The Retirement Income Quiz You Can't Afford to Fail

You are entitled to receive 100 percent of your retirement benefit when you reach your full retirement age (67 for those born in 1960 or later). You can claim your benefit as early as age 62, but the amount will be reduced. At 70, you become eligible for your maximum monthly payment, thanks to delayed retirement credits that start accruing when you pass full retirement age. 

Annuities can be complicated, but a basic immediate annuity is relatively simple: You give an insurance company a lump sum of cash and it starts sending you regular payments, usually for the rest of your life. The fixed payment, which never changes, depends on such things as your age (the younger you are, the less you’ll get), gender (women tend to live longer) and the amount of your lump-sum investment.

The average 65-year-old American will live for another 20 years. Even if inflation is a relatively tame 2 percent, a dollar today would be worth about 67 cents in two decades. While you may want to minimize risk as you age by investing in stable assets such as cash and bonds, keeping a part of your portfolio in stocks will give it the chance for growth needed to help offset inflation. The Dow has averaged a nearly 7 percent annual return over the past 20 years.

A traditional IRA is funded with pretax dollars and grows tax-deferred, but you’ll pay taxes on your withdrawals in retirement. A Roth IRA is funded with after-tax dollars, so no taxes are due when you start making withdrawals. Unlike traditional IRAs, Roths are not subject to required minimum distributions (RMDs). Assuming you have the cash to foot the tax bill, the most advantageous time to convert a traditional IRA to a Roth is after a big market decline because you are paying taxes on a smaller amount of money.

Withdrawals magnify the effect of a bear market on your retirement account because they reduce subsequent bounce-back gains. Taking a big hit to your nest egg at the precise moment you stop work and start making withdrawals would have the biggest impact. Many advisers say you should keep a year’s worth of withdrawals in cash to avoid having to sell stocks during a downturn