Age 61 1/2 and Laid Off

Jan,

I am 61 ½ years old and just received notice that I will be laid off on December 30, 2009. I believe that the Social Security Administration averages the last few years of your employment in order to determine your monthly benefit. For the past 3 years I have made about $77,000 and I am worried that if I find a new position it will not pay that much and if I wait until I am 66 ½ to retire my monthly benefit will be reduced substantially. Should I retire now while my income is high and work part time to supplement my income or take a lower paying job? I currently have roughly $220,000 in all of my retirement accounts. Thanks for your opinion.

Coy from Mineral Springs, NC


Coy: You are facing a difficult decision. According to the Social Security rules, your social security benefits are actually based on your lifetime earnings. Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most money. They then apply a formula to those earnings to arrive at your basic benefit, and that is the amount you would receive at full retirement age. There is a worksheet on line at www.socialsecurity.gov to help you determine your benefit amount. This means if you continue working past age 62, the additional earnings could actually increase your benefit.

I encourage you to talk with a financial advisor about your retirement accounts to determine how best to invest those funds for your retirement needs. There are some excellent variable annuities with lifetime income guarantees you can consider. If you don't currently have a financial advisor, I suggest contacting a local bank or brokerage firm and ask to speak with a retirement specialist. The financial advisor can assist you in determining whether you currently have sufficient funds to go ahead and retire or whether you may want to continue to work a few additional years so you will have the money to do what you desire in retirement.

Good Luck!

Year End Tax Planning

Since we are in the last few weeks of 2009 and looking forward to a new year in 2010, now is an excellent time for a financial review to ensure you take advantage of every opportunity to increase your savings for retirement and lower your tax bill as much as possible.

• Make sure you take advantage of the “catch-up” provisions for IRAs and retirement plans. That means if you are age 50 or older, you may contribute an extra $1,000 to your traditional or Roth IRA for a total of $6,000 for 2009. For your 401(k), Roth 401(k), 403(b), and 457(b) plans, if you are age 50 or older, you may contribute an additional $5,500 for a total of $22,000. For your Simple IRA and Simple 401(k), if you are age 50 or older, your catch-up amount is $2,500 for a total of $14,000.



• Remember Required Minimum Distributions from your traditional IRA, 401(k) and other qualified retirement plans are waived for 2009 due to the passage of the Worker, Retiree and Employer Recovery Act of 2008. This waiver also applies to Beneficiary IRAs.



• If you inherited an IRA and there are multiple beneficiaries, you have until the end of the year following the year of the IRA owner’s death to split the IRA into separate accounts. If the IRA is not split by the end of the year, the oldest beneficiary’s age will be used to determine Required Minimum Distributions. This could penalize younger beneficiaries because they may want to stretch the IRA out for a longer period of time by using their own life expectancy. If the IRA is not split in a timely manner, they lose that option.



• Remember there is a potential for higher tax brackets in the future. If Congress does not act, after 2010, the current 25%, 28%, 33% and 35% tax brackets will increase to what they were prior to 2001, which were 28%, 31%, 36% and 39.6%, respectively. Proposals are being considered for tax bracket modification; however, we do not yet know what the outcome will be.



• Consider a Roth IRA conversion. Traditional IRAs grow tax-deferred, however, you will tax ordinary income taxes on any withdrawals when you begin taking money out. Roth IRA’s, however, have the potential for not only tax-free growth but also tax free withdrawals. The Tax Prevention and Reconciliation Act makes it possible for anyone to convert their traditional IRA to a Roth IRA beginning in 2010. Remember taxes will be due on the amount converted, but, you also have the opportunity to spread the taxes out over two years paying them in equal installments in 2011 and 2012. There are many factors to consider when thinking about a Roth conversion, and it is usually not advisable to convert to a Roth IRA unless you have money outside of the IRA to pay the taxes.