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I just got my annual notice from the Social Security Administrationyou know, the statement that estimates your future retirement benefits based on past earnings.

Like most people, I want retirement to come sooner than later. Yet, for baby boomers like me the question of when to retire, and how to finance retirement, is quickly becoming a much more difficult question than it was for our parents generation. One reason is that the full retirement benefit eligibility age for my generation is now 66.

The new level of planning complexity partly stems from Social Securitys permanent de-linking of retirement from the magical age of 65. The eligibility for full retirement benefits is moving up, which means pre-retireesanyone born after 1937will have tougher decisions to make about when and how to retire.

For workers born between 1943 and 1954, the full retirement eligibility age is now 66 and gradually moves up to age 67 for those born in 1960 or later. For the former age group, the maximum reduction in benefits for early retirement at age 62 is 25%.

What follows are 3 dilemmas facing todays pre-retirees.

No. 1: Math Blues

For those whose earnings power has increased historically with age, retiring at age 62 could have a deeper impact on benefits than the obvious 25% “penalty” for collecting early.

The retirement benefit calculated at age 62 is actually an average of the 35 highest-wage years from age 22 through age 61, or to one year before the benefit year. For those who make less than $87,900 per yearthe maximum annual salary considered in the calculationthe year they begin drawing Social Security could impact the size of the benefit.

In other words, the benefit formula drops a workers 5 lowest earnings years over a 40-year period. Each additional year of work bumps a lower-wage or no-wage year from the final calculation. This can be especially important for women who dropped out of the workforce for several years to raise a family or for those who had low-paying jobs or sporadic employment at some point in their work history.

No. 2: Snap Decision Regrets

Once a retiree applies for Social Security benefits, the decision is irrevocable. If a worker takes early retirement at age 62 and later wants to return to work, the law requires a “payback” of future benefits equivalent to $1 of every $2 above the annual earnings limit of $11,640 per year. Once the normal retirement age is reached, the Senior Citizens Freedom to Work Act of 2000 permits an unlimited amount of FICA wages without penalty.

Another consideration is that, while the eligibility for full Social Security benefits is inching upward, Medicare eligibility still kicks in at age 65. Seniors must remember to enroll in Medicare at 65 even if theyre still working.

Retirement planning becomes even trickier for those who have employer-sponsored group insurance that automatically changes when they reach age 65. Additionally, some employers only offer retirement medical plans to employees who retire at age 65. This gap between the employers retirement date and Social Securitys full-eligibility retirement date may force some workers to choose between full Social Security benefits or employer-sponsored retirement medical benefits.

No. 3: Income Gap Traps

Employer-sponsored retirement programs come with an assortment of monthly income and lump-sum payment options.

In addition, many of us have had a long string of employers by the time we reach retirement. Each job departure may have resulted in a rollover to an Individual Retirement Account. In fact, according to Conning Research & Consulting, IRAs account for about $2.4 trillion of the markets $11 trillion in retirement assets.

These IRAs, along with other sources of retirement income, need to be considered when formulating an effective income distribution plan. Three issues facing pre-retirees include:

? Whats the best way to take distributions from the various plans?

? If Social Security is the sole source of “salary-like” income flow, how should retirees bridge the monthly income gap from lump-sum retirement sources?

? Whats the best way to manage the risk of making a lump sum last a lifetime?

To manage monthly cash flow, retirees will need their financial advisors help in identifying tax-advantaged distribution options. In many cases, retirees who worry about outliving their income may want to consider exchanging a lump-sum payment for a stream of income they cant outlivean income annuity.

Clearly, the decisions pre-retirees make about when to retire and how to take income deserves the same careful planning as saving for retirement, maybe even more. These decisions will be crucial to maintaining a quality standard of living throughout the 10-, 20- or 30-plus years they spend in retirement.

, FALU, FLMI, CLU, ChFC and ALHC, is senior vice president of Symetra Financials insurance subsidiaries (formerly Safeco Life & Investments), with oversight responsibilities for the Life & Annuities division. She can be reached via e-mail at jennifer.davies@symetra.com.


Reproduced from National Underwriter Edition, October 7, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.