Welcome to today’s Jump-Start Your Retirement Plan Live Chats!
Good morning. This is Mark Ziety, CFP(R) from Shakespeare Wealth Management in Pewaukee, WI. Glad to be here this morning!
Good morning! I'm Brent Perry, CFP from Piedmont Financial Advisors in Indianapolis, IN. Looking forward to answering your questions.
Alright! Here's our first question from Art Wholeflaffler
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.
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.
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.
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.
Here's our second question from John
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 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.
Planners, when you're ready, here's our next question from Jackec
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.
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.
Mark, when you're ready, here's a question for you from JFB
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.
Brent, when you're ready, here's a question from Bill
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.
And Allen, when you're ready, here's one from Donnie
Mark. When you're ready, here's a question from Scott
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.
Thanks, Mark. Great advice.
Brent. When you're ready, you can take a stab at this one from Laura
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.
Thanks, Brent. Great point and something for Laura to consider.