A Guide to Benefits After Retirement
When you save money for retirement, you have to make sure you save enough so that you can live off of your savings. If you do not save enough money, then you'll have to work longer than you expected just to pay your expenses. Even after you retire, you should understand how your retirement benefits can be paid out to you.
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IRA
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When you retire, you may draw off your Individual Retirement Account. An IRA invests in a variety of investments including mutual funds, stocks, precious metals and real estate. Depending on the investments inside of your account, you may have to liquidate more than you intend to withdraw. For example, if you're invested in a bank CD in your IRA, you'll need to cash in the entire CD before you can withdraw any money from it.
Taxes payable on IRA withdrawals depend on the type of IRA it is. A traditional IRA pays ordinary income taxes on all withdrawals made from the account. A Roth IRA does not pay tax on any of the withdrawals made.
401(k) Plan
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A 401(k) plan work similarly to an IRA. The difference with a 401(k) plan is that it is an investment account with your employer. These plans typically only invest in mutual funds. When you withdraw money from these accounts, you must fill out a distribution form and cash in your mutual funds. You only need to redeem enough funds to give you the income you need for any given year's expenses.
You must pay ordinary income tax on all withdrawals from a traditional 401(k). However, Roth 401(k) plans are not taxed when making withdrawals.
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Annuity
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An annuity is an insurance product that guarantees you an income during retirement. These financial products are designed and sold by life insurance companies. Before you retire, annuities often allow you the option to defer your payment. If they do, they're called "deferred annuities" or "savings annuities." A deferred annuity builds an account value. When you retire, the annuity may pay you a retirement benefit that will be guaranteed for your entire life or for a set period of time. You may choose when you want your retirement income to begin. You can also defer the payments indefinitely and simply withdraw money from the annuity's account value as you need the money.
Life Insurance
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Cash value life insurance may be used as a retirement benefit. When you retire, any cash value in your life insurance may be withdrawn (if it is a dividend paying whole life, you may withdraw money up to the total accumulated dividend amount, and if it is a universal life policy you may withdraw up to the total amount of cash value in the policy) from or borrowed against. Withdrawals up to your basis (the total amount of premiums you've paid into the policy) are tax free. All policy loans are tax free as long as the policy remains in force. Policy loans are open until your death and insurance companies generally charge low or zero percent interest rates on these loans.
Pension
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A pension plan is an employer-sponsored retirement plan. Traditional pensions are defined benefit plans. This means that the benefit is "defined"; it's a specific dollar amount. When you retire, your employer pays this amount to you every month. For example, your defined benefit may be "$1,000." This $1,000 represents your monthly pension amount. You have a choice of taking the full amount of your pension (the $1,000), or you may reduce your full pension and save some of it for your spouse. If you take the full pension amount, your pension payments will only be paid during your lifetime. Your spouse must also sign a waiver acknowledging that she will not receive any money after you die. If you take a reduced pension, you generally have the option of reducing it by 25 percent or 50 percent. This means that you receive 75 percent of your $1,000 (if you reduce your pension by 25 percent) or you receive 50 percent of your pension (if you reduce your pension by 50 percent). If you die before your spouse, your spouse receives the amount of money you set aside in the pension. However, if your spouse dies prior to you, you cannot recover the amount you set aside in the pension plan for your spouse. You are left with the permanently reduced pension payment. Your last option is to take your pension savings as a lump sum amount. This lets you invest your full pension savings any way you want, draw as much income as you need, and leave behind any dollar amount you want for your spouse. It gives you the most control over your pension but also comes with the most responsibility since you are responsible for investing the entire pension amount yourself.
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