NEXT MONTH, the oldest of baby boomers will turn 59 1/2 , that magical age when they can tap tax-deferred retirement accounts without penalty.
This means that after decades of accumulating assets - let's hope - boomers are nearing the time they'll retire and begin to spend down assets. The financial decisions at this juncture can be just as tough as when they were younger, but the consequences are far more serious.
"There is a smaller margin for error," said Robert Nestor, principal of retiree services with the Vanguard Group in Malvern, Pa.
Not saving at age 30 isn't good, but there are still years to catch up. Spend too freely as a 62-year-old retiree, and the chances of outliving assets jumps. It may not be easy to replenish a nest egg by returning to work, either. About half of recent retirees left the work force earlier than anticipated because of poor health, buyouts or layoffs, Nestor said.
Financial experts say they aren't sure why 59 1/2 became the starting point for penalty-free withdrawals, but it doesn't mean boomers should start draining retirement accounts once they hit the mark.
"Just because you can, doesn't mean you should. You'll still pay taxes on what you withdraw," said Stuart Ritter, a financial planner with T. Rowe Price Associates in Baltimore. Besides, Ritter added, "59 1/2 is a relatively early age for someone to retire."
Indeed, boomers generally have been consumers, not savers, and may need to work more during what is often their peak earning years to build up savings, said Ed Slott, an individual retirement account expert in Rockville Centre, N.Y.
Still, it's a good idea to think ahead, and here are some things for the oldest boomers to consider before cracking open a nest egg:
Develop a plan. For so many years, workers have been focused on accumulating savings that they haven't mapped out what their retirement will be like, Nestor said. "You should be thinking about that plan well before retirement," he said.
Will you work part time in retirement? When will you take Social Security benefits? Will you need long-term care insurance?
The plan must include how much you expect to spend each year in retirement, from necessities to extras, such as travel.
Also, unless your family history suggests otherwise, you might want to plan on living a long time, perhaps into your 90s.
Count up income sources. The Social Security Administration sends out statements each year giving an estimate of benefits.
Some retirees are lucky to have a traditional pension that will send them a monthly check for life. Others may have only the pot of money sitting in a 401(k), IRA, outside investments or savings account.
Retirees who want some sort of guaranteed income for life might consider buying an immediate annuity, where they pay a lump sum and begin to receive a monthly check based on gender and age. For $100,000, for example, a 65-year-old man today can buy an income annuity paying $643 a month, according to Vanguard.
Ellen Hoffman, author of The Retirement Catch-Up Guide, suggests some boomers might look to their homes for income, by selling an appreciated house and moving to a smaller residence or less expensive locale.
Drawing down assets. It wasn't long ago that financial experts assumed portfolios would grow 10 percent annually and advised that retirees could safely withdraw 8 percent a year for living expenses, Hoffman said.
"All of that came down as reality has sunk in and the tech market tanked," Hoffman said.
Experts now recommend a withdrawal rate of 4 percent or 5 percent.
"Many people are shocked by that statistic," particularly when they discover a $1 million nest egg generates a $40,000 annual income, said Jeff Van Keulen, region vice president with American Express in Minneapolis. "What many baby boomers will do as a result of that is continue working in retirement, maybe on a part-time basis."
Basically, there are two ways to make withdrawals, Nestor said.
Most often, experts recommend using dollar withdrawals that are adjusted for inflation each year.
Under this method, for example, a retiree in the first year would take out $20,000, or 4 percent of a $500,000 portfolio. The next year, he would take another $20,000 plus $600 to keep up with the 3 percent inflation rate. If inflation then goes up 2 percent, the next year withdrawals would be $20,600 plus $412. And so on.
The problem with this method occurs if the stock market takes a dive in the early years of retirement, Nestor said. "It can be devastating. You are drawing off principal at the same time you have depreciating assets," he said.
The second withdrawal method is to take out the same percentage each year, say, 5 percent. When the market is booming, annual income will go up, too. In the years when investments drop in value, so will income, and retirees must be disciplined enough to reduce spending. Many people, though, don't like this method because of the income swings.
What accounts to tap first? There are always exceptions, but the general rule is for retirees to dip into taxable accounts first, such as stocks, bonds and cash. Next in line are tax-deferred accounts, such as traditional IRAs and 401(k)s. Lastly, draw from a tax-free Roth IRA.
The reason is simple: Investors are better off letting money grow in tax friendly accounts as long as possible. "The value of the tax-deferred or tax-free compounding is phenomenal," said Twila Slesnick, co-author of IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out.
Also, sell assets when you rebalance your portfolio, usually no more than once or twice a year to keep trading costs down, Nestor said. Park the proceeds in a money market account that permits check-writing.
Don't forget taxes. But do not let distaste of taxes control investments. Sometimes, retirees try so hard to avoid taxes that they throw their asset allocation out of whack, such as holding a massive amount of a single stock, Nestor said.
To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose @baltsun.com.