QUESTION: My wife and I are retiring in two years. We think we will have sufficient income to meet our basic needs and do a little traveling. How can we be sure our plans will work out?
ANSWER: Transamerica Life Companies recently asked 1,000 middle-aged and older workers about retirement issues. The survey concluded that, while these workers were optimistic about their financial future, they were largely uninformed about real costs of retirement and long-term care.When you begin retirement planning, you need to know how you're going to spend your money. According to the U.S. Bureau of Labor Statistics, an "average" older urban household spends its income as follows: housing 33 percent; food 16 percent; transportation 15 percent; medical care 10 percent; clothing, personal care 7 percent; contributions 5 percent; entertainment, education and reading 5 percent and other expenses 8 percent. Add up what you're spending now and determine which items will change during retirement. For example, housing costs may decrease because your mortgage will be paid, but transportation costs will go up if you travel more. Most Americans are living longer, so plan on the possibility of having special medical costs, nursing-home care or alternate housing costs. You also need to make guesses about inflation and taxes (property, and in some cases, income).
Most retirees receive their income from one or more of these sources: Social Security, employer pensions, individual retirement accounts (IRAs) and income from private investments.
While Social Security is not usually the sole source of income for retirees, it is generally an essential one. To learn how much you will receive from Social Security, write or stop by your local office and ask for the booklet "Social Security Changes and How They Affect You." After submitting the form in the booklet, you will receive a printout of your lifetime qualified earnings and a projection of your Social Security benefits. If your employer has a pension or profit-sharing plan, visit your personnel office to find out the details of your payment schedule. Read the written information carefully and ask questions so you know all aspects of the plan. IRAs can also add to your retirement income. To avoid penalties, IRA distributions can start as early as 591/2 but no later than the year you become 701/2. Minimum withdrawal amounts are assessed based on your life expectancy or the combined life expectancy of you and your beneficiary. The longer you delay withdrawal on your IRA, the more you are likely to earn.
Income from private investments varies, but you can calculate the approximate amount you can withdraw based on the amount of the investment, the percentage of earned interest, and the amount you intend to withdraw annually. If you don't have an investment counselor, retirement and investment books may assist you in making these calculations.
The secret is planning ahead, so you have already taken the most important step.
QUESTION: I will be 70 next year and plan on continuing part-time work. Will I qualify for all my Social Security at the beginning of next year?
ANSWER: It depends on how much you earn. The full annual limit will apply for every month before your 70th birthday. In 1990, the average earnings limitation for workers 65 through 69 is $9,360. Any earnings exceeding this amount prior to age 70 are offset by $1 in benefits for every $3 in excess earnings. Once you've reached age 70, there are no limits.
If you become 70 in July 1991, you could earn up to the full $9,360 in the first six months without any loss of Social Security benefits for those months. But, if from January to June you earn $12,000, your benefit would be reduced by $880 for those six months (or $1 for every $3 over $9,360). Full benefits accrue each month after your 70th birthday.
There has been another benefit change recently. Delayed-retirement credit has been increased for workers over 65 who have not retired and for those who lose benefits due to excess earnings. In 1990 and 1991, the benefits will increase from 3 percent to 3.5 percent for each 12 months after age 65 that benefits are not paid. The credit will rise by another half-percent in 1992 and every other year thereafter until the year 2008 when it reaches 8 percent. Eight percent has been calculated to be actuarially fair. On average, workers who retire late will receive the same total lifetime benefits as if they had retired earlier. Of course, many people believe the only fair approach is to eliminate the earnings test. If you have strong views on the subject, write your congressional representatives and let them know.
Send questions about growing older to On Aging, P.O Box 84256, Los Angeles, CA 90073. Questions of general interest will be answered in the column; individual answers cannot be provided.