Jump-Start Your Retirement Plan Days 2 -- Saving for Retirement Transcript

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

TRANSCRIPT: Saving and Retirement

NAPFA members from across the country answered your retirement and financial questions on Tuesday, February 12. You can read the transcript below. The best way to find the answer to your question will be to search your name via Ctrl + S.

by Amanda Lilly 2/19/2013 4:25:43 PM
Welcome to today’s Jump-Start Your Retirement Plan Live Chats!

by Amanda Lilly 2/19/2013 4:25:50 PM
For the next 8 hours, NAPFA planners from across the country will be standing by to answer your questions. You can find a Fee-Only financial planner in your area at www.NAPFA.org

by Amanda Lilly 2/19/2013 4:25:51 PM
Advisors, are you ready?

by Amanda Lilly 2/19/2013 4:26:04 PM
Good morning. This is Mark Ziety, CFP(R) from Shakespeare Wealth Management in Pewaukee, WI. Glad to be here this morning!

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:26:06 PM
Ready.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:26:08 PM
Good morning! I'm Brent Perry, CFP from Piedmont Financial Advisors in Indianapolis, IN. Looking forward to answering your questions.

by Brent Perry edited by Amanda Lilly 2/19/2013 4:26:09 PM
Ready, Allen Purkiss

by R Allen Purkiss edited by Amanda Lilly 2/19/2013 4:26:11 PM
Alright! Here's our first question from Art Wholeflaffler

by Amanda Lilly 2/19/2013 4:26:13 PM
What's the best way to draw down assets? I'm about 10 years from retirement, with $500K in non-retirement accounts, $700K in 401(k)s and IRAs (about $150K of those are Roths), and $100K in a company pension which is getting no more contributions. I continue to invest $22k per year in the 401(k) and $25k per year in non-retirement accounts. 25% of these are in a REIT index, the rest in broad stock index funds. I suspect the best way to draw down the mutual funds is the same way I've been contributing to them, at a constant rate. True? And: save the Roths for last? Take the pension as an annuity or roll it into an IRA?

by Art Wholeflaffler edited by Amanda Lilly 2/19/2013 4:27:00 PM
Art: the rate at which to draw down assets in retirement is a big question. Using a constant rate (with adjustments for inflation) can be a good course to follow in that you create a steady stream of income like a paycheck.

by Brent Perry edited by Amanda Lilly 2/19/2013 4:27:06 PM
Art: the order in which to draw down your assets from your can depend on several factors such as your income tax situation and your legacy plans. Using the Roth last maybe be a good idea, but will really depend on your specific situation.

by Brent Perry edited by Amanda Lilly 2/19/2013 4:27:07 PM
Hi Art. You have multiple variables in your question. Let's start with the pension first. You might compare how much the lump sum from your pension could purchase in the form of an immediate annuity. Then compare the annuity with the amount your pension would pay if you took the income stream from the pension. That will tell you if the pension income is competitive. Next, you need to consider what your living expenses might be in retirement. Having guaranteed income sources like Social Security and pension to cover your minimum expenses will provide a solid retirement foundation. Then you can use your investments to pay for expenses beyond the basics.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:27:09 PM
Art - taxes are another consideration. Since you have Roth, pre-tax, and taxable accounts, you may want to draw from the pre-tax account to the point where you reach the top of your tax bracket. Then, take funds from the taxable account, and preserve the Roth money for last. In this manner, you control your tax liability each year.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:27:10 PM
Thanks, Mark and Brent

by Amanda Lilly 2/19/2013 4:27:13 PM
Here's our second question from John

by Amanda Lilly 2/19/2013 4:27:21 PM
My wife and I are 63, and starting at age 64 plan to live on $60,000/year derived from social security and investments in regular IRAs and 403bs aggregating about $600,000 (returning about 7% pretax). We plan to wait until age 66 before taking any social security and to use the file and suspend strategy re social security. By waiting to age 70 for me to claim social security, we can maximize social security but at the cost of spending down investments. I could take social security earlier, preserving some of our investments in the short run but reducing social security payments and survivor's benefits if I predecease my wife. I'm familiar with the online services for optimizing social security, but don't know how to weigh those recommendations against impact on investments. Please advise. Thanks!

by John edited by Amanda Lilly 2/19/2013 4:27:38 PM
Hi John. Great question. As you've noted, the problem with the online Social Security calculators is that they only help you maximize Social Security benefits and don't take into account net worth. We've run the numbers on the net worth calculation a number of times and typically, starting Social Security earlier works out better. As a rule of thumb, we like to see clients start the small Social Security check first with file and suspend for the other spouse if they are over full retirement age. Then, start the larger Social Security check when additional cash flow is needed.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:27:41 PM
By spending Social Security first rather than your assets, you are better able to preserve net worth and may end up with higher income potential in the end.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:27:44 PM
Thanks, Mark

by Amanda Lilly 2/19/2013 4:27:45 PM
Hi John -- You might also want to check out Kiplinger's Social Security Solutions for more expert tips on how to best maximize your SS benefits.

by Andrea Browne edited by Amanda Lilly 2/19/2013 4:27:47 PM
Thanks, Andrea

by Amanda Lilly 2/19/2013 4:27:48 PM
Planners, when you're ready, here's our next question from Jackec

by Amanda Lilly 2/19/2013 4:28:59 PM
I am 60 and want to know if you recommend buying an annuity with part of my portfolio and if so what percent at age 65.

by Jackec edited by Amanda Lilly 2/19/2013 4:29:00 PM
Hi Jackec. Buying an annuity guarantees a portion of your retirement income. However, you need to weigh the pros (guaranteed income) with the cons (typically higher expenses and low interest rate environment.) Determining your retirement expenses is important. If Social Security and/or a pension will cover your basic expenses, not getting an annuity may be more appropriate. If your investment portfolio is large compared to your living expenses (say 20x's your annual withdrawal amount), an annuity may not be appropriate either. On the other hand, if you won't have much income in retirement or are at risk of outliving your money, purchasing an annuity to guarantee your minimum income needs could be appropriate.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:29:03 PM
Jackec - if you will be purchasing an annuity, here's how to calculate the amount. Start with the income needed then have the insurance company calculate the lump sum amount required to provide that level of income.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:29:04 PM
For those of you asking about annuities, you may also want to check our Understanding Annuities Special Report

by Amanda Lilly 2/19/2013 4:29:43 PM
Thanks, Mark!

by Amanda Lilly 2/19/2013 4:29:46 PM
Anais, I see that you just submitted a question. The adivors in the "Other" chat room are actually answering your question now here: live.kiplinger.com

by Amanda Lilly 2/19/2013 4:29:48 PM
Mark, when you're ready, here's a question for you from JFB

by Amanda Lilly 2/19/2013 4:29:50 PM
My wife is contributing the maximum amount permissible to her ROTH 401K established by her employer for the 2013 year, and plans to do so for the next 6 years.
I will be 70 years old in June, 2013, and have no earned income.
Is it a wise decision for both my wife and I to contribute to individual Roth IRA’S as long as she has earned income?
Thank you
JFB

by JFB edited by Amanda Lilly 2/19/2013 4:29:52 PM
Hi JFB. Your question is all about your tax bracket now versus your tax bracket later. If you are in a high tax bracket now and will be in a lower tax bracket later, pre-tax 401(k) contributions would be better. This allows you to get the tax deduction now, while you're in a high tax bracket, and pay the taxes later when your tax bracket is lower. Depending on your income level, you might still make Roth IRA contribution if you can't deduct traditional IRA contributions. Likewise, once you turn 70 1/2 years old, you can't contribute to a traditional IRA anymore, but you can contribute to a Roth IRA. On the other hand, if you are in a relatively low tax bracket now, continuing Roth contributions for the 401(k) and Roth IRA makes sense. Keep in mind, if you have pre-tax retirement accounts, your required minimum distributions will start at age 70 1/2 years old, so this will added to your taxable income.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:29:54 PM
Brent, when you're ready, here's a question from Bill

by Amanda Lilly 2/19/2013 4:29:56 PM
Our company has a high deductible health plan. I've heard co-workers refer to the Health Savings Account as a "super-Roth"; they never use it to pay the deductibles nor co-pays. How does this work?

by Bill edited by Amanda Lilly 2/19/2013 4:29:57 PM
Bill: it sounds like your co-workers are treating their HSA savings account like a retirement account, which is perfectly fine. Instead of using the account to pay ongoing medical bills, they are allowing the savings to accumulate and grow. Many HSA savings accounts are basically bank checking/savings accounts that earn minimal interest, but I suspect that your company's HSA has the option to invest in stocks, bonds, or mutual funds. Note that in order to be withdrawn tax-free, the money in an HSA has to be used for qualified medical expenses.

by Brent Perry edited by Amanda Lilly 2/19/2013 4:29:58 PM
And Allen, when you're ready, here's one from Donnie

by Amanda Lilly 2/19/2013 4:31:27 PM
I am looking for a financial advisor. My wife and I have two kids, two homes, and a little saved for retirement, but not much. Any suggestions on how to find a financial advisor who won't "Madoff" me?

by Donnie edited by Amanda Lilly 2/19/2013 4:31:32 PM
Mark. When you're ready, here's a question from Scott

by Amanda Lilly 2/19/2013 4:31:54 PM
My company doesn't offer any 401(k) match. Am I right to just skip contributing any money to it and instead putting that money into maxing out my Roth and regular investments?

by Scott edited by Amanda Lilly 2/19/2013 4:31:56 PM
Hi Scott. Without a 401(k) match from your employer, the decision of where to contribute money becomes a tax question. If you are in a low tax bracket now, invest in the Roth IRA first. Remember, you can still contribute for 2012 until April 15, 2013. Maximum contribution for 2012 is $5,000 and maximum for 2013 is $5,500 plus an additional $1,000 catch up for both years if you're over age 50. If you are in a high tax bracket now, contributing to the pre-tax 401(k) will make more sense. If you can do both, do it! Make sure to have some money for emergencies too. Roth IRAs can double as an emergency fund since you can withdraw your contributions at any time for any reason (investment gains need to stay in until age 59 1/2) . A regular investment account is a great place to stash some cash for an emergency too.

by Mark Ziety edited by Amanda Lilly 2/19/2013 4:32:03 PM
Thanks, Mark. Great advice.

by Amanda Lilly 2/19/2013 4:32:24 PM
Brent. When you're ready, you can take a stab at this one from Laura

by Amanda Lilly 2/19/2013 4:33:20 PM
Background: my husband and I (mid-40s) max our 401(k)s. Our companies both offer Roth 401(k)s, so we switched our new contributions to that as soon as that was available. I would like to open a Roth IRA on the side, but we are past the income thresholds. So instead, I am thinking of opening a nondeductible IRA and converting to a Roth. The problem is that I have multiple traditional IRAs and 401(k)s -- one old 401(k) still with a prior employer; one IRA that I rolled over from a different employer's 401(k) when I left; and one traditional IRA that I opened in the years before my employer offered a 401(k). I understand if I roll over a traditional IRA into a Roth, I have to consider the value of my other IRAs (but not the 401(k)) and pay taxes on the proportional share. This is WAY too complex for me to deal with. What I'd like to do is roll over the traditional IRA and rollover IRA into my current regular 401(k) (obviously, the pre-tax part, not the Roth part). That way, the new nondeductible IRA would be my only IRA, so I'd only need to pay tax on any growth from the period before I convert it. Is there any problem with doing that? And if so, can I open the new nondeductible IRA in the same year as I roll over the old IRAs, as long as the old accounts are closed first? Or would the IRS look to all of the accounts I have open in the course of the year to determine what taxes I owe on the rollover? Thanks very much.

by Laura edited by Amanda Lilly 2/19/2013 4:33:22 PM
Hi Laura: The question regarding Roth conversion is, as you say, complex, and is something to be very careful with, as you could inadvertently generate a huge tax bill! But I'd like to take a step back and ask why you are wanting to do a Roth conversion now? It sounds like you and your husband are in your prime working/earning years, so you may be in a relatively high tax bracket. Why pay tax on conversion now, when you may be in a lower tax bracket in retirement? Generally, a Roth conversion is a good idea if you expect to be in a higher tax bracket in the years you withdrawal from your retirement accounts.

by Brent Perry edited by Amanda Lilly 2/19/2013 4:33:24 PM
Thanks, Brent. Great point and something for Laura to consider.

by Amanda Lilly 2/19/2013 4:33:26 PM