Thanks, Jeff and Stacy. While we wait to hear back from John, perhaps we can move on to the next question from JHwk
JHwk - RMD's can be very confusing and difficult to deal with. How you deal with the RMD depends on how complex you want to get. The easiest way to deal with them is to sell a small portion of each holding in each account to generate the cash needed. A more complex, but potentially better approach, is to use the RMD to help with rebalancing your portfolio. For example, if you find that you are over-weighted in bonds, you can sell some of the bond funds to reduce your allocation to bonds. Many brokerage companies also allow you to take the distribution "in-kind", so you don't have to sell the security and re-buy it later if you don't need the cash to meet your spending needs.
To JHwk: If you are planning on taking cash from your IRA to m
ake the distribution, it makes sense to sell proportionally to raise the funds. If you don't need the cash, so you don't need to sell, I would consider moving a stock/fund to a brokerage account in-kind (without selling). When thinking about what to move over, look for the most tax efficient holding (maybe an index fund...).
Hello - Randy Kratz, CFP, Owner of Willoughby Hill Wealth Managemen, LLC signing on.
Stacy and Jeff, when you're ready, let me know when you're ready for the follow-up from JHwk
JHwk - Thank you for the additional information. Your situation will allow you do some advanced tax and financial planning. For example, you may want to invest the 500K from the house for the long term, start spending down your Keogh now and delaying Social Security. This path may reduce your RMD's, maximize your Social Security benefits and reduce future taxes. I suggest you create a detailed plan with a professional who can work with you to meet your goals and customize an appoach for your situation. In the interim, I suggest putting the money in several money market accounts, being mindful of FDIC insurnace limits.
Eleanore and Randy, how about you take this one from LEP
Hi LEP - I believe it would depend on the state you're getting your pension from and where you move. What state would you be moving to?
To LEP: Your question deals with some little-known factors vis-a-vis State taxation of pension benefits. It is true that some states do not tax pension benefits, which is why some persons choose to move to a bordering state in retirement. Be careful to not let a tax tail wag the retirement dog, however, as there may be "unintended consequences," such as a higher estate tax, in your prospective new home state.
Jeff and Stacy, when you're ready, here's one from Julie
Hi Julie, The muni bond fund would certainly be more liquid/less restrictive. Annuities can be expensive to own because you are paying for the cost of insurance as well as the cost of the investments. There are often more fees involved
in the event you want to surrender the annuity at some point in the future.
Julie, Good question! One of the main advantages of an annuity is that income is deferred until you take it out. However, when you do start to take payments from the annuity, a portion of the payment is taxed as ordinary income (like wages, not capital gains or dividends). For a municipal bond, the interest received is tax free at the federal level and may be tax free at the state level (NOTICE - tax deferred versus tax free). Many annuities come with guarantees or other benefits that are not available in the municipal bond fund. Remeber that the annuity will charge you for the tax deferred benefits and other guarantees. I have seen contracts with annual expenses as high as 3.5% and as low as 0.25%. You also may not be able to access money in the annuity for many years without significant penalties.
Thanks, Randy. You can take this next one from SJ
Hi SJ - I would mainly look at and compare investment choices and internal fees. If the 403b only has a few, expensive choices, then rolling over to an IRA may be worthwhile But many times an employer plan can offer great choices with low fees.
SJ - Also, access to an IRA may be easier if you need the income. There are some possible estate planning differences if you are considering funding a trust. A little too complicated for this post, but a NAPFA advisor in your area could be beneficial.
To SJ: I usually recommend moving 401k/403b accounts to IRA's for a couple of reasons: First, for control of the investments and accessibility; these Plans are usually limited in the amount and type of investment choices. Second, because many 403b's, in particular, are held by one insurance company risk becomes a factor in that case. Third, each 401k/403b Plan is written with different legal wrinkles, some of which your beneficiaries might encounter after your death.
Eleanore and Randy, here's one from Berta
Hi Berta - When you mention "paid out", does that mean you have taken money out of the IRA? Or just rolled it over to the IRA?
Eleanore and Randy, waiting for Berta's response. Several folks submitted questions early and are checking back later for the transcript, so they may not be here at the time.
Stacy and Jeff, here's our next question from Hillbilly
To Hillbilly: There are those who would recommend that you roll over your 401k account into an IRA annuity. However, I would recommend that you look at all your other IRA investment options before taking the plunge to an annuity product. Generally, annuities are the more costly way to invest. If you are not accustomed to investing on your own, and your 401k is somewhat large, you might consider engaging a fee-only planner to direct you to the right choice for you.
@Hillbilly, yes, you can rollover your 401(k) to an annuity if you choose to. I would not recommend it, however. I would recommend that you roll your 401(k) into an IRA and create your own income stream in a much more cost-effective manner. You could consider working with a fee-only planner to help you. Annuities have added costs for insurance and mortality charges which will eat into your nest egg. This is counter-productive to you and your savings.
Hillbilly - Yes, you can use the money from a 401(k) to purchase an annuity. I assume you are looking at immediate annuities that will start to pay you monthly, not deferred annuities that you use to accumulate money for the future. I suggest you read the NAIC (National Association of Insurance Commissioners) Guide to Annuities. Annuities are not right for everyone and can be very expensive. If you do decide to buy an annuity, many proffesionals recommend putting no more than 25% to 30% of your money in the annuity.
In the mean time, Randy and Eleanore, you can take Sara Gamtt's question
Hi Sara - Low interest rates are great if you want to borrow, but lousy if you want income. It may be like this for a while, so alternatives may be in order. Unfortunately, higher income potential may mean higher risk. May people are looking at preferred stocks that pay 4-6%. You can search online for individual preferred stocks or an ETF such as PFF (yields about 6%). Preferred stocks carry the same risk of common stocks. Untility stocks may also be worth considering along with MLP's (master limited partnerships). Don't take these as actual recommendations You need to explain more of your situation with a financial advisor who can get a better picture of your needs and tolerance for risk.
To Sara Gamtt: Yours is a problem that many folks are experiencing these days. There are no easy answers. A focus on "income" rather than "cash flow" restricts thinking about investments and may limit you to fixed-income (bond-type) products. There is a way to both provide the appropriate amount of annual cash you need while growing the investments at the same time. This requires an adjustment in thinking about investments and may "feel" more risky because it involves moving into the equity (or stock-based) markets. In fact, such a new approach will likely be less "risky" than all bonds. If you are open to this "new" approach, a good starting point would be to either engage a fee-only advisor and to learn as much as possible about basic investment strategies. For example, I teach a course in very basic investments at our local adult schools, which is designed for beginner-investors; maybe there is one like that in your area.
Thanks all. When you're ready, here's our next question from David
David - The analysis by Bill Bengen (a fellow NAPFA member) that started the 4% safe withdrawal rate concept assumed a 60% equity, 40% bond allocation and a 30 year time horizon. If you continue to save for the next 8 years along with the growth in your account, you may be able to invest more conservatively to meet your goals.
Hi David - A gentleman name Harry Browne developed the "permanent portfolio" that consists of 25% stocks 25% Treasury Bonds, 25% Currency (Swiss Franc) and 25% metals (gold). The concept is to provide "non-correlating" assets that will do alright during most any economic situation. There is a mutual fund called "Permanent Portfolio", PRPFX that mimics much of the strategy. Any mutual fund is a prospectus item, so please read the funds prospectus before investing in it
To David Curran: The investment asset allocation of 60% equities/40% fixed-income products would probably meet your long-term needs and provide your target returns. My concern for you would be whether you are prepared for eventualities prior to retirement that might sideswipe your investment plans. For example, what if either of you is disabled--do you have LTD insurance? Can either of you survive the other with what resources are available to them? Do you have Long-term care insurance? What about medical insurance before and after retirement? Does your company provide medical insurance, or will you both carry your own after retirement at age 62? And, lastly, is it your wish to leave your investments to heirs or do you plan to spend it on yourselves? Are there family members, such as parents, that might need your assistance? So you see, what seems like a simple question to y ou, becomes a complex one for a professional advisor. You have planned and done well to this point and I send you my good wishes for continuing to do so in the future.
David, based on your pension and investment info, you may also wish to consider postponing Social Security until age 70 allowing your benefit to grow by 8% every year between ages 66 and 70. Additionally, when your spouse turns 66, you could claim and suspend your benefit and your spouse would file a restricted application for spousal benefits only, receiving 50% of your full retirement benefit until her age 70, when she will claim her own higher retirement benefit.
Thanks, all. Some great suggestions!
Here's our next round of questions from Rebecca Baldwin