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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@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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I am single adoptive mother to 13 1/2 year old girl. I am 58 1/2, so I am saving for retirement and college at the same time. I have a Roth and IRA, and a 529. plus a small pension. Can I use my Roth for retirement and college? I was told to add $5000 a year to my Roth but cant do that and help with college. College account has $17000 in it now.
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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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Our ages 79 & 76. We have a stable annual income of $67,000 (Soc. Sec. and Pensions) and a retirement portfolio value of $1,051,000.00. Our present asset allocation is: 65% stock, 32% bonds, 3% cash with 5% of the stock portion allocated to Foreign Stock.
I plan to change the allocation to 50% stock & 50 % bonds with about 17% foreign stock by the end of 2012. Is that allocation to risky for our age grouping? We would like to help with three grand kids with college education and leave some for our two children. -
@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). -
I'm 66 and planning to wait until I'm 70 to start taking Social Security benefits. Will the amount that I eventually receive in benefits be increased by the COLA increased (for instance the one just effected in 2012) ?? (I'm aware that my eventual annual benefit will increase roughly 8% for each year that I wait.) I'm just wondering if I will also benefit from these COLA increases in the interim.)
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@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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@Janet: If you invest your $400k in an allocation of 55% stocks and 45% bonds and cash, you might reasonably expect income from the investments of 3.5% a year, or $14,000. This is the interest and dividends - not principal- so if that is all you take from the portfolio the principal should be preserved (ignoring price fluctuations of the underlying investments).
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@Janet: We recommend investing in six asset classes www.marottaonmoney.com and we recommend using exchange traded funds from Vanguard or iShares for diversification and low fees. We have a gone-fishing portfolio series which mentions some of them. www.emarotta.com
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Re: the questions about making your money last. The Kiplinger Retirement Report regularly writes about such strategies. You can find several of their articles here: www.kiplinger.com
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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.
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@Helen: Your question is about as complex as they get, but my gut reaction would be to keep your coverage. You know you have a heart condition and are probably either going to need it or not be around. Either way you will not regret having it! Much depends on the cost, benefits, and options if you tried to apply for new coverage now, but I would not simply decide to drop it without some serious expert advice.
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@Helen: The average cost of a nursing care facility (at least in Cincinnati) is over $200 a day, or just about $75,000 a year, so $13k of benefit isn't going to get you very far. I'd be willing to bet that your long-term care coverage is less expensive than a comparable policy would be if it was issued today so what you have is probably worth keeping unless you feel like you could cover the cost of coverage with your own assets. One option in the middle would be to go back to you insurance provider and see if you can make any adjustments to your policy - maybe reduce the daily benefit amount or change from compound to simple inflation. This could reduce the cost of the policy which would be better than cancelling the coverage.
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@Helen, you may also
want to check out our special report about long-term care: www.kiplinger.com -
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Thank you to Kiplinger and the other NAPFA members for making this possible. It was very enjoyable.
David John Marotta, CFP®, AIF®, is President of Marotta Wealth Management, Inc. of Charlottesville providing fee-only financial planning and wealth management at www.emarotta.com and blogging at www.marottaonmoney.com. -
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I apologize to those of you whose questions did not get answered. We had several readers submit comments before 1pm, which led to somewhat of a back-log. The good news is we will be hosting these live chats with NAPFA planners on the third-Thursday of every month. Our next one will be on Thursday, March 15 from 1pm-3pm ET. We will also have more advisors online next time, so we will be able to answer more questions, more quickly!
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