Saturday, February 13, 2010
INVESTING TO FUND AFTER RETIREMENT
For many people who are drawing on their savings to fund current retirement, the safest route often makes the most sense. This means being invested in T-bills and bonds which are certain not to lose value. However, like all issues in investing, there are some drawbacks to the safest approach.
Bond interest is taxed fully as income. For investments outside of tax-sheltered retirement plans, investors can often achieve greater after-tax income, with a minor amount of extra risk, by owning preferred shares of large established companies. The dividend interest is taxed at an approximate 35% rate for top income earners, compared to around 50% for interest income. This can mean a considerable tax saving at all income levels. People owning bonds are often at a disadvantage due to inflation. The amount of interest from bonds may be sufficient for current expenses, but will it be enough in 10 or 15 years when expenses are higher? A sound strategy, then, for people who are just retired and are facing another 20 or more years of life expectancy, would be to have at least some portion of their investments in assets that keep up to inflation. For some, the ownership of their home or other real estate may be enough. For others, it may be wise to have some ownership of stocks, in order to achieve the higher returns over time.
For retired people invested in stocks via mutual funds, a systematic withdrawal plan could work well as an alternative to owning bonds. Such a plan would allow the withdrawal of funds on a monthly or annual basis, much like receiving interest from a bond. However, there are two important benefits: (1) the amount withdrawn in the early years would be treated for the most part as return of capital, and therefore not taxed; and (2) if the rate of withdrawal is less than the rate of return achieved by the mutual fund, then the amount invested would continue to grow over time. Instead of, or in addition to, investing in bonds, using a systematic withdrawal plan connected to an equity mutual fund could well allow a retired person a higher after-tax income as well as inflation protection.
Investing in Mutual Funds After Retirements
A mutual fund is a pool of stocks or bonds, sometimes both, owned on a proportionate basis by everyone who has invested in the fund. All investment gains as well as fund expenses are shared proportionately by the fund owners, called shareholders.
It is easy to invest in a mutual fund. Many mutual funds require a $1,000 initial investment to get started. The amount to be invested can be remitted by check or wire transfer, as a means of convenience.
Once a mutual fund account is established, each investor receives an account statement regularly, often quarterly. An investor can add additional investment sums at anytime, if he so desires. He can also withdraw his investment or a portion of it easily.
In general, it costs an investor less to invest in a mutual fund pool of stocks and bonds than if he tried to duplicate that same portfolio of stocks and bonds individually. All mutual funds, however, have asset management fees. Some mutual funds impose fees when you invest in them or redeem your shares. It is important to investigate mutual fund fees before investing. Read the mutual fund prospectus to find out about the fees and other provisions of a fund.
It is just as important to assess a fund's investment performance minus all such fees to determine if a fund has a good track record. An acceptable net investment performance record (investment return minus all fees) for a mutual fund should be your investment objective when selecting a fund. Keep in mind, however, that past performance is not a guarantee of a fund's future performance. Mutual Fund principal will fluctuate and be worth more or less than the original investment when redeemed.
Early retirement Benefits
That forced many to claim retirement benefits at 62, their first year of eligibility, instead of waiting to collect at the full retirement age of 66.
Also fueling the increase was the leading edge of the baby boom generation, more than 3.4 million boomers who turned 62 in 2009, Johnson said. That was 9 percent more than in 2008 — the first year that any baby boomers, those born between 1946 and 1964, were eligible for Social Security retirement benefits.
Because of the recession, trustees of the Social Security trust fund warned last year that the diminished 2009 surplus would "stay about constant in 2010 because of the economic recession" and "rise only briefly before declining and turning to cash flow deficits beginning in 2016 that grow as the baby boom generation retires."
The program's shaky finances were one reason that Arlie Collins, a retired plumbing contractor from Greensboro, Ga., applied for his benefits three months before he turned 62 in December.
Collins was among 1.3 million men age 62 and older whose retirement benefits began in 2009, according to Urban Institute research.
That was up 20 percent from 2008 and the most new male beneficiaries in any year since Social Security payments began back in 1940, Johnson said.
Collins, a retired plumbing contractor, didn't mind that Social Security would reduce his monthly payments by about 25 percent, or roughly $250, for starting to collect at 62 instead of 66. After talking with an accountant, Collins determined that he was better off getting less money now, than he would be if he waited for larger monthly checks later.
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