Happy Thursday everyone! Welcome to February's Jump-Start Your Retirement Plan day! Let's give everyone a few moments to finish logging in.
For the next 8 hours, NAPFA planners will be on hand to answer your questions. You can find a Fee-Only financial planner in your area at www.NAPFA.org
Joining us this morning we have NAPFA advisers Bonnie Sewell, Robert Schmansky, Nathan Hymiller, Michael Solari, and Mark Coffey and team.
Thank you all for being with us today!
We received a number of questions in advance, and questions will be answered in the order they were received. Each question will be held for moderation until an advisor is available to give you a detailed, personalized response. So, if you don’t see your question right away, don’t be concerned!
Here's the first question!
Good morning Phil, has anyone done a calculation of that for you? That would be the first step. For those taxes due, if you converted, do you have cash available to pay them? Are you working off a plan that includes a distribution plan - how much you receive from what source and the timing of each (aka -- your own retirement "paycheck"?
Phil, great that you're thinking about a tax-efficient retirement withdrawal strategy. I do find it can make sense to convert and recognize income in years before SS starts. There are other reasons to consider this strategy as well, but I certainly would look at it in the context of an overall financial plan.
Also, Phil, if there is some time before retirement consider building up a Roth account by maxing it out.
I would recommend speaking with your accountant to fully understand the tax ramifications of converting IRA/401k dollars. Depending upon the assets in these accounts it could cause a large tax bill. This could be a good time to convert certain amounts. Also, you do have the ability to recharacterize the amounts converted to Roth.
Phil - I second Bonnie. Your tax preparer, should help you understand the tax cost to this decision. I will say that it may definitely be a good time to at least consider a Roth conversion while you are in a potentially low tax bracket.
Hi Barry, smart to test out those calculations! And good job on saving 25%. So there's this really big ugly surprise for a lot of my retirees and it is their tax situation. Many did not anticipate this being their number one expense if they did everything else right and have no severe medical bills. Let me suggest a boring old taxable account that may hold tax managed assets. Oh, and vote! Let your representatives know how you feel about the current level of taxation - in my opinion it is brutally high.
Barry, great job on your savings rate... we can't know tax rates in retirement, but you can diversify with pre-tax, Roth, and taxable accounts as it sounds like you have been doing. Converting (and recharacterizing) is a strategy that works best in cases where you expect to pay a lower marginal tax rate today than in the future. I see it most often with clients that have pensions, or expect income to continue to increase before retirement, however, many pay a very high marginal rate in retirement. The only way to give a specific answer is to work with an advisor who can run those projections and discuss the trade-offs.
Hi Barry, one strategy that might work if you have a high deductible health plan is to open up a Health Savings Account. You can still get the tax deduction for contributions and if used for qualified health expenses the income gained will come out tax free.
Barry - we always suggest saving to accounts with varying tax attributes. After all, no one knows what tax rates will be in the future. 401k, Roth and Personal brokerage accounts should be considered. To maximize the tax-efficiency in personal brokerage accounts, you should utilize index funds.
Hi bebeham, I like bond funds personally because the managers do the work and individual bonds, like individual stocks bring more direct exposure/risk although can also bring higher reward. There are so many good bond funds with low costs and you might diversify further through those including international bonds. When the market is volatile, stocks get the flu and bonds get a sniffle generally so they can be used to soften that volatility.
@bebeham - If you feel comfortable investing directly in bonds that could be an option. I would definitely stick to very high quality and shorter term bonds if that is the case. Otherwise, there are lots of great bond funds that would give you low cost access to many types of bonds - that is the route I would recommend.
Barry, wishing you the very best as you're really on target. Let me confirm another idea you're sharing. Managing your cash is a big part of success in retirement. Cash is protection and/or opportunity, right? In the Great Recession, if you had cash, you did not need to sell into that mess. You also could have gone to Florida, Vegas or several other places and built your own REIT at attractive prices like many syndicates did. Manage your cash well (1-5 years of cash needs depending on your risk tolerance) and keep doing everything else you're doing and you should do very well.
And I'm sorry, that last comment was actually directed to Phil! But true for Barry as well.
Bebeham, we agree with Bonnie's comments and we would also add that allowing a manager to select the bonds within their fund you have their expertise and resources in best managing the bond portfolio. This also relieves you from trying to pick individual companies and decide which bonds you should be purchasing.
@bebeham - there are benefits to either approach, but I personally find the ability to diversify into the world of available bonds and rebalance tilt the advantage towards bond mutual funds. Many advisors will create bond ladders to match your withdrawal needs with a bond, and that approach has it's advantages as well.
Hi @bebeham, I second Chip's remarks. Another thought (hopefully not getting too technical) is to utilize insurance as part of a bond portfolio. There are no low guaranteed universal life insurance policies (sold by Low Load Insurance) that are guaranteeing 3% and paying out about 4.5%. This works well when the commission is avoided
Hi CathyLynn, I don't have the ability here this morning to run that SS analysis for you but that's something most advisors can do quickly for any client and give you very specific direction based on your numbers. As for saving enough? It sounds like you're on track, but let me suggest that watching clients retire for the last 25 years, it feels like few over save. There is just too much demographic research out there to be comfortable with the probabilities. It's important to balance all goals - financial and fun ones but if you are attaining what your care most about (whatever that is, travel, giving, spending time with family), then you can also have a planner model probabilities and these can give you a large range of outcomes. But bottom line, don't be afraid to save more than you think you need. I haven't had anyone complain they saved too much.
Cathy Lynn, one strategy would be for you to wait until full retirement age and make a claim for spousal benefits. Your husband would file and suspend his benefits. I recommend sitting down with an advisor to confirm this is the best strategy. Spousal benefits do not grow beyond FRA, so there is no reason to defer further.
@Cathy - Are you saving enough? The answer to that question depends on how much you spend and will need. It sounds like you are on the right track though. For the answer to your SS question, I would suggest that you read (or reference) the book Social Security Made Simple by Mike Piper, CPA. I think it cost less than $5 if you buy it through a Kindle app.
Cathy, when you get closer to retirement it would make sense to analyze claiming spousal benefits for social security versus claiming your own benefit. As for how much to save, you can use the 4% withdrawal rule of your retirement account assets once you have an idea how much you need from the portfolio after social security benefits.
Hi Bob, Thanks for the detail, it sounds like bottom line, you need some income suggestions? I like REITs a lot but if you get in right now, you've missed some very nice upside. That said, there is probably a lot of room left. LOTS of people will keep renting and there are also some good choices in nonpublic REITs but at our firm stick to REITs through mutual fund firms because we've had clients have to sue to get distributions from some of those closed REITs (that we did not recommend but that pay nicely until you want your money back). We can model 4% Bob, but that's not reliable and one of the reasons people do buy annuities is because they're told things like this are 'guaranteed' -
Bob, in my opinion you should not be seeking yield from stocks or bonds. I would advise that you consider bonds to be a stabilizing portion of your portfolio to be used for withdrawal needs in the near and intermediate term.
Even when bond nominal yields are higher, safer bonds do not have a "real" return after inflation, so hoping for those good old days of 5-10% yields isn't useful in my opinion. Higher-yield bonds act more like stocks, but return less on a total return basis, so if you are seeking higher yields, you may be reducing your growth and portfolio longevity potential. Investing in stocks for yield is simply accepting risk. Consider a "total return" mentality, that you use bonds to stability and reduce volatility, while broadly diversifying your stocks to provide growth for longer-term money with a tilt that includes small and value stocks.
Other advisors may have different philosophies of course! I do includes REITs for diversification.