Jump-Start Your Financial Plan
Join us Thursday, Feb. 16 to get your most pressing financial questions answered for FREE. NAPFA financial planners will be online from 1pm-3pm ET.
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@Danny, great advice from Danielle. We are big fans of Roth IRA's here at Kiplinger, particularly for younger people. Check out this recent article, Why You Need a Roth IRA. -
@Bara: First, I don't like annuities. Immediate annuities represents an immediate loss of 100% of your principle. They also are not commonly sold as indexed to inflation, so they diminish in what they will purchase. See our video www.emarotta.com and three part series on Immediate Annuities: www.emarotta.com -
@Bara: Make sure that you are not thinking of your portfolio as "income" and "principle". This a common back of the napkin retirement mistake. If you have a $100,000 portfolio paying 6% in dividend and interest and you spend that 6% you will run out of money because your "principle" is not going up by inflation. Here is an article to read for more explanation: Spending Retirement Income Can Be Risky www.emarotta.com
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@Bara: Another technique is to set up a taxable investment account. Then have your RMD distributed to your taxable investment account where you can keep it invested. We recommend decoupling lifestyle spending (that goes into your checking account) from RMDs which go into your taxable investment account.
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@exeditor: With you and your wife both around 60 years old, I'd recommend an overall allocation of around 60-70% stocks. The expense ratios you mention seem reasonable, but you can probably find even cheaper funds than that. There are large cap index funds and ETF's that have expense ratios of less than .1! Even international funds can be found for .35-.40. Every bit you save on expenses is more in your pocket.
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@ExEditor: First, get a Social Security calculation. If you both wait until 70, my guess is that you will be over the family maximum and you should have done something earlier. Additionally, depending on your incomes, the lesser wage earner may want to file as a spouse at age 66 and later on their own while the greater wage earner may want to file and suspend at 66 and delay their own SS until age 69 or 70 (probably 69 when they hit the family maximum). This will probably get you an additional $8,000 in your pocket. (Not bad for a Kiplinger-NAPFA chat!)
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@ExEditor: here is a link to the Social Security calculator recommended earlier by Danielle: www.ssa.gov They have a quick calculator that can show you what they estimate your benefit to be at different ages. You can also enter you real earnings history to get an even more accurate estimate. You can access that calculator through this link: www.ssa.gov
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@ExEditor: I would agree with Danielle's suggestion to look at lower expense ratios completely. Your total expenses should be closer to 0.3% if you have significant foreign. If 35-40-20 is bonds-US-foreign, I would suggest at age 60: 23% bonds, 28% US stocks, 31% Foreign stocks, and 18% Hard asset stocks. See for every age: www.emarotta.com
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@defensive: At age 70.5 you are going to have to take required minimum distributions out of your IRA (or else you have to pay a 50% penalty on the amount you didn't take). After all the years of tax-deferral, the IRS wants its taxes. I'm not sure by your question if you are looking for more income to live on or if you are trying to reduce the tax due upon your IRA withdrawals - if you would please clarify for me I will try to address that.
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@Defensive: At age 69 you should not take more than 4.7% out of your IRA account which would be $9,400 a year. www.emarotta.com I might suggest you not retire completely and find a job you would love to go to so that you can keep active and keep working. www.emarotta.com My father is 84 now and still working. He "retired" for the first time in 1976. He has had more retirements than most people have had jobs. And he has loved every one of them. A sedimentary lifestyle is easy for financial planning because the person will likely die young - dying young is
not a good plan. -
@defensive, sorry it took so long to get to your question. Here is an article about RMD's you might find helpful: www.kiplinger.com It also features a calculator that makes it easy to compute your RMDs.
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@Defensive: I recommend "Life Planning" or "Career Asset Management" for everyone I meet. At any age you can decide that you want something different, something more out of life. You will earn more doing what you love. www.emarotta.com We recommend any of the books by Barbara Sher. See here: www.amazon.com
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@defensive: Thanks for clearing that up for me. David's suggestion of having some part-time income is a good one. Also, since this year your only income is Social Security, you could probably take some money out of your IRA at a very low rate this year. This will reduce the amount you have to take out in future years in Required Minimum Distributions. Be careful though, because at a certain point your Social Security benefits will start to become taxable, which could be an unintended consequence of taking IRA withdrawals.
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@Pat: Here is our recommendation for an asset allocation for a typical 68-year:
5.0% Short Money
13.0% US Bonds
13.0% Foreign Bonds
23.5% US Stocks
26.4% Foreign Stocks
19.1% Hard Assets
If you can't get this exactly asset allocation. Merge the percentages for all the bonds together, and then look for a REIT or Natural Resources fund for the Hard Asset stocks. For the US put 2/3rd in a large cap or large cap value and 1/3 in small cap value. And for the foreign, put 2/3rds in developed countries and 1/3 in emerging markets. Round them all our to the nearest percent. -
@Pat: By age 68 you ought to have about 40-50% of your investments in bonds and cash. The rest should be in a diversified mix of stocks. Again, pay attention to the expense ratios of the funds you choose. Going forward, you should think increasing your bond allocation by moving 5% from stocks to bonds every 3-5 years or so.
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@defensive, David posted a link to one of our articles about taxing Social Security earlier in the chat. Here it is again: www.kiplinger.com
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@Pat: Dividend paying stocks are "hot" currently because they did better recently. They are just a subset of value stocks and tilting value makes sense but putting all of you eggs in the dividend paying corner of the value basket does not. Putting all your money in dividend paying stocks will not help you keep from running out of money. www.emarotta.com We require that our clients are willing to diversify for safety and we would recommend that you find a different advisor if you wanted to do something that we were not comfortable with. Having said that, your advisor could not like the strategy for less honorable reasons.
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@defensive: I don't think there is an investment strategy that will maximize your monthly income from $200,000 in your IRA other than keeping your withdrawal rates low and constant so that you will stay in the lower income tax brackets. You should not take more than $9,4000 a year. If the markets rise and your $200,000 increases, the appropriate percent you can safely withdraw will increase as well.
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@Vicki: You can withdrawal your contributions to a Roth IRA at any time prior to 59.5 without having to pay a penalty, so you could potentially take withdrawals to pay for college. The real benefit of a Roth IRA is that the growth in the account is tax-free. For that reason we usually see the Roth IRA as the last asset that you would tap for living expenses. Unfortunately deciding between college funding and your own retirement is a difficult decision many people have to make. I will say, that your daughter has options for funding her tuition - loans, scholarships, perhaps financial aid - but there aren't as many options for someone who hasn't saved enough for retirement. It's odd to think of it this way, but you are helping your daughter in one way by securing your retirement and not creating a financial burden for her down the line.
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@Pat, we write a lot about dividend stocks. Here are couple recent articles you might want to check out: www.kiplinger.com and www.kiplinger.com
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@Vicki: I completely agree with Vicki. The government will loan you money for college, but it won't loan you money for your retirement. Video: What's more important: Saving for College or Retirement? www.emarotta.com
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@Jeff: You can convert a 457 plan directly to a Roth IRA. It is treated as having been rolled to a traditional IRA first, then converted to an IRA, but you should not actually have to take that intermediary step. When you convert the account it will be treated as ordinary income on that year's tax return.
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@Vicki: The least expensive ways to fund college are: (1) Take AP classes and score well on the tests. My daughter took 10, passed 7 for college credit, entered with 1.5 years worth of credits and is graduating after 3 years. (2) Go to 2 years of Community College. In Virginia it is very difficult to get into the University of Virginia, but with 2 year of solid Community College classes you are guaranteed admission. After two years at UVa you get the same degree as everyone else at half the cost.
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Oops! Try #2: @Vicki, Danielle and David offered some great advice! You may also want to check out our special report about Paying for College: www.kiplinger.com
Lots of good resources there about financial aid. -
@Joe: Here is our age appropriate asset allocation for a 76 year old (we always use the younger of the two spouses):
5.0% Short Money
16.2% US Bonds
16.2% Foreign Bonds
20.2% US Stocks
22.8% Foreign Stocks
19.6% Hard Assets
This is
37.4% Stability
62.6% Appreciation
Our rule is to put 5-7 years of safe spending in stability and the remainder in appreciation. The asset allocation above is 6 years of safe spending in stability (Short money, US bonds, and Foreign bonds). -
@Joe: I'd say your target allocation of 50% stocks/bonds is reasonable, maybe just a touch on the aggressive side for how we invest our client's assets. I think I would scale back the allocation to foreign investments to more like 12-13% and make sure to have both developed and emerging international markets within that mix.
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@Joe: If you wanted a more conservative 7 years of safe withdrawals in Stability at age 76 here is our recommendation:
43.6% Stability
56.4% Appreciation
Or broken out:
5.0% Short Money
19.3% US Bonds
19.3% Foreign Bonds
18.9% US Stocks
17.6% Foreign Stocks
19.9% Hard Assets -
@Joe: I should put the disclaimer that we invest more in the foreign markets than most advisors. The world markets are 40% US and 60% foreign and we think diversifying outside the United States produces better safer returns. We also put more into equities (appreciation) becuase we limit the portion in stability (fixed income) to 5-7 years of safe spending.
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I am 75 and have a Long Term Care policy with 5% cost of care incremental protection. Have 3 years of coverage and am wondering if I should stop paying. It's getting harder to keep up. I probably won't use it as I have heart trouble and will probably not be around after a serious incident. I would still have the benefit of receiving benefits up to the amount I have paid in so far, not quite $13k at this point. I'm really torn between keeping it up and stopping at this point.
