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To Save or Not To Save?

That's the question many workers ask when their employer stops matching 401(k) contributions.

2. Postponing your withdrawals: In most situations, it is better to delay cashing in your benefits as long as possible. Also, once you’re required to take minimum distributions, you are well advised to stretch them out as long as possible. Here’s why: First, distributions from retirement plans are entirely or mostly taxable.  So you have to withdraw more money from a retirement plan compared with the savings you have outside retirement plans to have enough left over after taxes are taken out to pay your bills. 

For example, if you needed $10,000, you could simply withdraw that amount from a savings account or, perhaps, a maturing CD and have $10,000 in hand. But if you were to take the money out of a retirement plan, you’d probably need to withdraw around $13,000, because about $3,000 in taxes will have to be paid. A second reason it pays to delay retirement-plan withdrawals is that it gives the money more time to grow tax-free. Now you may argue that the retirement money is likely to shrink, rather than grow in the future, given the sorry state of the economy. But if you can wait several years or more to withdraw retirement-plan money, chances are pretty good that you’ll enjoy some nice growth from your investments. After all, stocks have been beaten way down, so it should pay to wait to make withdrawals.

3.  An exception to the rule: When you might benefit from taking retirement-plan distributions sooner rather than later.

You may want to make some withdrawals now, even though you don’t need to (assuming you’re over age 59½). If you find that your taxable income is quite low, you should take advantage of your modest tax bracket to withdraw enough money to have those withdrawals taxed at a low rate. Many recent retirees expect to be in the 25 percent or higher tax bracket once they have to make minimum IRA distributions, but they now find themselves in the 15 percent tax bracket, because they, like you, are living off savings, CDs, and other non-retirement investments. If this describes your situation, you should consider withdrawing enough money from your IRA or other retirement plan to have it taxed at 15 percent, rather than waiting until later years, when it will be taxed at 25 percent. Remember, in 2009, taxable income below $34,000 is generally taxed at 15 percent or less for singles and $68,000 for married couples filing jointly.

My husband is in his 60s and I’m in my 50s. We are both retired. Where should we put money that we definitely won't need for the next eight to 12 years? We have most of our money in stocks and bonds and one CD, which will be due later this year.  –Laurette, Washington

The way you should invest depends on two factors:  when you’re going to start tapping into the money and how long it will need to last.

In your circumstances, you won’t need the money for a decade, and, given your relatively tender years (relative to me, at least), you’ll need the money to last for another three decades. So your “investment horizon” is a whopping four decades. To their possible financial detriment, many people who are nearing retirement or are retired already don’t take their investment horizons into consideration.

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