Janice - I personally would recommend you put off buying a home until you have taken care of A) building an emergency fund of 3-6 months and B) have an amount that you can save towards retirement which you can continue after purchasing a home.
Alright, ready for our next question Julie?
Julie, Boy, it takes a lot for me to recommend a VA, but you may be an exception. I'd recommend a no load option like Jefferson National. Do you have a mortgage still?
Julie- First, if you are looking for a variable annuity, strongly consider a no-load annuity. Fidelity and Jefferson National both have great, inexpensive products that have no surrender fees attached to them. However, most of the benefit of a VA is the ability to obtain tax-deferred growth, and of course, the most growth will be obtained from a portfolio that contains a healthy mix of stocks and bonds. If you aren't interested in taking on more stocks, a muni bond could be an attractive alternative, depending on your tax situation.
Hi Julie - it seems like you're in a great place and maximizing your retirement savings! If you do not have any bonds in your portfolio, I would invest in diversified muni bond funds (not just in CA). There are many national muni bond funds, you can take a look at Vanguard. The income would be tax free on federal level but you'd have to pay state taxes. I'm not a huge fan of variable annuities because of the expenses and you pay income tax on all future growth instead of capital gains.
Julie - The main selling attraction of a variable annuity is its tax deferred status. Investments inside the variable annuity grow tax deferred. For an investor in a high tax bracket, this can be an attractive feature. However, there are drawbacks. In addition to the relatively high cost of annuities, the tax treatment of withdrawals is ordinary income, not capital gains. As long as there is a difference in the capital gains rate and your ordinary income tax rate (likely higher), then this tax treatment is not ideal. While you are benefitting from the tax deferral, the ordinary income tax treatment of withdrawals negates some of the tax deferral benefit.
Planners, when you're ready, here's another one from Sean
Sean - First, not that she will need to have a salary to do pre-tax savings. Assuming that, a Solo 401(k) with a profit sharing component would be a good start. If she is extremely successful and has no employees, a cash balance pension or defined benefit would be even stronger (though more administrative costs).
Sean, it sounds like you could benefit from establishing a SEP or a Solo 401k. We discussed these issues earlier, but a SEP is a very simple retirement plan offering tax deferral. Meanwhile the Solo 401k is a bit more complicated, but may allow additional contributions while still being tax deferred.
Sean, you may also want to familiar yourself with the concept of converting non-deductible IRA contributions to Roth dollars.
Alright, I'm going to go ahead and post the next two questions. One is from Murphy
Murphy, unfortunately, this is an incredibly complex issue and question. There are money types of annuities that function in different ways. I'd encourage you to sit down with a FEE-ONLY financial advisor to discuss your options. The fee-only aspect is important to ensure you are getting unbiased advice as opposed to just being sold a product.
Thanks, Lon. Annuities are certainly a complicated issue. Murphy, if you want to look for a NAPFA advisor in your area, you can find one here: www.NAPFA.org
Hi Murphy - I think you are referring to fixed annuities. You can consider them if you need the guaranteed income now and are concerned about living a long life. As you mentioned, the "return" is not that impressive. Plus you have to pay taxes on part of the income that you receive. Interest rates are extremely low right now so the payout is not very attractive. However, if you want the guarantee and the payout is more than you need, then it's not a bad idea to consider.
Murphy - Annuities can be a cash cow for insurance companies and the people who sell them -- making it vital for you to understand them and trust your source of information. There may be less expensive ways to achieve the same outcome with another investing strategy. As with any investment, discuss what is right for you with a trusted adviser who knows your entire financial picture.
And here is one from Bcrawf -- thanks for your patience,
Bcrawf - You are on the right track. Due to the housing allowance you likely pay little to no taxes outside of Social Security (assuming you haven't opted out). Keep on the Roth IRA. Your husband could also contribute to the Roth IRA as a next level of retirement savings.
Great point on the tax diversification, Lon. I agree.
Bcrawf - The taxable account should be comprised of primarily ETFs due to the fact that they don't distribute capital gains at the end of each year. Look at Vanguard ETFs, they have some of the lowest expenses in the industry.
Jake, I'd strongly suggest the Roth should NOT be considered part of the emergency reserve. Yes, you can withdraw your contributions, but the value of the account can drop at any time. We'd hate to withdraw our savings at a time when the market makes it disadvantageous. Finally, build the emergency fund first, then continue with the Roth contributions.
Hi Jake - the Roth / Traditional IRA route may be sufficient for you for now. But you can only contribute $5,500 per year currently. As you move up in your career and your income increases, you may want to contribute more than what is allowed in an IRA. The 401k allows you a much higher contribution limit so you should consider it then.
Also Jake, if you would like to contribute more than $5,500 (or double that if you are married by making the same contribution to her account), then it is still definitely beneficial to contribute to a 401k, even if you don't get an employer match. Tax-deferral and tax diversification go a long way...
Alright, here's our next round of questions from Susie
Hi Susie - there is not an easy answer to your question. It really depends on your income / expenses in retirement and what your goals / plans are.
Susie - The only advice I could give is a) you home should not be viewed as an 'investment', and b) less is more, especially in retirement :)
Hi WS. Its hard to answer this question without knowing more about your personal situation. However, looks like you have dona great job of diversifying. I'm a fan. I'd suggest that sometime soon you look to slightly increase your bond exposure (perhaps by cutting back on small caps?).
WS - Also, make sure your bond portfolio is diversified. Exposure to US government bonds, corporate bonds, international bonds, and emerging market bonds helps!