Almost There: When Retirement Is On Your Horizon

Courtesy of: Daniel Griesmeyer, Financial Advisor
Branch Name: Morgan Stanley Garden City
Phone Number: 516-683-3243
Web Address:  morganstanleyfa.com/daniel.griesmeyer 

When retirement is on your horizon, there are many financial issues to consider, such as when to retire, when to begin collecting Social Security and how to lower risk in your retirement portfolio.  

Are you thinking of retiring? Whether you’re approaching a long-anticipated retirement date or beginning to cut back your work hours, planning ahead for your retirement is a wise move. Even if you’re on track to meet your retirement savings goals, there are other considerations you’ll want to address before taking the big step. 

Timing Is Everything
Planning is essential to achieve the retirement you envision. And the first thing you’ll want to decide is when you plan to retire. This is a big decision and should factor in lifestyle as well as financial considerations. Although age 65 is considered the “traditional” retirement age, in practice, it varies widely. According to the U.S. Census Bureau, the average American retires at age 62, well before they are eligible to receive workplace pension plan payments, Medicare coverage and full Social Security benefits. When deciding on when to retire, keep the following factors in mind:

• Retirement savings A major factor determining when you can retire is your retirement nest egg. Will it be enough? The average life expectancy of a 65-year-old is 18.5 years, but many live well into their 90s, meaning your savings may need to last 30 years or longer.1 The good news is that you still have time to make up any shortfall by maximizing your contributions to your IRA or retirement savings plan. In addition to regular contributions, the IRS allows you to make “catch up” contributions if you are 50 or older, permitting you to contribute up to a total of $23,000 to a 401(k) and $6,500 to an IRA in 2013.

• Pension timing  If you qualify for a pension, either through your current or former employer, keep in mind that most plans will not pay full benefits unless you are age 65 or older. But many will pay a reduced amount depending upon your length of service and retirement age. Ask your plan administrator what payments you will qualify for at different ages.

• Health care costs  Seniors age 65 and older have guaranteed access to health insurance through Medicare and, for lower income seniors, Medicaid.  But if you plan to retire before then, you’ll need to provide for your own health insurance--which can be a significant cost. Check to see if your employer offers a retiree health plan, if you qualify and how much you’ll pay. Keep in mind that a provision of the Affordable Care Act is scheduled to take effect in 2014 which may provide another option for securing health insurance if you retire before 65.  Nearly everyone in the United States will be required to be covered by health insurance or pay a penalty for failing to do so. States will create American Health Benefit Exchanges where individuals can purchase health insurance if they don’t have employer provided insurance.

• Social Security  You can begin collecting Social Security as early as age 62. But if you choose to collect before your “normal” retirement age (65 to 67, depending on when you were born), you’ll face a reduction in monthly payments of as much as 30%. What’s more, if you opt for early collection and continue working, you’ll be subject to an annual earnings limit until you reach your full retirement age. If you exceed this limit, $15,120 in 2013, you’ll pay a stiff penalty: for every dollar you earn over this amount, $0.50 of your Social Security benefit will be withheld.2

Structuring Your Portfolio for Retirement
One critical step you’ll want to take before you retire is to reduce risk in your retirement portfolio. Since you will soon have to depend on your portfolio for income, you’ll want to begin shifting a greater portion to bonds or other lower risk, income-producing investments. You’ll also want to review the specific holdings in your portfolio. Are there some higher-risk stocks you might replace with more stable holdings? Could you lower risk by shifting some of your lower-rated bond issues to US Treasuries or municipal bonds? You might also consider dividend-paying stocks.  

These and other risk-reducing strategies can help to structure your portfolio for the day when you’ll need to draw on it for regular income.  

At Morgan Stanley, we work closely with clients to put in place a retirement income strategy that is tailored to their unique needs. Let me work with you to assure a smooth transition.  

1Source: Social Security Administration, Period Life Table, 2007 (latest available).
2Source: Social Security Administration, 2013 Social Security Changes. 

Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses. 

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account. 

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer.  

Interest in municipal bonds is generally exempt from federal income tax. However, some bonds may be subject to the alternative minimum tax (AMT).

Equity Securities’ prices may fluctuate in response to specific situations for each company, industry, market conditions, and general economic environment. Companies paying dividends can reduce or cut payouts at any time.This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this material may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. 

If you’d like to learn more, please contact Daniel Griesmeyer. 

Article by Morgan Stanley Smith Barney LLC. Courtesy of your Morgan Stanley Financial Advisor. 

Daniel Griesmeyer may only transact business in states where he is registered or excluded or exempted from registration www.morganstanleyfa.com/daniel.griesmeyer. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Daniel Griesmeyer is not registered or excluded or exempt from registration.

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