Hi BG. I'd start by considering your income tax bracket now and later. For instance, if you are currently in a high tax bracket, it may make sense to wait until your income is lower before you convert that 401k to a Roth. But if you are already in a low tax bracket, then it may make sense to chip away at the 401k by converting a portion of it each year. That way you spread out the income tax consequences over multiple years. Potentially higher Medicare premiums as a result of Roth conversions wouldn't be a factor until you started paying for Medicare at 65.
BG, I second James' advice. I'm very partial to partial conversions as well.
Therese and James, when you're ready, here is our next question from Larry
Larry, I'm a fan of consolidating accounts wherever possible. Unless you're dissatisifed with the investment options at your current IRA custodian, there's alot to be said for learning one website, one trading platform, one statement, etc.
Larry, watch for this pitfall, though: if you're over age 55 when you retire, but under 59 1/2, you may want to leave the dollars in the 401(k), as you can get them out without the 10% penalty should you need them (the 401k plan you just retired from, that is -- not an old employer's plan).
Thank you, Therese and James. Great responses
Therese, when you're ready, here is one from khsemvee
Hi Khsemvee -- your question suggests that perhaps you're in a school system that doesn't participate in the Social Security system. Is that the case?
Khsemvee, the reason I ask is that if you will be drawing a pension from a school system that opted out of Social Secuirity, your benefit on your own or your ex-wife's record may be limited.
Therese, I submitted khsemvee's question from another chat room...told him/her to come over here, hopefully they will be here soon.
While we wait to hear back from khsemvee, here is a question from Bonita
Bonita, it's great you're preparing now. Do you have access to any employer retirement plans through work, or are you self-employed?
Bonita, your retirement savings is probably best done in an IRA then -- which may or may not be deductible, depending on what your tax return looks like. If it's not deductlble, and you qualify (there are income limits), a Roth IRA could be a good choice. You could fund up to $5,500-- that's the IRS limit for your age this year. Any of the discount brokerage firms make it very easy to open and fund an IRA, and they all have target-date funds. As far as how much to save toward college vs. retirement, that's a hard one. But if you haven't saved anything for retirement, you have to prioritze that first, in my opinion. You can do both, but I'd weight the retirement much more heavily.
James, if you're ready, you can take this question from Kate
Hi Kate. Great question. Delaying the start of social security benefits until age 70 will indeed maximize the amount he will receive each year while he is living, and it would likely maximize the survivor benefit you would receive at his death (provided your own social security benefit isn't higher). But for delaying the start of social security to be superior to starting at 67, your husband would have to live long enough to make up for the foregone benefits between age 67 and 70. Also, consider that at most 85% of social security benefits are taxable income, while withdrawals from most other forms of retirement savings are fully taxable.
Thanks, Therese! Here is a question from Reva Tomko
Reva, that's the $64,000 question! Turning a nest egg into a retirement paycheck is the primary financial challege we all face once we're retired. Start by making sure you understand safe withdrawal rates; that's critical. Make sure you educate yourself about asset allocation -- the right mix for you between low risk and high risk assets. And understand that if you're looking for guaranteed income, you have to look at single premium immediate annuities -- where you hand over a lump sum to an insurer, irrevocably, and in turn, they pay you a promised amount for life. A portfolio of stock and bond investments does not come with any guarantees.
Thanks, Phil. When you're ready, here is a question from Dario
James and Therese, when you're ready here is one from Sand
Hi there, Sand. What age are you and your husband now?
Hi Sand, once you're past age 70 there is not really anything that can be done to affect social security benefits. At one time retirees were allowed to pay back early retirement benefits already received by writing a check to the SS administration, then restarting benefits at a higher amount. But the SS administration effectively did away with this option a couple of years ago by only allowing this pay back strategy to be utilized within the first 12 months of starting benefits.
Glad to help, Sand. Take care.
Therese, want to take this one from Jane?
Hi Jane -- good question. Sounds like you have alot of flexibility for where to take your retirement withdrawals, which is a great position to be in. In general, the preferred order of spending in retirement is to spend down the taxable accounts first, then the tax-deferred accounts (403b/401k), then the Roths last. However, that's a general rule -- each person's situation is different. Some people, for example, may find themselves in an unusually low tax bracket in early retirement, before they take Social Security, and so may want to take IRA/403b distributions at a low marginal tax rate. If you have a CPA, a five-year projection of your taxes would be a very helpful tool for answering your question.
Jane, start with the high level question: is your asset allocation appropriate for who you are, and what you need? Deciding if you have the right mix between low risk/return assets like bonds and high risk/return assets like stocks is the first, and most important question to consider. So view your Treasury notes in that light first. After that, if you decide that you want to keep the funds from these maturing notes on the bond side, consider your fixed income allocation as a whole, includign the fixed income you have with your advisor. The risk you've got with those notes is purchasing power risk -- the yields are so low you're probably losing ground to inflation over time. So consider if you're willing to diversify your fixed income position into some more areas of the bond market via a diversified bond mutual fund(s). You'll have other risks to face by doing that, but diversification on the bond side is prudent just as it is on the stock side. All that being said, if your portfolio is large enough compared to your spending needs that low-yielding Treasury notes will see you through a long lifetime (and decades of inflation) just fine, go for it! Basic rule of investing: only take on risk if you need to.
Therese, here is one from Mij Airaf
Hi Mij. I agree that that tax free vehicles, by which I think you mean municipal bonds, are generally priced to be useful/competitive in taxable accounts, not IRAs. Holding the broad bond market index via BND as your fixed income allocation is certainly a reasonable position, as long as you're prepared to hold on through rising interest rates and don't have unrealistic expectations going forward.
James, you can take this one from Hornman.
Hi Hornman. It sounds like you have a good bit of flexibility there, that's terrific. If you are able to defer withdrawals from your retirement accounts for a while, then any growth and income in those accounts will continue to be tax-deferred. You will have to start withdrawals at age 70 1/2 though. And if you can wait to begin social security benefits, the longer you wait the higher your benefit will be (up to age 70). So in the meantime, you do have a window of time where you have some control over the amount of your taxable income, and partial Roth conversions during that time might make sense, especially if you can get them done at a lower tax rate now than you will be subject to later.
Planners, we have one more question from Ken, which I'll go ahead and post now.
Ken, if you start taking SS before your full retirement age (66 for current retirees), then the amount of your benefit will be reduced by as much as 20% to 25%. If you can afford to wait until you are closer to full retirement age, you may be better off in the long run because your monthly benefit will be higher.
Hi Ken. Much has been written about the break-even age, but the main uncertainties to consider are life expectancy and future inflation. If you're single the life expectancy consideration doesn't matter as much since you're not planning for a surviving spouse's benefit. So consider how much you have set aside in savings and what those savings can earn for you in retirement, and whether or not your savings will help keep up with inflation.
Thank you very much, James!
Alright folks, unfortunately we are out of time for today's chat.
THANK YOU to everyone who joined us.
You all asked some great questions, and I hope we were able to help.
And planners, we couldn't have done this without you!