Congratulations! After a lifetime of work, it’s time to enjoy. But first, you will need to think about how you’ll best use your retirement investment to make your retirement years the culmination of all your dreams and goals.
If you’ve invested in a retirement plan, such as the A&M System ORP or TDA programs, you’ve had the opportunity to save on a pretax basis for retirement. What’s more, you haven’t paid current taxes on any investment earnings. These features—pretax contributions and tax-deferred growth—have provided substantial benefit and opportunity for long-term capital growth.
As you consider retirement, it’s time to determine how to best use those dollars for their intended purpose—your security and happiness now and in the coming years. You have a long time ahead of you to enjoy retirement, so planning is important in making the most of your investments.
Living longer means more time in retirement. A person turning 65 in 1949 had a life expectancy of another 16 years. Someone turning 65 in 2000 could expect to live another 21 years. Healthier lifestyles and better medical care mean that our life expectancies may continue to increase, making it more critical that we have the financial resources to make the extra years fulfilling and rewarding!
To manage your money, you’ll need to know where and how your money is invested. You’ve probably accumulated funds in a variety of vehicles. While you’re cataloging your assets, you’ll also want to look at your liabilities to make sure you have the continuing ability to meet your financial obligations after you retire. Once you’ve analyzed your situation, you can determine what to do with your A&M System ORP or TDA retirement plan.
Because your ORP or TDA plan allowed you to contribute pretax dollars and your money to grow tax-deferred, you’ll need to consider the tax consequences of withdrawals. Withdrawing all of it right away (a lump-sum withdrawal) and investing in a nontax-qualified vehicle—a savings account or mutual fund—may have serious immediate tax consequences.
Even if you’re older than 59½ and not subject to early withdrawal penalties, you’ll still have to pay current taxes on the entire amount. That amount may be substantial enough to bump you into a much higher tax bracket than when you received a regular paycheck!
You have several other options to best utilize your retirement dollars to fit your immediate and long-term goals:
If you don’t want to leave your money in your A&M System ORP or TDA account, but are not ready to make withdrawals yet, consider a Rollover IRA. This will allow your investment to continue to grow tax-deferred, and you’ll be able to choose from a variety of IRA options. An IRA might also give you a wider variety of investments than were available under your A&M System ORP or TDA account and can also accept rollovers from other employer plans and IRAs.
A systematic withdrawal from your A&M System ORP or TDA account or an IRA allows you to take a series of periodic withdrawals from your account balance. As you take these withdrawals, you surrender a portion of the shares of your various investment options. The actual amount of each withdrawal depends on the payment method you select.
You may have the option within your plan to use all or part of your investment to purchase an income annuity. Like a systematic withdrawal, an income annuity turns these assets into a series of payments. But with annuity payments, you can choose your guarantee—how long the payments will last, an interest rate for the length of the annuity and income-for-life options (protecting you against the risk of outliving your money).
Of course, you don’t have to choose just one option. You can combine them. For example, you could guarantee an income stream by purchasing an annuity with a portion of your assets while you take systematic withdrawals from what you leave in the plan. Or, you could roll a certain percentage into an IRA to preserve for your heirs, while purchasing an income annuity with the rest for a steady income.
All this planning may be more than you’ll want to manage on your own. A financial advisor may be able to help you understand your options and find the solution that makes the best sense for you.
This article is part of an ongoing series of articles regarding retirement savings. The information has been provided by various A&M System ORP and TDA vendors and SEC educational articles.