Preparing to retire

Did you know that you may spend almost as much time in retirement as in the workplace? As your retirement draws closer, you’ll face important decisions about how to spend your money and how much you need to live comfortably.

Careful planning is the key to ensuring that your nest egg lasts through retirement. Make sure that you and your investments are ready for the change. Here’s what you need to do:

Review your investment mix

The goal of most people approaching retirement is to begin preserving the capital they’ve accumulated so far while continuing to build assets. That’s why you may want to consider adjusting your investment mix to reduce your portfolio’s risk. One way to reduce your risk and look to preserve capital is by moving some money out of stock funds and into bond funds and cash equivalents. That way your portfolio may not experience as many ups and downs.

Also, make sure to carefully reassess your risk tolerance, time horizon, goals and other personal factors. They’ve probably changed over the years. Use the American Funds Retirement Roadmap® to estimate if your savings strategy is on track and to figure out what investment mix makes sense as you near retirement. If you need more help, talk to your financial professional; he or she can help you maintain the right allocation.

Weigh your Social Security options

Many experts predict that you’ll need about 70% to 85% of your preretirement income to maintain your current lifestyle through retirement. For many people, Social Security may only provide about 40% of total retirement income needs.

One of the biggest decisions you’ll have to make about Social Security is when to start collecting your benefits. You can take a reduced benefit at 62, wait until you’re eligible to receive your full benefit (at 65 to 67 years old, depending on when you were born) or postpone your first payment to qualify for a larger amount. The federal government requires you to start your benefit no later than 70; it offers no bonus for waiting longer than that.

How much money can you expect to receive from Social Security? That depends on your work history. In most cases, the longer you work and the higher your salary, the more income you can anticipate. For a detailed comparison of your retirement benefits at different retirement ages, visit the Social Security Administration website.

Decide what to do with your retirement savings

Since Social Security provides only a part of your total needs, you’ll have to draw on other sources for the rest of your retirement income, including:

  • Salary deferral plans
  • IRAs
  • Variable annuities

Salary deferral plans

As you know, your salary deferral plan allows you to build an investment portfolio to draw upon in retirement. Your account may include a combination of pretax and after-tax contributions and earnings.

You may have to pay a 10% early withdrawal penalty on withdrawals made before the age of 59-1/2.If you’re over age 55 and you leave your company, you won’t have to pay a penalty on taxable withdrawals. Other exceptions to the penalty may apply, including disability and death.

To qualify as tax-free, withdrawals from Roth accounts must be made at least five years after the account was established, and you must be at least 59-1/2, be disabled or have died.


You can begin to take penalty-free withdrawals from a Traditional IRA at age 59-1/2, but withdrawals may be subject to income tax. If you want, you can let a Traditional IRA continue to grow untouched until April 1 of the year after you turn 70-1/2. That’s when you’ll have to start taking minimum distributions. If you don’t withdraw the required minimum amount each year, the IRS will penalize you with a hefty 50% tax on any amount that you should have withdrawn. For more information on required minimum distributions, see Taking distributions.

With a Roth IRA, you’ve already paid taxes on your contributions. That means if you wait until you’re 59-1/2 or older to take money out and the account has been open at least five years, you’ll owe no income tax on a withdrawal. Roth IRAs are not subject to required minimum distributions over your lifetime. Your beneficiaries, however, will be subject to Traditional IRA distribution rules.

Variable annuities

With a variable annuity, you choose how your money is allocated among different investment portfolios. While you may get higher returns on your retirement account with variable annuities than with a fixed annuity, your return is not guaranteed. Again, you’ll face a penalty if you withdraw money before age 59-1/2 and don’t qualify for an exception.

Determine what to do with taxable investments

Just because you’re retiring doesn’t mean you should stop investing. Sure, your taxable investments in stocks, bonds, mutual funds, cash equivalents, real estate and CDs can provide retirement income, but they can also be converted to cash or used to buy income-producing investments such as annuities.

Talk to a financial professional

When you retire, you’ll probably share a common experience with almost everyone who has already made the change: You won’t get a paycheck anymore. Somehow you’ll have to replace this steady stream of earned income. Don’t forget to factor in income sources such as alimony or disability payments. They can really make a difference in your retirement plan.

To help you figure out the best way to replace your income, discuss these questions with your financial professional:

  • What sources of income are you confident that you can count on?
  • How much income will they provide each year?
  • How will you coordinate payments from different sources to create a steady stream of income so you can pay your bills when they’re due?

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