Joseph, I would not advocate putting all your money in stocks. Conceptually, you can afford to take more risk because you are young, but can you tolerate the risk and make rational decisions if we had a repeat of '08/'09. Target date funds are useful, particularly if an investor does not have the time or energy to monitor their investments. I would recommend keeping some of your money in the stocks and the remainder in a target date fund.
Lea Ann. How about you take this next one from AJ
HI AJ. I use 3% for inflation (which is the long term historical average rate); 2% for Social Security benefit increases and 6% for long term care/medical expenses. That one is harder to predict - I think the medical/long term care landscape is changing rapidly, but 6% seems appropriate based on premium increases for long term care insurance and medical plans.
Lea Anne, we have a follow-up from AJ when you're ready
Hi AJ - yes I do. We haven't really been as high as 3% for the last couple of years now but I'm sure there will be years where it will also be higher than 3% in the future. But for long term projections, I am comfortable using the historical average. Of course using an inflationary rate that is higher in your own projections will mean you need to be saving more money now. If it turns out inflation doesn't get that high between now and your retirement, you will be in even better shape.
Thanks, Lea Anne. Here's our next question from Matt S.
HI Matt. There is no one best investment for an IRA. Given that you are 35 and the investments in your IRA will have a chance to grow for awhile before you start withdrawing, you could consider more aggressive mutual funds such as small cap, international, emerging markets...but you also want to always have some downside protection to limit the volatility in the account - so some exposure to short and intermediate term bond funds are also important. I agree you should be cautious of overweighting bonds due to inflationary concerns and REITS should never be a significant part of a portfolio (I usually limit real estate to 3-5%) but it doesn't mean you can't have exposure to these portfolio diversifiers.
Robert. You can take this next one from Alexis
Hi Alexis, I think diversifying your asset base is reasonable. However, I would be prudent and do your due diligence if you are taking on a rental property. I would consider the fixed costs of your rental property and put 6 months aside so that you can carry the costs, if you do not have a renter. I am assuming that you have studied the rental market, including the "hassle factor" of mananing the property. If you hire a management company, less money to you but less of a hassle.
Lea Anne, you can take this next one from Sneaky Pete
HI Sneaky Pete. I am hoping your IRA only has non-deductible contributions in it and that every year you made a contribution you filed Form 8606 with the IRS. If so, your conversion to a Roth IRA shouldn't be too complex. I would first figure out the amount of earnings within the account that is going to be taxable upon the conversion. If it is significant AND you are anticipating being in a lower tax bracket soon, then waiting to convert might make sense. Or you could spread the conversion over two years so you have less of a tax impact in any one year. Given the tax rate climate, I wouldn't assume your bracket will be lower in the longer term, so converting before 70 1/2 makes sense.
Robert. Ready for this next one from Peter?
I would like to welcome NAPFA advisor James Gallo to the chat room. James, here's a question for you from Otis
Otis: I would say that the 80% of current salary needed for retiremnt income is after expenses for raising kids and saving for retirement are taken out. But remember this is just a guideline. I would suggets you have a current budget that you track and then from this figure out budget for retiremnt. A NAPFA advisor can help you with this planning. Good luck
Robert, you can take this next question from Ann Carrns
Hi Ann, I would suggest contributing to a SEP IRA. 401k plans, not all but many, are notoriously expensive (internal fees of the funds- expense ratios) with limited investment options. A SEP IRA will allow you to have access to less expensive funds and more of a selection.
I agree with Robert that SEP IRAs are the lowest cost, easiest way to save for retirement for someone who is self-employed. If Ann's employment income is at the level that she is maxing out her SEP and would like to put away even more, then looking at more expensive Owner 401k or Owner DB plans might make sense.
James. Here's our next question from Lane Peeler
Lane: Converting some of 401k to ROTH is a good idea when you retire, especially if you delay SS income and have funds in non retiremnet accounts that when used do not generagte much taxable income. In this way tax bracket is low. You may want to convert enough $ each year to just raise you to maximumum of tax bracket you are in or just below minimum of tax bracket you will be in when receiving SS and MRD.
Robert, you can take this next one from Wolde
Wolde: Without knowing the current allocation percentages, it is unfair to offer sound financial advice. However, if you wanted to have diversification with low costs funds, consider Vanguard products... possibly Total World Market Index, Total Bond Market Index, and next quarter.. Vanguard is offering an International Bond Market ETF. You can allocate according to his risk tolerance. Additionally, if the money is needed for immediate needs, consider a cash equivalent for liquidity and safety. If this is money for current living needs then put it into a savings/checking
Readers, we'll be welcoming a new round of advisors into the mix at for the next couple of hours.
I'm here and ready to answer questions.
Welcome, Kathy. Can you just remind our viewers what firm you're with and where you're located?
Sure. I'm in Verona, WI, just outside of Madison. My firm is Fiscal Fitness, LLC
Vivian Honeycutt with Honeycutt Financial in Chesapeake, VA
Thanks, Kathy. And welcome Vivian!
Robert, Lea Ann and James, here's one more question for all of you before you have to sign off. This one's from Brad
Brad: This question requries some detal analysis to answer. It dependes on present value of additional benefits versus cost of buy back and on the details of the pension plan. Suggest you consult a NAPFA advisor on this one
HI Brad, Each of these offers are a bit unique, but I recently ran a similar analysis for a client and it made sense to buy back the 4 years to receive the higher pension amount later on. I would encourage you to really run the numbers using an average rate of return on the equity investment alternative of no more than 6.5% to be conservative.
I'm moving over to the Other Financial Challenges chat room now! Great questions the last two hours!
Robert from Modera is signing out. Great questions everyone and good luck.
Thanks, Robert and Lea Ann!