There are few things that are more important than planning for your retirement and yet most people tend to put off the decision for years. It may be because the idea of advancing age for young people is not tangible; it is so far removed from their reality that it is difficult to see it as inevitable. Yet, we all know that those days are coming, sooner or later. They creep up on us and catch us unaware even when we know that end of life is inevitable.
As we plan for our future, our retirement, our goal should be very basic. We want our money to outlive us. We don’t want to leave this world a pauper and a burden on others. The thought may sound morbid and depressing but that is exactly what retirement planning is all about. Yet, it is hard to determine exactly how much money we’re going to need for our retirement years. None of us know exactly when the inevitable will strike. That is why so many people refer to the IRS life expectancy table to help them plan.
What Is the IRS Life Expectancy Method?
It might seem strange to refer to the IRS for your retirement planning but doing so can be very beneficial. Their life expectancy method has helped many people figure out exactly how much money they will need in order to prepare for their future. They actually have a system of dividing the total value of your retirement account by your expected life span in order to determine how much annuity payments you should receive.
The IRS has two different ways of calculating these payments. The Certain Method and The Recalculation Method. Both of these methods focus on a different aspect of retirement but they have the same ultimate goal. To make sure that the money you’ve saved will last you until your last day.
Both Methods Explained:
The Certain Method is a means of calculating the minimum distribution needed to be dispensed from a retirement account based on the anticipated life expectancy of the account holder. It is used to estimate how much money to pay out from the account with the expectation that the money will last for the remainder of his life. The amount is determined based on the life expectancy at the time of the first withdrawal and will gradually be depleted with each successive payment. The belief is that if the money is evenly distributed over the life expectancy period so that the account would be completely paid out by the time the holder reaches his maximum life expectancy age.
Account holders are required to start receiving payouts from their IRAs on or before the first of April in the year after they reach the age of 70 1/2. While on the surface this type of payout seems to be very practical it does has its downside. Determining just how much to payout on a monthly or quarterly basis can be tricky and there is always the risk that the account holder will outlive the estimated life expectancy. Rigid adherence to this type of calculation could leave them completely depleted of funds and if they live for many years past the final payout they could end up destitute.
One way to counteract this problem is to use the second method of calculating life expectancy, The Recalculation Method. This is very similar to The Certain Method but the recalculation is redone every year and the amount of the payout is adjusted accordingly. That way, a healthier retiree may live many years past the expected age and may need to stretch his savings so that they last him for the duration.
The whole system is pretty basic but there are many factors that we might forget to consider. While the IRS regulations require you to begin regular distributions from your retirement account after you turn 70 1/2 the when is pretty much already determined. The purpose of the IRS life expectancy charts and tables is to determine the how much to distribute. But you want to avoid oversimplifying the situation. It is one thing when you are single and only have yourself to think about but it can become even more complicated when you are married, have children and want to plan for their future as well. Other factors that are not easy to determine when using the IRS calculations is the anticipation of health issues, medical care, and unexpected events. All of these can have a direct influence on not just how long you are expected to live but also on your quality of life as well. If you haven’t planned well, your decisions could impact many more people than yourself. So don’t rely solely on what the chart says. Keep in mind that it is just an estimation of your life expectancy. Whether you choose to use the Certain Method or the Recalculation Method, trying to determine your life expectancy and how it will affect those around you is something you need to view with all seriousness and the sooner you do it the better.
The fact is that saving and planning for your retirement is no easy task. No one really wants to think about their end of life but it is necessary. Many people look forward to retirement with great anticipation, planning for those years when they can finally sit back and relax and enjoy life. If you have planned well, then those final years can be a pleasure with enough cash on hand for you to live comfortably.
By using the IRS life expectancy charts, you can easily calculate how much money you need to do whatever it is you want to do in your retirement years. Whether you want to travel, relax by the beach, or just sit in front of your television, planning ahead can ensure that you will have a comfortable life that will be full of wonderful things to look forward to. So, while no one wants to think about the end of their life and have someone predict their final days it pays to use the IRS life expectancy charts so that at least you can plan ahead so you are happy and content when that time comes.