MasterPo says: This blog is about topics and issues that are of importance to me. I am not one of the countless blogging lemmings that are tripping over each other scurrying down the hill and off the cliff of blogging oblivion trying to write the greatest blog on the latest topic de'jour. Your comments are welcome.

October 14, 2008

The Reality of Retirement: Myth #1 – Using IRAs and 401ks

I thought I well understood how retirement worked. Oh was I wrong!

There are soooooo many myths and outright falsehoods out there about retirement, specifically the financial aspects of retiring and of general growing older. I feel it is necessary to set the record straight on many of these aspects.

Based on all the feedback I receive (and THANK YOU for sending it!) my blog site seems to attract a number of younger people (teens, 20-somethings and 30-somethings). Retirement is probably the furthest thing from your minds. It was when I was your age. Just a word and something that "old people" did before making the ultimate contribution to the paranormal field (if you catch my meaning).

But kids today are being forced to face the realities of the grown up world sooner and Defiantly a loss of innocents. And more to the point of this series of articles, young people are being bombarded with slogans and politician's campaign sound bites about many topics including retirement that sound good but are hollow and meaningless. By the time a young person grows up and (hopefully) attains a level of understanding of these things much valuable time will have been wasted.

My goal – my hope! – for these articles is to pass on the reality of financing (paying for) retirement and how many of the popular retirement programs really work. It is my desire that the young people who are reading this article will glean some wisdom in advance from my experience dealing with retirement finances.

My qualifications for discussing this subject? Besides a financial background from college and a life time of working in the financial industry, my mother passed away in the late fall of 2006. For the last 5 years of her life I managed her day-to-day affairs, including her retirement income sources. For fifteen years prior to her retirement she had been employed by the New York City Board of Education. She had a pension, TDA (tax-deferred annuity, think 401k), her Social Security, and a small IRA that I insisted she open before she retired. This is all I had to pay her bills during her retirement. My qualification comes from my experience having to manage her post-retirement financial life.

I will dispensing that experience now.

Myth #1 – How IRAs and 401ks Withdrawals REALLY Work!

Most people think a traditional IRA or 401k (including 403b and Thrift Savings if you are a government employee) is just like a bank account, but that you can't take out the money until your retire. And you don't pay tax on the money until then too.*

(*NOTE: the ROTH IRA and new ROTH 401k have different rules. But few people are, unfortunately, using them as compared to regular/traditional IRA and 401k accounts. So this discussion does not apply to ROTH accounts.)

That part is correct. But the withdrawal aspect is not.

Unlike a bank account (or a regular mutual fund account), with an IRA or 401k you can NOT simply take out money whenever you need to. Frankly, I don't understand why and no one in the financial community has ever given me a good explanation why not. But that's the way it works.

You can instruct the IRA/401k company to send you a check periodically (monthly, quarterly or annually). In some cases you can convert the IRA/401k to an annuity and annuitize. Or just take the annual Minimum Required Distribution (MRD – something the IRS requires of all non-ROTH retirement plans). But in general you can't just call up and request a distribution.

Yes, you can call up and request one. But most companies have restrictions on how often you can request withdrawals. Typically there has to be 30 days or so between requests. Again, I can't understand why. But that's the way it is.

Also, the time to process your withdrawal request and actually get a check out to you is much longer than with a non-retirement account. Again, I can not fathom why it is but it's so.

So what does all this mean to you? If means that if you don't annuitize your account (which is often not a good idea for reasons I'll get into in another article) or take a systematic withdrawal plan you have to very carefully plan your spending and take out what you need ahead of time. You may not be able to get access to your money as often a you will need to.

If anyone knows why IRA and 401k accounts are this way please let me know!

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