Things to Consider When Nearing Retirement (Part 2)

Understand Your Retirement Plan Distribution Options

Most pension plans pay benefits in the form of an annuity. If you’re married, you generally choose between a higher retirement benefit paid over your lifetime or a smaller benefit that continues to your spouse after death. It’s best to consult a financial professional to help guide you in making this difficult, but important, decision.

Other employer retirement plans like 401(k)s typically don’t pay benefits as annuities; the distribution (and investment) options available to you may be limited. This may be important if you’re trying to stretch your savings, as you’ll want to withdraw money from your retirement accounts as slowly as possible. Doing so will conserve the principal balance, and will also give those funds the chance to continue growing tax-deferred during your retirement years.

Consider whether it makes sense to roll your employer retirement account into a Traditional IRA, which typically has very flexible withdrawal options.¹ If you decide to work for another employer, you might also be able to transfer assets you’ve accumulated to your new employer’s plan, but only if your new employer offers a retirement plan or allows a rollover.

Plan for Required Distributions

Keep in mind that you generally begin taking minimum distributions from employer retirement plans and Traditional IRAs once you reach age 70½, whether you need them or not. Plan to spend these dollars first in retirement.

If you own a Roth IRA, you aren’t required to take any distributions during your lifetime. Your funds can continue to grow tax-deferred, and qualified distributions will be tax-free.² Because of these unique tax benefits, it generally makes sense to withdraw funds from a Roth IRA last.

Know Your Social Security Options

You’ll need to decide when to start receiving your Social Security retirement benefits. At normal retirement age (which varies from 66 to 67, depending on what year you were born), you can receive your full Social Security retirement benefit. You can elect to receive your Social Security retirement benefits as early as age 62, but if you begin receiving your benefit before your normal retirement age, your benefit will be reduced. Conversely, if you delay retirement, you can increase your Social Security retirement benefit.

¹When considering a rollover to either an IRA or to another employer’s retirement plan, you should consider carefully the investment options, fees and expenses, services, ability to make penalty-free withdrawals, degree of creditor protection, and distribution requirements associated with each option.

²To qualify for tax-free and penalty-free withdrawal earnings, a Roth IRA must meet a five-year holding requirement and the distribution must take place after age 59½ with certain exceptions.

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