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Money Cents

When Is It Time To Retire?
By Shelley Phillips-Mills
May 16, 2005 - 10:25:00 AM

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Most of us work our whole lives with the dreams of one day retiring and spending our days traveling, practicing our hobbies or participating in activities we enjoy. We plan for retirement, both financially and mentally, and know that it will be a wonderful reward after a lifetime of hard work. But when is the best time to retire?

It may be a difficult decision to leave the working world and be confident that we are financially ready to forego our steady income. There are many factors to look at when deciding whether or not to retire - your family situation, your health, and your financial stability, among many others. If you’re getting close to retirement and not certain if you’re financially ready, you may want to consider working a little longer.

Staying on the job for just one or two more years could help you achieve the same retirement goals and increase the possibility that your funds will last longer. It will give you another year to add to your retirement savings before you start taking withdrawals. In addition, maximizing your contributions to an employer-sponsored retirement plan, such as a 401(k) plan, can help boost your retirement nest egg.

Waiting another year also offers the opportunity to give your retirement savings more time to potentially grow. Likewise, you’ll be meeting your expenses from your earnings, not by tapping into your retirement portfolio. This will allow the money in your retirement accounts to compound for a while longer.

Postponing your retirement may have some impact on your Social Security benefits. The formula for calculating these benefits is complex, but adding another year of income may increase the size of your overall benefit.

However, you may not want to - or be able to - wait any longer to retire and decide that now is the time. Many investment vehicles make it difficult for you to access your funds without tax penalties before age 59 ½. But if you are considering retiring before age 59 ½, you may want to dip into some income from your IRA.

If you decide to take some money out of your IRA, you’ll want to try to avoid the 10 percent early withdrawal penalty that the IRS may impose on the amount you withdraw. One way to do so is by taking what’s known as 72(t) distributions, which are essentially a series of substantially equal periodic payments. This strategy requires you to take - at least annually - substantially equal withdrawals that you compute based on IRS life expectancy tables and methodologies. You must continue these withdrawals for five years or until you reach age 59 ½, whichever is longer.

For example, if at age 50 you begin taking these periodic withdrawals, you must continue them until age 59 ½. If you start the withdrawals at age 58, you would have to continue them for at least five years from the first payment date or until age 63.

If you use this strategy, you might consider splitting your IRA in two - one for withdrawals and the other to continue to potentially grow and act as a fallback in case of emergency.

A solid plan and a good understanding of your goals will not only help you prepare for your future, but also give you an idea of where you stand financially. You should work closely with your financial consultant to plan for retirement as well as to determine when the best time may be for you to step into your golden years. If you would like to receive the A.G. Edwards’ publication, "Planning a Secure Retirement - Charting the Path Toward Your Retirement Goals," please contact financial consultant, Shelley Phillips-Mills in Bangor at 1-800-947-5456.

This article was provided by A.G. Edwards & Sons, Inc., Member SIPC.

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