New Rules for the Retirement Game

Retirement planning has never been a more exact science. Or a bigger crapshoot.

There are low-risk investment options yielding many safe and secure golden years, and boatloads of professional advisers ferrying wannabe retirees to those sunny shores. The metrics of comfortable retirement have been established, analyzed and polished to a high sheen. But a down economy confounds even the best laid retirement plan. Professional careers are being extended by financial need and longer, healthier life spans. Buying a boat at 65 and floating into the sunset was granddad's ideal, but this generation thinks differently.

It all adds up to new rules for the retirement game, played on a shaky field. There's no right answer, according to those advisers. Each retirement plan is as individual as each retiree. But whatever form it takes, a winning plan must expect the unexpected.

Recessions and excellent cardiograms challenge the done-at-65 strategy, but it's not impossible to pick a retirement date and stick to it, according to Ed Slott, president of Rockville Centre accounting firm Ed Slott & Co. "You can have a goal," Slott said. "But you're going to have twists and turns along the way, and you're going to have to make changes. The roof leaks. You lose your job. Life happens. You can't be so strict that you freak out when you can't stick to your plan. You have to have flexibility built in."

The roll-with-it-baby approach is useful to those forestalling retirement by necessity or choice. "Some clients of mine never stop working," said Seymour Goldberg, senior partner at Goldberg & Goldberg in Jericho and professor emeritus of law and taxation at Long Island University. Goldberg cited clients who "lost money on the market and have obligations" and one who won't retire because he's afraid he'll be bored without a 9-to-5 schedule. Such you- never-know factors are exactly why retirement planning must be nimble - and why Slott touts the Roth IRA as the consummate retirement investment.

A Roth IRA accrues tax-free interest, provided certain conditions are met. While a Roth IRA generally carries fewer restrictions on how funds can be invested, its principal difference from other tax- advantaged individual retirement accounts is granting a tax break on funds withdrawn from the plan, instead of funds deposited. Despite the up front tax burden, Slott called it the "perfect safety hatch" for anyone requiring a dynamic retirement strategy. "It grows tax- free," he said. "And you can always access your original contributions tax and penalty free."

Goldberg concurred a Roth IRA can be the backbone of a worthy retirement plan, "but only if the market remains stable." Investment markets have recently done anything but that, he noted, leading to several Roth "recharacterizations" this year.

Goldberg hypothesized an investor putting $1 million into a Roth IRA in 2010. That investor had a choice: Pay full taxes on the principal investment in 2010 or defer those payments to $500,000 in 2011 and $500,000 in 2012. Most investors defer, Goldberg noted.

Flash forward to 2011. The rough economy has sapped the value of the investment portfolio, now worth $900,000, and the hypothetical investor has another choice: Switch back to a regular IRA that will tax the gains later, or stick with the Roth IRA and pay taxes now on a million-dollar investment suddenly worth substantially less.

"A lot of people have gotten into [Roth IRAs]," Goldberg said. "And a lot of people have gotten out. There were many Roth recharacterizations in 2011."

Unsteady markets certainly challenge the value of Roth IRAs, but they challenge virtually any investment plan, and Slott insists Roth remains the best long term bet. "When you're not working and you're most vulnerable, that's not when you want to pay a huge tax bill," he said. "Tax free is a lot better."

This leads to another crucial play in the retirement planning game; owing as little as possible when that career finally wraps. Like a looming tax bill, a big debt can deflate a retirement strategy and there are varying opinions which is most important - saving up or paying down.

"There's no replacement for saving money," Slott noted. "When people get a nice bonus or a nice hit from a customer, instead of putting that money away, they spend it on a trip. That's the money you put away for the lean years."

But even this champion of saving for a rainy day believes paying down debt is probably more important than squirreling away cash. "The last thing you want to do is go into retirement with debt," Slott said.

Craig Silverman, a retirement planning specialist with AXA Advisors in Melville, sees an inexorable connection between reducing debt and increasing savings.

"The faster you pay down the debt, the more money you will have available to save for retirement," Silverman said. "If someone has high-interest credit cards, they should pay those down more quickly. The extra money that isn't spent paying off the interest can be put toward their retirement nest egg

SOURCE: http://insurancenewsnet.com/article.aspx?id=294377