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

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Jump-Start Your Retirement Plan Days -- Saving and Retirement Transcript

NAPFA advisors took your questions about IRAs, Roth IRAs, 401(k)s and more.

  • Hi - I have 80K in a money market fund that I know is a big mistake. I'm wondering the best way to put this money to work in the market. Do I dribble it in over time, or all at once? Wait for a pullback, or not try to time? Put it into an existing account, or start new ( I also have a 401(k) from a previous employer). BTW, I am 43 years old. Thank you!
    by Sitting on cash edited by Amanda Lilly 2/13/2013 10:08:02 PM
  • Sitting, I like to see people slowly get back into the market rather than putting all of their money in at once.
    by Francine Duke, CFP(r) edited by Amanda Lilly 2/13/2013 10:08:04 PM
  • Also, I would make sure that you leave some of that money in the money market as an emergency fund. I recommend at least 6 months of expenses, however, if you are single or concerned about job security, a year's worth of expenses should be covered by this money.
    by Francine Duke, CFP(r) edited by Amanda Lilly 2/13/2013 10:08:06 PM
  • Sitting, my advise is assuming that the money market account is your only savings vehicle in a taxable account.
    by Francine Duke, CFP(r) edited by Amanda Lilly 2/13/2013 10:08:08 PM
  • Pat, here's a question for you from Colleen
  • I am 58 and hopelessly unemployed. I truly do not think I will ever be employable again so I need to figure out how to "relax" when it comes to investing and retirement. I currently have $680,000 in savings/investments and hope not to start SS until 70 to maximize benefits. Any advice on what to do and how to handle big down days in the stock market...like TODAY!
  • Colleen, I understand the concern that you feel about the markets. The best remedy for that is to take your attention off of the day to day movements of the market. You would not believe how many folks believe that 2012 was not a good year for investing, yet the S&P 500 returned 13.4% in 2012. Observing volatility is not good, it's sort of like rolling around in poison ivy and then wondering why you have a rash - just avoid the exposure. That said, be sure that your investments reflect your ability to withstand volatility, and remember that your investment time horizon is not just until retirement, but for your entire lifespan.
    by Pat Jennerjohn edited by Amanda Lilly 2/13/2013 10:08:26 PM
  • Steve, here's one from Gin Gin
  • I'm 69 years old and in the 15% marginal tax bracket. I will start required minimum distributions (RMDs) from my traditional IRA starting next year and these should still keep me in the 15% marginal tax bracket, considering also my social security. I expect to be in this bracket in the future as well. What are the pros/cons of converting additional traditional IRA funds (beyond the RMD) into my Roth IRA once RMDs begin.
  • Gin Gin: If I were going to do a Roth conversion in your tax situation, I would do so *now* in the year *before* your must begin taking RMDs. That way, you will have more "head room" within the 15% tax bracket for this year's conversion. As to doing further conversions in 2014 and beyond, also within the 15% tax bracket, please note that 1) doing a Roth conversion in one year will decrease (slightly) the size of RMDs in future years, and 2) Roth IRAs do not have RMDs. Also, having a tax-free Roth IRA in additon to a tax-deferred traditional IRA will give you flexibility regarding from where you might take an above-RMD distribution if that should ever be needed. Finally, if your heirs are likely to be in a higher tax bracket than you, voluntarily pre-paying tax when you make the Roth conversion can provide a tax benefit to them.
    by Steve Johnson edited by Amanda Lilly 2/13/2013 10:08:37 PM
  • Pat, you can take this one from DC
  • We have $1.0 million in 2 IRAs and another 400k in 401k's. I am 50, my wife is 47. We want to move, buying a house in a neighborhood with better schools. Is it crazy to consider beginning a series of substantially equal withdrawals from the IRA to build up more cash for the down payment? Also, would it be at all prudent to withdraw some $ from the IRA and pay the tax and 10% penalty to allow us to buy more house. I sort of see this as a diversification play, as well as allowing us to buy "more house." Currently all $1.4 million is in equities. The Washington DC housing market has returned to pre-crash levels.
  • DC, given the craziness that we have seen in past housing markets, I would like to deflect investors from the idea that a personal residence is an investment. The most valid reasons for owning a home are not financial - good school district, nice neighborhood, amenities, stability. The consequence of that "quality of life" decision is financial, of course (price, mortgage, insurance). I can understand the buying pressure that you feel due to the fact that housing markets are starting to recover. However, I would hate to see you transfer a chunk of your future retirement income to an illiquid asset (a home) which may or may not "pay you back" later on. If you want to use your 401k you could consider taking a loan from your plan, rather than an outright distribution (you cannot borrow against an IRA), if your plan allows, to help you make the down payment.
    by Pat Jennerjohn edited by Amanda Lilly 2/13/2013 10:09:24 PM
  • For DC...as background to your question, here is a primer on the rules for taking substantially equal periodic payments from an IRA -- www.kiplinger.com
  • Francine, here's a question for you from Gianluca
  • Me and my wife have a current 401K plan, a current 403-b plan, a previous simple-IRA and each of us has a Roth IRA that we just started last year. I am considering an annuity to diversify at most the retirement saving strategy, what do you think ? The idea is to put in the 401k only the amount matched by the employer and eventually the rest in an annuity ...
  • Gianluca, An annuity is an investment vehicle and does not offer you any diversification as to your investments. If you note my previous comment, it is often laden with considerable fees. Therefore, I don't agree with your idea at all. Without knowing more about your situation, I cannot give you specific advice, however, there are Roth IRA's, Traditional IRA's, Roth 401k's (if your employer offers this) plus of course the Traditional 401k. As for the 401k's, there is nothing wrong with contributing more than the company match, however, if you qualify, IRA's could offer your a great deal more investment options that your 401k might. Hope this helps!
    by Francine Duke, CFP(r) edited by Amanda Lilly 2/13/2013 10:09:34 PM
  • Annuities do offer you the option of and income stream which, the longer you live, the more you can benefit from them.
    by Francine Duke, CFP(r) edited by Amanda Lilly 2/13/2013 10:09:36 PM
  • Francine, here's a question for you from Sisi
  • my husband doesn't have any 401K or roth acct, he is 43 and I have 401K (i contribute 12% and company match 3%)and we have a saving. should we open a roth or IRA for him? he always say we buy a house and sell that when we retire. we don't have any kids...
  • Sisi, I think that having your husband contribute to an IRA is a great idea. There are both Roth and Traditional IRA's. Without knowing a lot more details, I cannot advise which to take, however, it would be great for your husband to start saving for retirement as well. Best of luck!
    by Francine Duke, CFP(r) edited by Amanda Lilly 2/13/2013 10:10:36 PM
  • For those facing the dilemma of traditional vs Roth IRA, here's Kiplinger's quick take on the issue -- www.kiplinger.com
  • And Pat, when you're ready, here's one from Dale
  • Hello and what a great service you are providing. My question is, my wife and I are 51/52 years old respectivily. Due to some stupid living in the past we have had to spend the last several years paying off stupid debt, credit cards, personal loans, student loans. We do not have much at all in savings for retirement. She is self employed and my company does not offer a retirement plan. The good news is that we have paid off all debt except the house and car. House payment 900/m and car 300/m. We together make around 90k per year. We are very conservitive now as far as vacations etc. What should our first steps be to try to pplay majr catch up as far as retirement. Should we even consider an IRA given only around 15 or so years of max earnings potential? Given my steady dependable income, she would like to cut back in about 5 years (owns a cleaning company) would it make sense for us to be more aggresive in investing. I have talked to our bank (PNC) and they recomended a Roth IRA in some of their funds. I guess I am looking for what the next few steps should be to get us on the right path to some type of quality retirement. Any help would be appreciated.
  • Dale, congratulations on getting out of debt and taking steps to create a better financial situation for yourself. Although saving into retirement accounts is a great idea, due to the tax deferral, there are some restrictions on how much you can save. Your employer does not offer a retirement plan, but since you are employed and not self-employed, the option for you is a Roth IRA (your income is too high to use a regular deductible IRA) - the maximum contribution in 2013 for folks over 50 is $6,500 per year. Your wife is self employed, but you mentioned that she owns a cleaning company - which may possibly mean that she has employees. Any sort of retirement plan that she would set up must also benefit her employees. If this would cause administrative issues or negatively impact the business cash flow, she may not want to do this. So her option would also be a Roth IRA. After that, you can look at some other tools to help you save more for retirement, depending on how much you need to defer income, and what you have left after your commitments to Roth IRAs and your regular living expenses. You can pick some good no load balanced mutual funds that can be accessed directly from the fund company (try Vanguard or T. Rowe Price). Or, you could (gasp) consider a low cost annuity (do NOT purchase one from a broker) if you want to lock up the money a bit more. See if there's a fee only planner in your area who will work with you on an hourly basis to figure out a good strategy. Remember that your investment time horizon isn't just to retirement, it extends over your entire lifetime (although that's a less predictable milestone).
    by Pat Jennerjohn edited by Amanda Lilly 2/13/2013 10:11:30 PM
  • Steve, how about you take this next one from Chris
  • CAN SOMEONE TELL ME USEFUL CRITERIA TO SCREEN WINNING MUTUAL FUNDS?
  • Chris: It is exceeding difficult to pick "winning" mutual funds. Academic research is mixed as to whether it is even possible. Although there is something to the "momentum" theory that what has done well recently will keep doing so for a while longer, there is also something to be said for "mean reversion" where what has done poorly will return to favor, giving you out-sized returns as it does so. The one thing that is predicatable is fees: a low-cost fund this year is likely to be a low-cost fund next year, and a high-cost fund is likely to continue to be a high-cost fund, eating into your investment returns. This is important because as a group low-cost funds outperform high-cost funds by roughly the amount of the fee differential. For further criteria, you might take a look at Morningstar.com or the AAII.com.
    by Steve Johnson edited by Amanda Lilly 2/13/2013 10:11:41 PM
  • Francine, here's our next question from Mindy
  • My partner and I are planning to retire in 2020. I will be 60, she will be 64. How do we know we will have enough money saved (in all accounts) to do this and support our So. California lifestyle?
    by Mindy Parmett Fiddler edited by Amanda Lilly 2/13/2013 10:11:48 PM
  • Mindy, I suggest meeting with a fee-only financial planner who can assess your situation in detail. You are at an age where you still have some time to save more toward retirement if necessary. Nobody wants to outlive their money, thus, it's well worth the time and expense involved. Wish I was in CA! I'm in Chicago watching a snowstorm outside my window as I respond to you!
    by Francine Duke, CFP(r) edited by Amanda Lilly 2/13/2013 10:11:50 PM
  • Steve, here's a question from Jem
  • Would you please advise me on a good index fund? I am putting $2k into my IRA, and the ones I've found require a $3k minimum. I am in my mid-50's - am looking for something that pays dividends and is a good risk. Thanks for the help
  • Jem: Who is the custodian of your IRA? Surely they will have available for purchase a low-cost, broadly diversified fund with a minimum of $2,000 or less. If not, why don't you switch to a more investor-friendly custodian such as Vanguard?
    by Steve Johnson edited by Amanda Lilly 2/13/2013 10:12:31 PM
  • Francine, you can take this one from Mark
  • It seems to me that many Personal Financial Planners and Investment Advisors are recommending ETFs and Index Funds because they are low management fee and will neither signicantly outperform or underperform the stock market. My feeling is that these types of funds are mindless and driven by a predetermined trading algorithm as in the case of ETF's or at the mercy of the general market as are index funds. When the market takes a nosedive as in 2007-2008, the index funds take a corresponding nosedive as there are no hedging or defensive tactics initiated to maintain the value of the fund. I prefer to select mutual funds with a management team and portfolio manager/s that have a long (10 years or more) solid track record that charge reasonable management fees. Index funds and many ETFs track the market and are therefore destined to have mediocre performance. Mutual fund managers are a bit like professional football coaches, most coaches over their careers are lucky to win 50% of their games, but a few coaches like Madden, Lombardi, Walsh know how to win and won more they they lost. Therefore, you carefully select the mutual fund/s with a long term winning portfolio manager/s. What is your opinion of ETF and Index funds vs. well managed mutuals funds?
  • Wow, Mark, you have given this a lot of thought. When you buy an index, you buy the whole market. Mutual funds, while containing many different investments, are designed by investment professionals. Sometimes this works in their favor, sometimes not. ETF's can either be very specific or quite general in their investments. Personally, I see nothing wrong with any of these vehicles. In the case of mutual funds, I prefer to deal with no load funds that are not laden with high fees. Many investors like to use a combination of the above. At any rate, I suggest doing what you are most comfortable with. Perhaps a fee-only financial planner could offer you addtional assistance.
    by Francine Duke, CFP(r) edited by Amanda Lilly 2/13/2013 10:12:36 PM
  • Mark: Allow me to add to Francine's excellent response: Picking a "winning" mutual fund manager is easy after the fact but not so easy to predict who will beat the market going forward -- especially after the inevitably higher fees associated with both the management and the (hidden) cost of trading in an actively managed fund. In short, if you can indeed pick a winning active fund manager, go for it. Just lean toward an especially low-cost manager for a give asset class or sub-class.
    by Steve Johnson edited by Amanda Lilly 2/13/2013 10:13:05 PM
  • Pat, here's one from Barry B
  • My wife and I are contributing the maximum to our 401k and 403b accounts. We are also saving 12k per year for 3 children in a 529 plan. We currently do not have other investments but have 100K sitting in savings. We cannot do the IRA thing based on income. Should we 1) invest some of the savings in some kind of taxable funds and if so any suggestions and 2) contribute to a 457 plan that my wife is eligible to participate in.
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