will increase with inflation. Start by detailing your core retirement spending needs, then determine the portfolio withdrawal rate it will take for your assets to fund them. Make sure your plan is based on solid research and your level of spending flexibility.

2) Get the most out of Social Security. If you’re married and one of you is in good health, try to wait till age 70, when you can file for the largest possible benefit. Otherwise, you may be leaving tens of thousands on Uncle Sam’s table. Remember that the bigger check is what the surviving spouse keeps regardless of who dies first. To make this strategy work, you may have to tap other income sources to fund your spending while you wait.

3) Choose the right asset allocation. Holding too little in stocks can be even more costly than holding too much—that’s because equities are likely the only assets able to generate the long-term returns needed to sustain your retirement income. Make sure you’re well-read on the recent research that’s been published on navigating the inevitable market ups and downs. Yes, stocks are risky, but even the recent market crash didn’t sink most plans unless you panicked at exactly the wrong time.

4) Be smart about taxes. Your current tax bracket matters a lot less than your bracket when you or your heirs take IRA distributions. A good strategy can be to spread out these withdrawals so their taxation can occur at lower federal tax brackets. Delaying can cause higher taxable amounts that may push your into much higher brackets. In 2014 singles are taxed at just 10% on their first $9,075 of taxable income after deductions; for married couples filing jointly, it’s $18,150. Rates then rise to 15% until $36,900 for singles and $73,800 for married couples. The next bracket jumps to 25%. In years when your income is low, take full advantage of the opportunity by doing Roth conversions in modest amounts that won’t trigger a move up in brackets.

5) Leave room for splurges. You don’t want to jeopardize your financial security, but you want to enjoy your retirement too. Set aside 5%-10% of your nest egg as a discretionary fund for that trip to Paris or seasons tickets to your local team’s games. That way, you can have your fun and still avoid poking dangerous holes in your retirement income plan with each extra “just-this-time” withdrawal.

Once you launch your retirement, you’ll want to keep tracking your spending and keep your plan on course. Consider setting up a withdrawal policy statement as a guide for the adjustments you may need to make along the way. Having these policies in place can help keep your emotions from getting the best of you during choppy markets or life’s upheavals.

If you found yourself confidently checking off these items as you read, chances are your retirement income plan is well on its way to being ship-shape. Bon voyage!

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Jonathan Guyton, CFP is a nationally-recognized financial planner and a retirement columnist for the Journal of Financial Planning. A Principal at Cornerstone Wealth Advisors, a fee-only advisory firm in Minneapolis, he can be reached at jon@cornerstonewealthadvisors.com.

MONEY Ask the Expert

Should I Use My Roth IRA to Pay Off Debt?

Q: I am trying to pay off some debt to become debt free. I’m 44 years old. Is it possible, at my age, to withdraw from my Roth IRA to pay off debt? – James, Nashville, TN

A: Yes, you can withdraw money from your Roth IRA to pay off debt. But it is rarely a good idea to tap money earmarked for your retirement.

First, you should understand the rules. IRS regulations allow you to withdraw your contributions from a Roth IRA without incurring a penalty, since you’ve already paid taxes on that money. But if you withdraw earnings on those contributions, and you are under age 59 1/2, you will incur a 10% penalty and income taxes. “That’s a hefty price to pay,” says Ed Slott, founder of IRAhelp.com.

You have to weigh the benefit of erasing high-cost credit card debt with the impact on your future retirement income. And that impact could be significant. Roth savings are an especially valuable stream of retirement income because they offer both flexibility and tax diversification. After age 59 1/2, if you’ve kept the money in the account for five years, all withdrawals are tax free. Moreover, Roths aren’t subject to required minimum withdrawal rules after age 70 1/2, like traditional IRAs. That means you can pull out a large sum for a health emergency in retirement without worrying about taxes. And if stock prices plummet, you won’t be forced to make withdrawals at a market bottom.

At age 44, you’ve got two decades till retirement. Even if you withdraw a small amount, it will end up costing you a lot when you consider the 20 years of compounded growth you are giving up. Look for other ways to free up cash to pay down the debt. Do you have expenses you can cut back on? Can you drum up some extra income? If you do decide to use the Roth, stick with contribution withdrawals so you don’t lose money to penalties and taxes.

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