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| Q and A with Denisa - Retirement |
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- Debt Management and Bankruptcy
- Life Cycle Planning
- Investing
- Home Financing
- Retirement
- Children and College
- Life Insurance
- Marriage and Divorce
- Budgeting and Taxes
- Business Planning and Opportunities
- Estate Planning
- Financial Identity
- Tips and Miscellaneous
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5. Retirement
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From: Carol
Age: 40 - 44
"My husband and I have Roth IRA's, Traditional IRA's and an investment account. These will be our main source of income for our retirement. Should we make monthly contributions to our retirement accounts during this time of uncertainty and does it matter to which accounts?"
ANSWER:
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Yes, you definitely want to continue with you monthly contributions. This is the time when 'everything is on sale and heavily discounted', and that is why you not only want to remain invested in the market but to also contribute on regular basis. This approach is called dollar cost averaging, which allows you to buy more shares when the price is low and fewer shares when the price is high.
As for allocating your dollars among your retirement and non-retirement accounts, take advantage of the tax deferral and maximize your IRA contributions first. Then invest the remaining balance into your non-retirement account.
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From: Becky
Age: 45 - 49
"My husband and I had planned to retire in 15 years but since our 401Ks lost about 25%, the outlook is pretty gloomy. Should we move away from stocks completely to go to more conservative choices? Also, we want to begin rebuilding our cash reserve but we don't know which bank institution is safe."
ANSWER:
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It is important to include in your retirement planning the years following retirement. A healthy 65-year old can be looking at some 20-25 investing years. Therefore, with the next 15 years, you could have 35-40 years for your investment portfolio to work.
Having a broad asset allocation, including international stocks and bonds as well as non-financial asset classes such as commodities and real estate, helps reduce overall risk and volatility while maximizing returns over time. At your age, it is important to keep some equity exposure and think in terms of years rather than months. If you simply can't stomach the losses, move more money into cash for right now but remember that it does not pay off to time the market in the long run.
Visit http://www.bankrate.com for information on safe and sound bank institutions.
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Social Security Tips for Divorcees:
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In these uncertain times, many of you want to know how to best use your social security benefits. There are many little known and very useful ways to utilize these benefits.
This week, we will offer a few tips on SS benefits for Divorcees.
Here are questions from a 62-year-old divorced Susan:
TIP#1:
Can I collect social security benefits on my ex-husband's earning record?
Yes, provided that:
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- you were married at least 10 years
- you are currently unmarried or you re-married after age 60
- the benefit you are entitled to receive based on your own earning history is less than the benefit you would receive based on your ex-spouse's work; AND
- Your ex-spouse is entitled to Social Security retirement
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TIP#2:
If I begin to collect SS benefits on my ex-husband's earning record, will it reduce his SS benefits?
No, your ex-husband's benefits will not be impacted.
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TIP#3:
In order to collect SS benefits on my ex-husband's record, do I have to wait until he begins to collect his benefits?
You don't have to wait for him to actually receive the benefits he only needs to be ELIGIBLE to receive his SS retirement benefits.
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Gary started collecting his social security benefits at age 62 to pay off some his debts. Now, at age 65, he wishes he could reverse that decision because he is currently collecting over a $1,000 less each month than if he had waited until age 70. Gary wants to know if it is possible to return the collected benefits to Social Security in exchange for a higher pay out later on.
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Not only will Social Security allow you to return all of your benefits but also INTEREST-FREE. You will need to file a form 521 with Social Security and they will calculate how much you need to pay back.
I would not recommend this as a general investment or debt repayment strategy for a number of reasons: Social Security was not designed for this purpose, you might not be able to repay what you've already spent, or the rules regarding this circumstance could change. However, it is an option for those who simply miscalculate the need to collect early.
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From: Peter
"Should I contribute to my Roth IRA or a 457 Plan that is being offered at work? "
ANSWER:
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If your employer offers a match, contribute up to the match and then channel the rest of your savings into your Roth IRA. If there is no match, maximize your Roth IRA contributions first and then defer the rest of your earnings into the 457 Deferred Plan.
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From: Mary
"Denisa, I am 52 years old and I have had to recently accept a much lower paying position. Luckily I had been saving into my IRA for years. I know that I should preserve the retirement savings but I do not have enough to cover my budget, which is already very minimal. Is there a way to start pulling money out of my IRA now without getting hit with the penalty?"
ANSWER:
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The IRS actually does provide an exception to the rule.
Under section 72(t). The 10% penalty will not apply to money taken from a retirement account if the money is withdrawn in "substantially equal periodic payments" (SEPP). What that means is that you would have to take a payment from your IRA at least once a year for the period of five years or until you turn 59 1/2, whichever is longer. After that, you can stop taking payments altogether if you want.
To determine how much money you can safely pull out each year, the IRS offers three different methods to calculate the amount that you can choose from. It's important that you do not set the amount too high because if your IRA fails to earn enough money to cover the required periodic payment, you will not be able to comply with the duration requirement. Because remember you have to take the money out over the course of at least five years. That may result in penalties, and interest!
Mary, the good news is that if you use it properly, this exemption can offer you the needed penalty-free access to your IRA funds to supplement your income.
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From: Martin
Age: 50-55
"I am considering an earlier retirement and I would like to find out about options for health care for retirees so that I am better prepared."
ANSWER:
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- First, check if your employer offers any health insurance benefits for retirees, other than COBRA. This option is less and less common just like the good old pension plans, which are becoming extinct, but is still worth looking into.
- If you are a member of some personal or professional organization, check and see if they offer group insurance coverage for their members
- Don't settle for COBRA, which is offered by eligible employers to their employees for 18 month. One downside of COBRA is that if you develop a pre-existing condition while on this plan, it may be difficult for you to obtain an individual health insurance plan when the coverage ends. Also, the premiums of individual plan may be cheaper than COBRA. So, don't wait, and apply for individual policy on your first day of retirement.
- If you select high deductable, catastrophic coverage to keep the cost of premiums down, consider putting the amount of deductable into a tax-advantaged Health Savings Account (HSA).
- Medicare-eligible retirees, make sure you understand the limitations of the Medicare and plan accordingly.
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From: Randy
"Denisa, I am retired and I am fortunate to have accumulated substantial assets in my IRA that I do not need to tap into. Please help me understand about the scheduled 2010 Roth IRA Conversion Rules and if it is something I should take advantage of."
ANSWER:
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Essentially, the $100,000 adjusted gross income threshold, which is currently in place for Roth conversions, will be repealed in 2010. Anyone earning $100,000 or more will be able to convert their Traditional IRA to a Roth IRA. It is important to know that since a Roth IRA can only be funded with after-tax money, there will be an income tax due on the converted amount above any after-tax or nondeductible IRA contribution. However, there will be a two-year window to pay the tax on any 2010 conversion.
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As you are regaining your confidence in the stock market, let’s talk about how to best position your retirement dollars.
Imagine you had 3 buckets into which you placed your retirement savings:
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- The tax-free bucket would have your Roth IRA because the dollars that come out will not be taxed.
- The dollars in the second bucket are ‘tax deferred’. It would hold your 401K and your qualified annuity because this money becomes 100% taxable later on.
- Finally, your third bucket has taxable instruments, like your non-retirement brokerage account, which gets taxed as you go.
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You might ask - why not put all your savings into the tax-free bucket. Unfortunately, there is a contribution limit. That is why people tend to put most of their money into 401Ks and IRAs BUT remember those are fully taxable at retirement.
So, a better strategy may be to draw your retirement dollars from a combination of all three buckets and as a result, only some money will be taxable.
For example: You have $600 to save each month. You would put $200 into a tax-free Roth IRA, $200 into a tax-deferred 401K, and the remaining $200 into a taxable investment account.
This way you will be able to retain most of your hard earned money without being excessively generous to Uncle Sam.
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Many of you have been asking what to do with your old 401K. Should you add it to your 401K with your new company or should you roll it over into an IRA. These are very important questions. So let’s do a quick refresher today.
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- THE MOST important thing to remember about investing is that you always want to be diversified. This means having your money spread out among many asset categories, like US stocks & bonds, foreign stocks & bonds, real estate, and commodity funds. Typically 401K plans offer only a limited amount of these investment categories, but IRAs have a much wider selection. So your best bet would be to transfer your old 401K into an IRA.
- You can open up an IRA with just about any financial institution. Many of them even offer an option to open up new account online.
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There may be some caveats. For example, if your old 401K contains a company stock, that portion may be taxed differently, so check in with your financial advisor first before you roll it over.
As always, I welcome your questions and comments. Stay tuned next week to learn more about INVESTING.
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I receive many emails from you asking if Traditional IRA is better than Roth IRA. It generally makes sense for many people to put money into Roth IRA as opposed to Traditional IRA and here is why. With a Roth IRA, any earnings can be pulled out tax-free if you are at least 59 ½ and have had the Roth at least five years.
So, why wouldn’t everyone convert his or her Traditional IRA into Roth? There have been two challenges until now that would deter many people from converting. They had to meet certain income limits to be eligible and they had to pay taxes on the converted money.
Thanks to the new tax rules, there is a small window of opportunity only in 2010, the Government will be lifting the income limits so that everyone is eligible to convert their Traditional IRA money into Roth, and it will also allow you to spread out any tax due on the converted money over the next 2 years.
Let’s say you convert your traditional IRA, with a value of $20,000, to a Roth IRA in 2010, instead of paying tax on the entire $50,000 that year, under the new rules you can pay 50% of the tax in 2011 and the remaining 50% in 2012.
While this may be a good opportunity for you, the conversion rules can be very tricky, so be sure to consult your financial advisor before you go forward with this.
Again, this is to remind you not to miss our big contest. Starting in January, email me about your personal financial struggle and the financial resolutions that you laid out for yourself for 2010. At the end of month, we will select two viewers whom I will work with to develop financial recommendations to put these resolutions into action.
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