Good morning. Robert Dowling from Modera Wealth Management in Westwood NJ
HI. Lea Ann Knight from Garrison/Knight Financial Planning in Bedford, MA
Hello all! And welcome to today’s Jump-Start Your Retirement Plan live chats! Thanks for joining us, Lea Ann and Robert.
We received several questions in advance, and for the most part, questions will be answered in the order they were received. Each question will be held for moderation until an advisor is available to give you a detailed, personalized response. So, please do not be concerned if you do not see your question appear right away.
If you have a follow-up question, please submit it, and we will bring it to the advisors’ attention right away.
Lea Ann, you can take this first one from Bubba
Hi Bubba - Vanguard certainly is the low-cost leader in the mutual funds market. And Fidelity has a wide variety of fund choices. There are many good mutual fund companies. My favorites are T Rowe Price, which has several strong no-load funds, and American Funds, which you have to purchase through an advisor. If you are looking for a strong, low cost fund in a particular asset class, I would suggest visiting morningstar.com and search on your required criteria. There will probably be some excellent fund choices that come up in the search.
And Robert, here's one for you from R Minch.
R Minch, I am not a CPA, so please consult with your account. However, the conversion amount will be considered income. You will need to consider the tax rate as it applies to your income sources on your 1040 tax return. I am unclear about the second part of your question but long term cap gains is 0% if the someone falls into the 10-15% marginal bracket.
Lea Ann, here's another one for you from Benjamin
Robert, here's our next question from Herestous
Mindy Vanguard does have low cost funds and ETF's, so that's good. As far as a specific recommendation for funds, that would require more information than we can provide here. You could look at the Kiplinger site for recommendations and some guidance.
Mindy -- on the social security question I usually try to tell people to delay if they can because the amount increases roughly 8% for each year you wait, under current law. However, if you need the money this may not work.
It's not an ETF but a performer that I use with people their ages for long term growth is Vanguard's VASGX lifestrategy growth fund. Solid yield, very low fee and a prudent blend of us / non us equities comprising 80%
Thanks, all! Great advice
Hi cafLM2 - since you indicate the investments can be aggressive, I assume you're considering this $11k long-term/retirement. Just be sure they don't want to use it shorter term, e.g. house down payment, business start-up. Assuming long-term, can be primarily in stocks. (I'm not sure if you're looking for inidividual stock recommendations.) Although you like technology, I would caution you to not overweight in that sector. I encourage broad diversification: across countries, sectors, capitalization, etc. Note PRGTX is about 17% foreign stocks.
A couple funds I like are
Vanguard Total Stock Market Index Fund, VTSMX (or VTSAX with $10k minimum), the ETF ticker is VTI. I also like Vanguard Total World, ETF ticker is VT.
Hi again cafLM2 - the funds I listed are 100% stocks - I also like and often recommend Vanguard Target Retirement Funds.
Thanks all. Ready for our next round of questions?
Hi Suzanne -- have you completed a risk profile with this advisor? That diagnostic plus a conversation around how you feel about risk as well as your time horizon impact the type of target portfolio you construct. 60-40 is quite common, although you may be able to tolerate a higher equity percent if you can stomach the volatility that's inherent with higher returns over the long term. You have the time horizon to be more aggressive, but the other factors I mentioned are important too. Discuss these with your advisor. As far as going it alone, I have another credentialed advisor looking over my financial plan and investments. I don't go it alone and I don't recommend others at your point in life go it alone either.
Hi Susanne - is the 401(k) with a former employer? If it's with your current employer it is unlikely you can roll it over to an IRA - which I assume is where this ETF portfolio is being recommended. The overall allocation of 60% stocks, 40% bonds seems reasonable, but depends on your risk tolerance, risk capacity, anticipated withdrawal rate, etc. If you're retiring in 15 years that is 2028. As a comparison, the Vanguard Target Retirement 2025 fund is approximately 50% US stocks, 22% foreign stocks, rest bonds/cash. I'm not sure if the management fee is at Fidelity or in the ETF portfolio (or both). Note that target retirement funds automatically rebalance *and* automatically adjust the allocation towards the target date.
Suzanne
in answer to our question about the 401K money, the allocation doesn't seem particularly conservative to me, it looks pretty good at first glance and without knowing specifics. As to the management, since you state you are all cash, I would assume you moved to this during a downturn. I'm not sure paying a management fee would keep you from panicking. I have found that more education on investing, and looking at the long term results helps.
Part 2 for Suzanne
You may want to take the advisors advice and check in with him/her quarterly to get more comfortable with the rhythm of the markets.
Suzanne: Did the advisor you consulted with discuss your risk tolerance? If you would be tempted selling the funds in market corrections, then perhaps your not comfortable/ don't want the risk with the 60 stocks/40 fixed income, especially since you're asking if this is too conservative. Paying someone to manage your funds will incur additional fees, but may also not stop you from questioning the allocation. Perhaps decide how much stock vs fixed income you are comfortable before you choose which path to take.
Susanne, another nice aspect of the "all in one" target retirement funds is that they may help manage the emotion, as the market volatility is less obvious. If you held a stock fund and a bond fund, you might be tempted to sell the stock fund upon market drop. However, if the stock fund is part of a target retirement fund, the drop in the fund value would likely be mitigated by the bond holdings.
And another one from Marty
Hello Marty If you start the distributions earlier it will serve to lower the RMD amount at 70 1/2, but you will still have to take the RMD. I use this strategy with clients who have very large IRA's to help with the tax bill later.
Hi Marty - If you withdraw from IRA before 59 1/2 there is a penalty. After that you can withdraw whatever you want. There is no maximum, but remember you will owe taxes on the withdrawal. The minimum only starts when you're 70 1/2, as you state. As far as a recommended amount - that depends on your situation: cash flow, tax bracket, etc.
Hello Marty - Only when you reach 70 1/2 are you REQUIRED to start taking distributions. If you take distribution prior to age 59 1/2, then you could be access an early distribution penalty. There are a few exceptions for the penalty. Remember you will be paying income tax on all distributions, so depending on your income bracket and your need for the money should be considered.
Thanks, all. Some great advice for Marty!
Wonderful. Here's our next batch of questions from Samean
Samean, I'm not sure what your question is. If you're wondering if the 401(k) contributions are worthwhile, my answer is absolutely, given the match. This is free money, or 100% return on your contribution. Whether you contribute beyond the matched amount is less clear, depending on the rest of your situation, your husband's employer plans, ability to contribute to IRAs/Roths, etc.
Yes, the 401k is taxed if you withdraw early. It's also taxed if you withdraw late. 401k contributions are tax deferred - so tax will always be due on withdrawals (unless it's a Roth 401k). If you withdraw early (generally before 59 1/2, 55 for some plans), you will owe penalty (10%) in addition to regular income tax.
Hi SAmean
That 's a great match at 7%! I don't think you can go wrong investing here, as for the tax , yes if you take it early in most cases it is taxes and a penalty of 10% applies. But remember , this is for retirement. Without knowing your cash flow or goals I can't adivise on whether you should be doing less that the 7%.
Hello Samean - It is true you are taxed when you withdraw from your 401k. If you withdraw early you will also pay a penalty. But if you do not contribute you are leaving 'free money' on the table. The money your employer contributes is actually free money to you.
Mindy Vanguard does have low cost funds and ETF's, so that's good. As far as a specific recommendation for funds, that would require more information than we can provide here. You could look at the Kiplinger site for recommendations and some guidance.
Hi cafLM2 - since you indicate the investments can be aggressive, I assume you're considering this $11k long-term/retirement. Just be sure they don't want to use it shorter term, e.g. house down payment, business start-up. Assuming long-term, can be primarily in stocks. (I'm not sure if you're looking for inidividual stock recommendations.) Although you like technology, I would caution you to not overweight in that sector. I encourage broad diversification: across countries, sectors, capitalization, etc. Note PRGTX is about 17% foreign stocks.
Hello Marty - Only when you reach 70 1/2 are you REQUIRED to start taking distributions. If you take distribution prior to age 59 1/2, then you could be access an early distribution penalty. There are a few exceptions for the penalty. Remember you will be paying income tax on all distributions, so depending on your income bracket and your need for the money should be considered.
