5 Questions You Should Answer Before You Retire
Do you know how much money you will need at retirement? Do you know if you will even have that much money? The best method to know for certain is for you to start putting together your retirement worksheet today. Before you begin your worksheet, however, you will need to answer the following 3 vital questions:
How much do you want to make a year, in today’s dollars, when you retire? Or, to put it another way, if you were to retire right now, what yearly salary would you require in order to keep you living in the fashion to which you have become accustomed. The majority of worksheets and calculators will have built into them projected appraisals for inflation and will be able to use this figure to calculate roughly the amount of annual income you will need at retirement.
How many years are there before you retire? This is critical because it is the number of years you have remaining in which to add funds to your financial portfolio. The spreadsheet will take the value of your current portfolio and add to it any expected contributions up to the retirement date. The calculation will show how much you can expect to have at retirement. If this amount is less than what you require, you will either have to add more money to your portfolio, change your investment strategy, or lower you expected standards of living at retirement.
What is the sum of all your sources of expected retirement income? This includes your expected Social Security income as well as any of the following investment plans – 401k, 403b, 457, Keoghs, SEP, IRA, and pension plans. It’s important to get as concrete figures as you can and put them on paper. This helps to avoid the rose colored glasses scenario where you think you have more money than you actually do. A major cause of people getting to retirement and being shocked that they don’t have enough money to live at their current lifestyle level is their failure at an earlier age to take a hard look at their financial situation when they had plenty of time to do something about it.
How many years will your retirement funds be expected to last? This is a sensitive question as it gets into life expectancy and mortality issues. Once you begin to collect Social Security, your income from it will be relatively constant. But Social Security will most likely cover less than half of your desired income. And in many cases, it will cover much less. This means that your remaining investments have to supply the rest of your income. In the best of circumstances, you will be able to live off of a combination of the interest and dividends from your investments and not have to touch the principal. If, however, you are forced to start drawing against the principal, your annual income from it will continually decrease until gone. Knowing how many years your retirement funds will be necessary will help you make the decision as to whether you should start to draw the principal down or accept a lowered standard of living.
How is your health? For many retired people, their medical bills are their biggest out of pocket expense when they retire. Even with Medicare, you may have deductibles to pay for. We can’t look into the future and say for certain what our health will be at retirement. But if you already are taking medical treatments for a disease such as high blood pressure, diabetes, cancer, and so on – you can be almost certain that those bills will increase significantly as you reach retirement age. Many people when making their retirement plan, forget planning for future medical bills. But now, before your retirement, is the best time to do this.
Eric Bayne is writer and researcher for http://www.retirementplanhelper.com . Visit his site to find out where he’ll answer questions such as what are 401k plans and other retirement related questions.
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Kinky sings the wonderful song and a heartfelt tribute to Native American Marine, Ira Hayes who was one of the men who raised the flag at Iwo Jima.
Video Rating: 4 / 5
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Top 10 Questions for Self-directed Iras And..
Top 10 Questions for Self-Directed IRAs and…
With all the questions related to self-directed IRAs…..with some of them being answered here….more people who “fit the box” should be seriously considering a self-directed 401(k) rather than a self-directed IRA.
As mentioned in a previous blog, if an individual enters into a prohibited transaction within their IRA , the plan as nationally-recognized tax expert, Tim Berry, states, “blows up.” In this parlance, it simply means that the individual will face full distribution on the first day of the calendar year which the prohibited transaction occurs, incur early distribution penalties (if they apply) and taxes. Yikes, that doesn’t sound user-friendly to me.
But, let’s not digress and…..now for the Top 10 list (courtesy of www.pgiselfdirected.com):
1) What is a Self-Directed IRA?
Legally speaking, a self-directed IRA is no different than any other IRA. Having a self-directed IRA simply means that you are allowed to direct the investments of the IRA. Many custodians claim that they allow you to self-direct your IRA investments but then turn around and restrict what you can invest in. A truly self-directed IRA allows you to make the decisions without restriction.
2) Why Haven’t I Heard of This Before/Is It Legal?
Congress passed ERISA in the Securities Act of 1975. As a result of this passage, banks and brokerage houses found that this was an ideal time and market to bring IRA and 401(k) plans to individuals and employers and sell the products they wanted to sell….stocks, bonds and mutual funds. Nothing in the IRS code states that you can only invest with a brokerage house…let alone in stocks, bonds and mutual funds. But this IS what 97% of the population believes. Banks and brokerage houses have a vested interest in having you invest in stocks, bonds and mutual funds – not real estate, businesses and other non-traditional investments.
As investors have become more disillusioned and frustrated with traditional investment choices, they have begun looking for alternatives. After the steep stock market decline, corporate scandals and corruption (e.g. Enron, ImClone, Worldcom) and many investors seeing their retirement accounts cut in half, they are ready to take control of their own investments. They often want more tangible investments such as Real Estate.
However, when they ask their current custodians / brokers, they are typically told that such investments are illegal, too complicated or that it can’t be done. But those are ignorant and self-serving responses. Although those custodians / brokers may not allow it, it can be done. It is just likely you can’t do it through your current custodian so they financially suffer if you make a move.
3) What Can My IRA Invest In?
Well, the real question should be what CAN’T my IRA invest in? Now, that being said, there are some very strict IRS regulations that must be followed, but the IRS does not provide an all-inclusive list of possible investment options but rather excludes and stipulates what you CANNOT invest in: life insurance contracts and collectibles
The following list is an EXAMPLE of some permissible investments with your self-directed IRA:
Residential Real Estate
Commercial Real Estate
Trust Deeds / Mortgages, and Mortgage Pools
Private Notes and Loans
Private Stock Offerings
Limited Liability Companies (LLC)
Limited Partnerships (LPs)
Stocks, Bonds, Mutual Funds
4) What is ERISA?
ERISA stands for the Employee Retirement Income Security Act. It more or less passed along the responsibility of an employee’s retirement plan from the employer (company sponsored pension) to the employee. As a result of this act, the IRS only excludes what can be invested in. These two prohibited investments are: life insurance contracts and collectibles.
5) What Types of Retirement Accounts can be Moved into Self-Directed Status?
Sep IRAs ;
Coverdell Education Savings (ESA);
Profit Sharing Plans;
Money Purchase Plans;
Government Eligible Deferred Compensation Plans;
6) How Do I KNow This is Legal?
Well, first of all, be prepared to be told by many accountants and CPAs (and possibly yours) that this is not legal or is very dangerous to do. Neither is true. First of all, as mentioned before, this is legal as a result of the ERISA Security Act passed over 30 years ago. It is more of a question of whether an individual SHOULD do it (see question #7).
Find out for yourself by going to the Internal Revenue Service’s website www.IRS.gov. Request Publication 590. On pages 40-41 you will see what investments are not allowed (see below – collectibles, life insurance, s-corporation stock, etc.). Real Estate is NOT mentioned as a disallowed investment just like stocks, bonds, mutual funds are not mentioned as a disallowed investment.
7) Should Everyone Do This? How do I Know it is Right for Me?
Of course you know the answer to this question is NO. Not everyone should do this and not everyone will. It really depends on a person’s interest level to self-direct. Some folks would rather bury their heads in the sand and just hope that everything turns out okay for retirement. Others have done well with the brokerage accounts and have not diversified into real estate. However, the best aspect of a truly self-directed plan is that you can invest in non-traditional assets (e.g., real estate) and STILL invest in stocks, bonds and mutual funds.
8) Are There Certain Investments Disallowed?
Of course. As previously mentioned, IRS Code does exclude one from investing in Life Insurance Contracts and Collectibles. These are referred to as “prohibited transactions”. Prohibited Transactions are defined in IRC 4975(c)(1) and IRS Publication 590.
The biggest concern at times is for the Manager (you) of the IRA self-directed account to REMEMBER that any and every transaction that the SD IRA engages in is for the exclusive benefit of the retirement plan. An individual cannot “self-deal”. Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit rather than to benefit the IRA. As an IRA owner, if you violate these rules, your entire IRA could loose its tax-deferred or tax-free status.
9) What Are Prohibited Transactions?
Prohibited transactions as noted by IRC 4975 (c) (1), identifes prohibited transactions to include any DIRECT or INDIRECT:
- Selling, exchanging, or leasing, any property between a plan and a disqualified person;
- Lending money or other extension of credit between a plan and a disqualified person;
- Furnishing goods, services, or facilities between a plan and a disqualified person;
- Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan;
- Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account.
- Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
10) Who Is a Disqualified Individual?
As it related to IRC, the following would constitute disqualified individuals for entering into any investment or arrangment with, directly or indirectly.
- The IRA holder and his or her spouse;
- The IRA holders ancestors, lineal descendants and their spouses;
- Investment advisors and managers;
- Any corporation, partnership, trust or estate in which the IRA holder has a 50% or greater interest; and,
- Anyone providing services to the IRA such as a trustee or custodian.
Please note that too many individuals are playing games with the disqualification provision of an IRA holder who has 50% or greater interest in an investment. A word to the wise, do not play games with this provision by placing the IRA holder as a 47%, 48% interest in the endeavor. This is dangerous grounds to walk on for reasons to be examined later….but caution if you are advised to do this.
John R. Park is President of PGI SelfDirected and co-founding Partner of Fulcrum Investment Network
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