CONNIE BREZIK Special to the Star-Tribune | Posted: Sunday, July 6, 2008 12:00 am
Before you quit working and paychecks cease, determine where retirement income will come from to support your retirement expenses. A typical source of income is Social Security, and if you are lucky, you may receive a pension. If you are still short of cash, consider structuring investments to provide income when needed.
* Social Security: Social Security retirement benefits can start at age 62. However, consider delaying benefits until your full retirement age if you are working and earning more than $13,560 for 2008. Benefits are reduced 50 percent for every dollar earned above this amount.
* Pension: Few retirees will receive a pension and those who are eligible should carefully review the payment options as this can affect the amount and duration of your payments. Married couples may want to consider a joint and survivor option so income will continue if the pensioned spouse dies prematurely.
* Retirement accounts: Annual distributions are required from retirement accounts, such as IRAs and 401ks, starting at age 70 ½ and are allowed after age 59 ½ without a 10 percent tax penalty. There are specific exceptions for withdrawals before 59 ½, however most retirees should plan on using other sources of funds before this age. All distributions are taxed at ordinary income so allow for this additional expense.
Investments need to be managed to provide for adequate growth to keep up with inflation in addition to providing cash flow when needed. If you spend all the income generated from your investments, without reinvesting and growing your principal, your future purchasing power may erode. Bearing this in mind, if you specifically want to generate investment income consider the following types of securities:
* Earning interest income: Money market accounts, certificates of deposit (CDs), Treasury securities and bonds all generate interest income on your principal invested. Bank-issued CDs are FDIC insured up to $100,000 per account. Bonds usually pay interest every six months providing a known source of income. Municipal bonds offer federal and possible state tax exempt income but usually offer a lower interest rate. Interest on Treasury securities is taxable for federal income purposes but not taxed at the state level.
* Dividend paying stocks: Preferred stocks pay a fixed rate of return (dividends) at a rate usually higher than the rate paid to common stock holders. Common stock dividends may be taxed as ordinary income or as qualified dividends that will receive the favorable 15 percent tax rate under current tax law.
* Mutual funds: Mutual funds pay dividends, and you can request the dividends be paid in cash or reinvested to buy more shares. If you are looking for cash flow, choose the cash option.
* Real estate: Net income from real estate can provide a steady stream of cash flow either by owning individual properties outright or via a real estate investment trust (REIT). REITs offer professional management of a portfolio of real estate.
* Annuities: Annuities can be used to guarantee a stream of income for a period of time, such as 10 years, or for your lifetime. There are many different types of annuities with varied provisions to consider.
Connie Brezik is a Casper investment advisor and financial planner. Her e-mail is connie@asset-strategies-inc.com.