Jump-Start Your Retirement Plan Days -- Income in Retirement Transcript - Live Chats, Q&As: Free Advice on Retirement, Investing, Personal Finance -- Kiplinger

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Jump-Start Your Retirement Plan Days -- Income in Retirement Transcript

NAPFA advisors took your questions about Social Security, income investing, annuities and more.

  • Bob, if you're still there, let us know. Thanks!
  • Here's our next question from Flyboy
  • I have a sizable 401K and I also cash accounts - which include a Roth IRA (open for more than five years). I have a military pension as well as S.S. and a PBGC annuity. I have always managed my own investments, and I'm about to embark on a strategy that involves "filing and suspending" S.S. and delaying my PBGC annuity until I am 70. Even though PBGC has no COLA, the annuity does increase 10% for each year of delay - even past 70 - unlike S.S. which will max out at age 70. Of course, this will require replacing the estimated after-tax income from S.S./PBGC ($54K/year using an average tax rate of 20%) with funds from my cash accounts - or income from another job.

    At age 70, the yearly S.S. increase (compared to age 65) will be $12K and the PBGC is $26K. So for $54K/yr for 5 years, I believe I have essentially purchased an annuity paying an additional $38K (pre-tax) per yr. BTW, the break even age is sometime before 80. Considering the joint survivability for me and my wife at age 65, this strategy seems like a no-brainer if I want to maximize our total lifetime income. Is this a good plan.
  • Flyboy, If you have the ability to live on your investments and military pension until age 70, and you live past the breakeven age, it seems like a good strategy. I would suggest withdrawing from taxable accounts first and leaving your Roth IRA to grow if possible.
  • Rich, when you're ready, Flyboy has a follow-up question for you
  • For Richard - I will withdraw from cash accounts from 65-70. During those 5 yrs, my income will be low, so I also plan to convert 401K amounts (up to next one or two tax brackets) to my Roth since my income will increase significantly at 70.
  • Flyboy, It sounds like you have the means to defer taking social security and your pension until age 70 and still convert some of your 401k to a Roth IRA while you are still in a low tax bracket. Well done! I like your plan.
  • Pat, you can take this one from Randy in the mean time
  • Hi there. We have a deferred annuity purchased through our fee only advisor, who we trust very much. It pays a guaranteed 8% return year one, guaranteed 6% return years 2 - 10, or market return on the underlying investments whichever is higher. Post year 10 we can begin making withdrawels, or not depending on where we are. I've run several scenarios on market conditions using excel worksheets. The annuity in all cases beats what would happen in a non-annuitized similar investment...at least on paper. I understand the fee structure and am OK with it. Other than liquidity, are there any downsides I'm missing? Thanks for your insight!
  • Randy, there is one downside that I think investors don't always consider, which is the health of the insurance company that underwrites the annuity. If you obtained this annuity from a fee only advisor I'm assuming that the advisor checked out the stability of the insurance company, as that company is the backstop for any guarantees that apply to your annuity. One of the features of this annuity is the protection from downside risk (guaranteeing 8%, and then 6%), and the insurance company must be financially healthy to be able to provide this guarantee.
    by Pat Jennerjohn edited by Amanda Lilly 2/11/2013 9:34:47 PM
  • And Pat, here's one from Suzanne
  • We have a GNMA fund whose interest dividend is decreasing monthly. Is this due to the Federal Reserve now buying mortgage securities?
  • Suzanne, this would not be due to the Fed buying mortgage securities as the payments, which consist of interest AND principal, are guaranteed. However, many borrowers are refinancing at lower rates, so if there is a lot of prepayment going on, with new mortgages coming on board at lower rates, that will affect your dividend. GNMA funds give the best returns when interest rates are stable; right now you are seeing the effect of lower interest rates working their way through the system. And the net asset value of GNMA funds can still go up and down based on interest rate conditions, although not usually as much due to their unique features.
    by Pat Jennerjohn edited by Amanda Lilly 2/11/2013 9:35:07 PM
  • Rich, here's another one for you from Gregg
  • I currently have 1million invested with a money management firm. They charge 1.5% which means $15000. I wonder if I should go back to managing my own account. $15000 for 10 more years is $150000. I culd do a lot with that money. I don't think the cost/benefit is there. They make a lot of money and I make a little or lose money. Should I just manage my money myself and use Kiplinger as my guide?
  • Gregg, you can look around for an advisor that charges differently, or check out some fee only advisory firms that specialize in online investing using model portfolios (with minimal personal advising, just maintenance and rebalancing). The most important thing is to trust your advisor, and feel that you have received value. And, sometimes the value of an advisor is difficult to quantify, as that value comes from their ability to remain objective about your situation and prevent you from doing something unwise. Yes, market returns have been disappointing to most of us, but I do think (sadly) about the individual do-it-yourself investors that exited stocks at the bottom in 2009 and are still scared to get back in, having missed the subsequent rally (acknowledging that it was a bumpy ride) that at least got most investors back into positive territory. Sometimes the advisor's function is to be a seatbelt during a turbulent flight!
    by Pat Jennerjohn edited by Amanda Lilly 2/11/2013 9:36:48 PM
  • Gregg, The answer to that is a definitive….it depends. I agree that a 1.5% fee is pretty steep. You should be able to find a fee-only planner who charges less. If you feel comfortable with asset allocation, diversification, picking low-cost and tax-efficient investments and rebalancing on a regular basis you may be able to manage your portfolio. It would be some work and research on your end, but if you enjoy investing, it might be something to consider. The problem with many investors is that they don’t keep up with their investments and that they let their emotions rule. Many investors invest too aggressively or too conservatively, they sell at the bottom and buy at the top and they don’t rebalance. A financial planner can be helpful to keep you on track, to determine if you are withdrawing too much from the portfolio, can help keep emotions in check and focus on the long haul.
  • gregg says thanks to Pat and Richard for their replies!
  • Pat, you can take these next two from Greg
  • I'm 59 and have $40,000 from an inheritance that is in minimal savings account. Makes for a good years worth of money as a back for economic tough times. Any sugestions for were to keep for better interest and access if needed? I have 401K at work, putting in 20% wages. Can I have a Roth 401K for a quick access to higher paying funds, at the same time as having a 401K at work? Taking money in and out of Roth 401K as it suites me?
  • What is your opinion of EDWARD JONES? I can't get over giving them money and they take 5.25% upfront. It takes a lot to make up the cost.
  • Greg - regarding your savings and the use of a Roth 401k - you need to be careful as the rules regarding Roth 401k accounts are the same as regular Roth IRAs. Any withdrawal from a Roth account is subject to penalties if done before age 59 1/2 or five years, whichever comes LAST ( for example, if you open a Roth 401k at age 59, you can't take the money out until you are 64). So it should not be treated as an in-and-out account; even if not subject to income tax, the penalties can wipe out any benefits from returns. I know that interest rates are frustratingly low now, but there are scarcely any other options that offer a better rate without also adding risk to your portfolio. Congratulations on have a safety net; you will just have to be patient about interest rates and look at the cash as "dry powder" for your cannon, available to you without loss of value (or penalties). I will answer your question about Edward Jones in a new post.
    by Pat Jennerjohn edited by Amanda Lilly 2/11/2013 9:37:07 PM
  • Greg, regarding Edward Jones, well you have run into the issue of the load mutual fund. This is how brokerage firms get paid. And that's a pretty high load; most funds come in around 4%. I had a tax client who invested several million dollars in a municipal bond fund that charged a 4% load - which wiped out the entire first year of interest income - and I considered that to be a very high load for a bond fund. Did you get any advice from the broker? - possibly not, since they are in the transaction business, not the advice business. Next time, consider a fee only advisor who is willing to work with you for an hourly rate, and can steer you to good mutual fund companies that don't charge a load.
    by Pat Jennerjohn edited by Amanda Lilly 2/11/2013 9:38:30 PM
  • Here's a question from RAMFIT
  • I am planning to invest in some bond funds since I am in a high income bracket in California. Is it better to invest in a lower expense ratio that has fees or put the money into one that has expense ratio but no fees? The choices I have seem to have an expense ratio almost half but with a $75 fee. I am assuming it also depends on the investment I plan to put into this fund. Minimum is $3K.
  • RAMFIT, are you going to invest on a regular basis (say, monthly contributions), or make a lump sum deposit? Also, are you investing directly with the fund company, or through a custodian such as Schwab or Fidelity? For example, if you want to invest in a Vanguard bond fund, you can go directly to them with no fee, but if you purchase it through a custodian, you will pay a fee. Low cost mutual fund companies don't want to pass on the cost of "shelf space" with a custodian to their direct investors, hence the lower expense ratio. That said, sometimes the minimum investment is lower at a custodian than investing directly with the fund. If you are investing a lump sum, I would go with the low expense fund with a fee through the custodian since the fee is a one time event. If you are going to make periodic contributions over time, consider setting up an account directly with the fund company to avoid the fee. I would stay away from the fund that has the higher expense ratio, since yields are so low now that a higher expense ration does have an effect on returns.
    by Pat Jennerjohn edited by Amanda Lilly 2/11/2013 9:38:49 PM
  • Rich, here's our next question from Linda
  • I'm 65 and have monthly income from SS and an annuity totaling 2,700. Also have an IRA currently valued at 195,000. Can I start to take 4% annually from the IRA for my future years? Thank you.
    by Linda: I'm 65 and have... edited by Amanda Lilly 2/11/2013 9:38:56 PM
  • Linda, Taking 4% from your IRA is something you can start. I would like to give you an idea of why 4% is an okay withdrawal rate. Withdrawing 4% does not guarantee that you won’t run out of money, but it is a good starting point. Since 1926, a 40% stock/60% bond portfolio has averaged about 7.5%. Inflation, over the long haul, has averaged between 3% and 4%. If you are withdrawing 4%, if inflation is averaging 3.5%, and if you have a portfolio that averages 7.5%, your portfolio will be able to keep up with inflation even though you are withdrawing 4%. The less you can withdraw from the portfolio, the longer it will last, but 4% is okay.
  • Pat, when you're ready, here's one from Berta
  • I thought only variable annuities were complicated, but I didn't think a deferred fixed annuity was complicated. My understanding is that I provide the insurance company with a fixed amount of dollars today, for example $75,000 and then tell them when I need them to start paying me for single life with a cost of living rider attached to it. They provide me with how much each month I receive and since this figure does not fluctuate, how can this be complicated? I do not intend to ever take this money out. Short of a bankruptcy on the part of the insurance company, I'm assuming I get paid for life and it ends upon my death. That is why I am very concerned about the viability of the insurance firm that will be paying out the annuity. What would make this type of annuity complicated? Thanks!
  • Berta, you are right that the main concern with a deferred fixed annuity is the financial health of the insurance company. And with any annuity, costs are attached to various guarantees, such as your cost of living rider. Another complication is beneficiaries, and whether or not you want them to continue to receive payments for a specific number of years after your death. So, to avoid the risk of investing in the market, you agree to get a bit less than you might by agreeing to have your payments guaranteed, for a cost, either just for your lifetime, or additionally for beneficiaries at your death. Hope this helps.
    by Pat Jennerjohn edited by Amanda Lilly 2/11/2013 9:39:04 PM
  • Readers, bear with us here as the advisors change shifts.
  • Let's go ahead and welcome our new advisors to the room - Chad, Margot and Heidi
  • Here's our first question from Joel
  • I am 67 years old and have approximately $950,000 in tax-deferred IRAs and $50,000 in a Roth IRA. I still work part-time and earn around $75,000 per year. My wife is 62 and has $160,000 in a Roth. She works part-time and earns around $18,000 per year. I plan on waiting until 70 to take social security to maximize that income, which would amount to around $3,150 per month. We both plan to be fully retired in 1-2 years. We owe $100,000 on our house, $15,000 on an automobile. Our normal annual spending is compatible with a joint taxable income of around $100,000 per year. I have moderate risk tolerance.
    (1) What would you recommend as an appropriate asset allocation - stocks, bonds, REITS, gold, cash, etc., for us at this point in time?
    (2) When should my wife take social security? She is eligible for $712/month now; $983 at FRA. I have heard of something called “file and suspend” would that be advisable?
  • For Joel, take a look at this article on Social Security strategies, which includes a section on "file and suspend" -- www.kiplinger.com
  • Hi Joel, GREAT questions on asset allocation and Social Security.
  • I use Asset Allocation software that takes into account your unique situation-amount of social security, part time income, timing on different needs for income. I can give you a VERY ROUGH seat of the pants asset allocation that may help
  • Joel, the file and suspend strategy would be a good idea but you would want to wait until your wife stops working or earns less than $15,120 (2013) per year. Otherwise, her benefit will be reduced by $1 for every $2 she earns over $15,120.
  • Joel, this social security earnings limitation applies only until your wife reaches her full retirement age.
  • Depending on your risk tolerance, you may want to start with a Broad Asset Allocation of 40% fixed income and 60% equities. Then you'd break down each of these.
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