For many of us anglers, fly fishing trips start with a mental image of the destination lake or stream. The image includes the type of fish we hope to catch, and that determines which fly rod and which flies to take along. It is essential to make reservations and review the route, the rest stops, and the cafes on the way. And it helps to sum up the anticipated costs for gas, guides, food, lodging, and “stuff” we invariably buy at a local fly shop. It also helps a lot to have a friend or a grandfather to teach us the ropes at an early age so all this planning becomes routine enough to do in the dark. Eventually fly fishing trips become a part of life, regularly and with joy. The same process applies to planning for and practicing our retirement: establish an image of where we want to be across our retirement years, locate a guide, assemble the necessary gear, sum up the anticipated costs, and arrange life to accommodate regular excursions into that realm: rehearsals for the main event. As with anything else worth doing, the earlier we begin, the more fun the trip. Don’t miss it!
The Garden of Eden is as much a state of mind as it might have been an actual place. Dining on forbidden fruit does tend, as the story goes, to change one’s perception of what life is all about. Adam and Eve were expelled from their Eden; their son Cain wandered away to some place “east of Eden” after he killed his brother. The story implies that we humans are prone to stray from our vision of Eden but eventually we would like to retire there. If you envision a move to a nice place, either right now or “later,” know that after you settle in your children, nieces and nephews, classmates, old army buddies and their families will probably want to visit you. You won’t have to go anywhere ever again. This makes great sense in your elder years. If you have planned well and are blessed with the ability to choose the location of your Eden, make sure it offers good shopping and hospitals and theater and wi-fi. And… see if you would choose to go out of your way to visit the place just to spend time with old folks like we all shall become.
Whatever you are allowed to contribute to your IRA account, you can contribute to a Roth IRA account instead. Eligibility depends on the amount of your Adjusted Gross Income, line 37 of your Form 1040 tax return.
If you are not eligible to contribute, you can still convert existing IRA value into Roth IRA value: that counts as a withdrawal, fully taxable as ordinary income and you would be wise to pay the tax with money you have set aside outside your IRA.
Is converting some of your IRA value into your Roth IRA worth the tax cost? The answer hinges on your answers to three questions:
- Do you believe future tax rates will increase (which would make paying the tax now more attractive)?
- Will the annual taxable Required Minimum Distributions (RMDs) that start at age 70 cost you a great amount in taxes during your later years?
- Is it better to have your retirement money accumulate tax-deferred, with both earnings and principal fully taxable upon future withdrawals… or to have your retirement money accumulate tax-free and be available tax-free in your later years?
Sometimes conversion is really worth doing; this is a good time to find out.
Those of us with mortgages repay the original loan with interest over a period of years. A 6% loan of $100,000 amortized across 30 years requires monthly payments of $599.55, and the lender stands to receive $215,838 on that loan. The borrower eventually gets to keep the property he could live in or rent for a steady income.
Instead of borrowing $100,000, one could save and invest a portion of his earnings and eventually use it to fund retirement needs. At 6%, the income on $100,000 would be $6,000 a year: $500 a month. That person would probably die with the $100,000 in his account.
If instead he were able to amortize $100,000 at 6% across the rest of his life expectancy—let’s say another 30 years—he could plan on receiving $599.55 a month with nothing left at the end of the 30 years.
Add a zero: $1,000,000 generating $5,000 monthly interest income at 6% would instead provide $5,995.50 a month if amortized. Not bad.
And yet… while almost no one blinks at amortizing a mortgage loan to someone else’s advantage, many of us overlook the implications of amortizing our nest egg to our own advantage.
It pays to look both ways.
The “tiring house” was a three-story structure built into the back of the Globe Theater in William Shakespeare’s time. Actors were able to enter the “tiring room” easily from the stage, to change costume and props for their next role as the performance went on.
Freshly “re-tired” actors entered the performance again as a different character entirely.
This is a far more intriguing prospect than many of us now arrange for ourselves in retirement; more often than not we tend to consider retirement as the time to stop working, rather than as a chance to play a new role in our lives…appropriately attired, at that.
Shakespeare’s actors followed a script and its cues into retirement; most of us are not so well prepared. We know we should be setting money aside for our retirement years, but surprisingly few of us consider what role we want to play, much less how we should dress for the part.
A clever financial planner can help clients achieve entertaining and well-rehearsed performances after retiring. After all, we have it on good authority that “All the world’s a stage…”
“And all the men and women merely players;
They have their exits and their entrances,
And one man in his time plays many parts…”
From William Shakespeare, As You Like It, Act II, scene VII