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May 4 2009 12:00AM

Question

I've retired at the age of 56 with a pension plan of $713,000 and $298,000 in my 401(k) plan. I have a mortgage of $250,000 at 5.25 percent, an equity loan at $108,000, $30,000 in savings and $140,000 in stocks. I have no incoming income, so I need a monthly check for my living expenses. What is the best way to handle my situation?

Answer

There's no getting around the fact that you might need both a financial plan and a financial planner given the complexity of your situation. According to FPA member, Barry Rabinowitz, CFP®, you should prepare a cash flow statement that addresses how much income you need to live on each month.

Rabinowitz said numerous academic studies suggest you should withdraw no more than 4 percent per year if you want your money to last over the course of 30 years of retirement. "In other words if you want a high probability of not running out of money,  through good and bad markets, you can withdraw $44,000 a year from your investment pool, adjusted each year for inflation," Rabinowitz said. Withdrawals higher than 4 percent a year, have a high probability of running out of money during a 30-year retirement."

If the income from your financial capital isn't adequate, Rabinowitz suggests that you consider some form of consulting/employment to supplement your investment income. In addition, he noted that you should factor into your calculations that you likely will be eligible for Social Security starting at age 62. You can get an estimate of your benefit at age 62 at the Social Security Web site.

In addition, Rabinowitz suggests that you consider rolling your pension and 401(k) plans directly into an IRA because it will typically give you more investment choices. However, do consider that any distributions from your IRA or 401(k) plans prior to age 59½ will be subject to a 10 percent penalty in addition to being taxed at your ordinary income tax rate. There are some exceptions: You can take what are called substantially equal periodic payments (called 72(t) payments) based on your life expectancy. If you do use 72(t), Rubina K. Hossaim, CFP® noted that you have to continue those payments until 59 ½ or five years, whichever is later. After age 59 1/2, you can take penalty-free withdrawals from your retirement plans. 

When creating retirement income plan, Hossaim noted that you should draw down your money in the most tax-efficient manner possible. "I would tap my non retirement money first to generate income and then qualified or retirement money since retirement money grows tax deferred," Hossaim said.

As for your asset allocation, Rabinowitz suggests that a conservative 60 percent stocks, 40 percent bonds asset allocation "should be expected to generate an average 7 percent return." Of course, you should examine your risk tolerance when constructing your portfolio. Hossaim also suggests allocating up to one-third of your money into a fixed annuity as part of your retirement income plan. This type of annuity can provide you with income for life. As always, consult with a planner when creating a retirement income plan. Hossaim also suggests you should have at least two years worth of expenses in a money market or savings account.

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