Jump-Start Your Retirement Plan, February 2015 - Live Chats, Q&As: Free Advice on Retirement, Investing, Personal Finance -- Kiplinger

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Jump-Start Your Retirement Plan, February 2015

Kiplinger is teaming up with the National Association of Personal Financial Advisors (NAPFA), whose planners will answer questions on retirement planning and other financial challenges. Submit your questions here and get free personalized financial advice on Thursday, February, 19, from 9 a.m. to 5 p.m. ET.

  • Best strategies, you have a lot of questions on this and the only way to get a comprehensive answer on what is best for you is to consult with an advisor. Several things. 1. It seems like you have all of your money equities and you might want to include a fixed income allocation to reduce the risk. 2. You have a lot in company stock. You might consider diversifying that as well. Now to your bullet points a. Know that you can contribute to an IRA for your wife to even things up. I hope you will be in a high tax bracket when you retire so you might choose to put half in an IRA and half in a taxable account. Having different buckets of money in retirement gives some valuable flexibility. b. ROTH, this might be good for the half I suggested under a. You can always go get the contributions back but you can't take any of the earnings before 59.5 without a penalty. c. I love 529 plans and your kids are still young enough to have some significant increases in their holdings before you need the cash for college. I like the low cost Utah plan but beware of broker sold plans. I wouldn't fund the 529 for more than half the needed amount...to include room and board... as one child may not go to college or may get a scholarship (you can use anything left over for you or grandchildren who go to school). d. Waiting for the market to drop? Well I have been waiting since Jan of 2014. Such thinking humbles me, which is a good thing:-) Why don't you dollar cost average into the market over the next 12 months?
  • My son is planning to buy a condo but does not have quite enough funds. Which is better to help him. 1. Loan/give him money to help with his down payment so he can afford the monthly mortgage. 2. Co-sign the papers and help him with the down payment. He is in another state if that matters.
  • @Beststrategy - (D) - Waiting until the market drops to make a lump sum investment is really tough. Is a 10% drop enough, 15%, more? I'd recommend averaging into the markets in a relatively systematic way. Perhaps you'll choose to invest $25k each month for the next 10/11 months. If the markets do correct (and you have the stomach), you can accelerate the investing. I'm a big fan of Vanguard's LifeStrategy funds. Have a look and pick the risk/reward level that you can stick with.
  • Not sure if this will help with your situation, @Beststrategy, but just in case:

    Ways for High Earners to Contribute to Roth IRAs-Kiplinger

    www.kiplinger.comYou can reduce your modified adjusted gross income by contributing to a 401(k) or flexible spending account.
  • Julie C, do not cosign please as this usually ends up being problematic. Now as for the loan, if he can't afford the higher payment how is he going to be able to repay the loan? Go into this with eyes wide open and if you do a loan, make it official by writing it up.
  • Thanks all. I will take advice to call SSA. I should have mentioned I have tried ALL the calculators I could find on their website and none seemed to work. I am fairly savvy (IT and Acctg degrees) but calling is next option. If the hit will be too large, I might consider just taking a couple years off and then continue to consult again for a few years in my late 50's to keep the hit small.
  • Thanks for all the advice everybody. thanks Kiplinger also. have to step away. Stay warm.
  • Thanks for joining, Cash Flow!
  • Mark Wilson, APA, CFP(R) 2:01 PM
    My agi dropped in 2014 and I was able to reduce it with my 401k, HSA, and wife's IRA deductions bringing it to $80,300. So I do qualify if I read the tax rule correct. Should I also take some of my cash after opening up this IRA and put some of it into a Roth?
  • @beststrategy: I will echo a lot of what's been said. The odds are very high that you will not be able to accurately predict the bottom of a market dip. And even if you could, you might not make enough back to make up for the time that you sat things out in cash. I would consider investing the $270,000 systematically along the lines of Mark's suggestion. I also like using 529's for sonly a portion of education expense in case things don't go as planned.
  • @Beststrategy - At that AGI level, you AND your wife can make deductible IRA contributions if you are looking to save the maximum. Running some numbers makes sense, but I'd probably stick with the traditional IRA.
  • @Julie: If you can afford to, I would loan or give the $ for the down payment. I do not recommend co-signing, but if you do decide to do so, be sure to get and maintain life insurance on your son. This would allow you to pay off the mortgage if he were to die prematurely. This would still do nothing to help you if he were to, for example, become disabled which may be a higher statistical likelihood.
  • Many of the retirement financial planning articles you read suggest that you need to plan to have 80% of your pre-retirement income for retirement. However I have not seen an explanation as to what that represents, is that 80% of gross income or “take home pay”?
    I believe it really should depend upon the type of lifestyle you anticipate you are going to live in your retirement years, whether frugal or extravagant and other variables (e.g. a paid off mortgage). If you plan on taking frequent elaborate vacations an individual might need 120% of pre-retirement income. Consequently, that 80% “rule of thumb” to me is a totally meaningless guide.
    Utilizing an 80% simplistic approach doesn’t really have anything to do with anticipated retirement expenses. As an example, in my situation, after federal and state tax withholdings, 401k retirement saving deductions, and charitable contributions, my wife and I are currently living moderately comfortable on approximately 51% of my gross salary. So using the 80% rule, what conclusion can I draw, that I need more income in retirement than what I earn while presently working?
    Since every individual’s needs are unique, isn’t a much better approach to project (as best you can) what annual income you anticipate you will need in retirement to supplement your social security and/or pension and the number of years you anticipate you will be in retirement (i.e. 25 – 30) and then base your required retirement savings on that figure rather than an arbitrary percentage of current salary?
    Since I am only a few years away from retirement, I believe I have come up with a pretty realistic retirement budget based upon my current expenses (including projected inflation) and feel I have a pretty good idea of what we are going to need for income besides social security, at least in the first few years of retirement. I am also planning for the need for additional savings for potential one-time major expenses such as a roof replacement, medical, burial, etc.
    Can you please comment on my thoughts above, what am I missing? Doesn’t it make more sense to base retirement savings planning on expected expenses rather than current income, at least for those individuals who are approaching retirement?
  • by Bobbie Munroe 2:06 PM
    In regards to your advice in fixed income allocation. I agree that I do not want to have all my investments in equities. What fixed income would you recommend? Can you be specific.
    Thank you all so much for your advice.
  • @Julie C, here's some advice on loaning money to family. Good luck!
  • @Rick - You are completely correct, income levels do not determine spending needs. Rules of thumb should be used as rules of thumb. My favorite way to determine a good number for retirement estimates is what you are recommending: have a look at where money is going before retirement and adjust for the things that change in retirement (ie. more golf might add to expenses, less auto related expenses would reduce expenses). For a shortcut, look at your net income (take home pay), subtract additional savings (if any) and that is what you are spending. For many, that number is pretty close.
  • @rick: Setting your retirement spending goal as percentage of your total pre-retirement income is a shortcut that gets used a lot. This is probably because it's easy and you don't need to figure out your expenses (which most people don't know or perhaps don't even want to know). That approach is better than nothing, but yes, estimating what your actual costs might be in retirement in today's dollars and then trying to inflate appropriately is often a better approach. Some things to think about. Your healthcare costs may be higher. You may spend less when you aren't working or you may spend more because you have more time. Most spending usually tapers off later in retirement although healthcare spending may increase.
  • Beststrategy: I suggest a diversified fixed income allocation. I usually use something like Vanguard Bond Fund or ETF as the core holding. Then I might include some TIPS (inflation protected but not exciting performance) if my clients are concerned with inflation. I also use a high dividend yield fund (Vanguard has a good one) or bank loans (we use BKLN)....for a small portion I also like the Vanguard GNMA fund. We also include foreign bonds. Vanguard has a lot of low cost options and I like some of the Metropolitan West offerings. I suggest that initially to keep it simple you could just go with a total bond fund. You may even want to look at what Vanguard uses for fixed income in their target date funds. REMEMBER THIS IS A GENERAL COMMENT AND IS NOT NECESSARILY WHAT IS RIGHT FOR YOU!
  • hi i am asking your opinion do you recommmend lifestrategy growth or retirement date by vanguard thanks
  • @Beststrategy, you might want to consider these, too:

    Best Bond Funds for Income Investors-Kiplinger

    www.kiplinger.comThe six funds we discuss here will earn you a good yield and provide some defense against interest-rate uncertainty.
  • @ Rick, I tell clients there are 3 phases of retirement, go go, slow go, and no go. During that go go phase we often include extra funds for travel and other exciting things. But after about 10-15 years in retirement, those funds are usually not needed. So as others have said, I would take a look at my current spending an make allowances for what will change (if the mtg will be paid, reduce the needed income--but allow for taxes and insurance, if additional insurance or long term care premiums will be paid, increase the needed income). Of course, you can also reduce the needed amount for job related expenses like clothing, dry cleaning, commuting expenses. Be SURE to include money for "what if" expenses like car or home maintenance, a child's plea for financial assistance. I usually have clients fund a separate account on a monthly basis for this kind of thing.
  • @Hassan Dannawi - I typically recommend Vanguard's LifeStrategy series (LifeStrategy Growth, Moderate, Conservative or Income). That way I can control the timing and level of risk I'd like to take. Target date funds shift on their own schedule that may not match my schedule.
  • All thanks so much for your advice. I like the dollar cost average strategy. Can you recommend where I should invest this. You know what I have in my 401k, and it seems as if ETF's are recommended. Should I invest it in a particular sector and industry and what ETF's would you recommend?
  • In regards to your fixed income allocation recommendation. I agree and do not want to have all my investments in equities. Could you recommend where I should put this, being specific?
  • Ah beststrategy, I think I was detailed in my last reply and unfortunately this is not a good forum for very specific recommendations. Why don't you schedule a visit with an hourly planner? One that works with investments of course.
  • thanks a lot beststrategy can i build around
  • @ Hassan, remember that target date fund have varied allocations depending on the company that is offering them. One company's 2035 fund might not look much like another company's 2035 fund. Figure out what allocation you want and then find the Vanguard fund that best fits that allocation. The Vanguard Target Retirement funds are a good, simple, low cost choice.
  • @Beststrategy - Specific investment recommendations are difficult. Think about using a low cost broad based "all in one" approach (mentioned in several other posts here) OR consider chatting with or hiring an advisor (I'd say a fee-only advisor with a respected financial designation) to help guide you.
  • @Hassan Dannawi: Target Date funds may eventually shift your allocation to be too conservative. Allocation funds with a more static approach might leave you too aggressively invested at some future point. Both types of products can be very valuable tools, but neither approach strikes me as ideal with an overall strategy, regular monitoring, and tweaking if/when needed.
  • Seeking to retire Jan 2016 –will be 56.5, very good health and active.
    Husband already retired 62 on SS, not in best of health, would like more time with him.
    Spouse has annual B4 taxes (SS/Pensions) $39,516 if he was to pass there would still be $27,744 coming in annually just to me. Our budgeted expenses for retirement, after tax $50K. Included in that is health care premiums. No longterm care, No life insurance, no credit card debt, debt limited to car payment. 401K =$640K, house paid off.
    1) Am I crazy to retire Jan 2016 based on these figures listed?
    2) What is the best mix stock/bond fund mix based on situation?
    3) Any other suggestions.
  • @ Almost, one thing I know is that if you don't take this time with your husband, you might regret it. That said, I think it would be wise to work through this with a planner. For instance, does the pension inflate (very important as those dollars will not spend the same in 10-20 years if it doesn't). Would you downsize if you survived him? Do you work in the kind of job (like a consultant) where it would be easy to re-enter the workforce after a year or so, giving you more time to feather your nest egg? It is a puzzle. Get all the pieces on the table and get a planner to help you solve it.
  • Thank you all for your advice. Much appreciated.
  • I have a question about Social Security for my Children. I have two children who will be 11 when I turn 62. Can they collect SS based on my work history when I turn 62 even though I do not collect SS at 62 but am deferring collecting until I turn 66?
  • @Almost - Lots of issues here. You are a prime candidate to work through these questions with an advisor. I have several comments: (1) It is really difficult to retire when you are young and healthy. You have a solid chance that you could live for 40 years so $640k in a 401(k) is probably not enough once inflation and taxes are taken into account. (2) Not every decision is a financial one. Time with your husband cannot be replaced. Tradeoffs may be necessary (taping home equity is a possibility). (3) You still have a long investment time horizon - do not invest too conservatively. I would not be hesitant to have 40-60% in equities as long as you can ride through the inevitable bumps.
  • Ah Victor, I hope they can't collect as the only benefit available is a survivor benefit:-)
  • @Almost: I don't think it's crazy to retire so that you can spend time with a loved one whose health may not be the best. Having said that, with only very rough info I'm concerned that covering your planned expenses could get dicey or worse, especially if your husband were to pass away relatively soon and you were to to live a fairly long time. I would strongly recommend hiring a planner to go over your situation in great detail. Armed with a much clearer picture of what various scenarios and options might look like, you would then be able to make a much better informed decision. There may be some in-between options to explore too.
  • Bobbie - The pension does not inflate. We would already be downsizing in Jan, so that would be it - of course there is a bit more room with just 1 versus 2. At this point, don't want to consult or reenter.
  • vanguard total bond index,gnma,mwtrx,inflation protecion.for equites wwllesley wellington and growth divident in place of the total stock mkt.index.iwill be very appreciative
  • hi. i thank you for your advice and time in fixed income what kind of bonds you recommend.thanks
  • Mark - Thank you. When you say 40-60% equities, we are at 30-70% now, so would you recommend this ?
  • Almost,, a comprehensive plan now, before you retire, is even more important if you don't want to go back to work later. The fact that the pension doesn't inflate (and most don't) will put an even bigger strain on your resources. To even out the spending power throughout retirement, most people have to save some of the pension income for later years when inflation makes it spend like it is less money).
  • @Almost - Let me clarify my statement. I'm comfortable if you had between 40% and 60% in equities. I think you would be too conservative if you are 30% in equities today.
  • Timothy - Thank you for your insight. My income would go up at 68 from SS/Pension to 39,180 with SS inflationed somewhat. What other strats would you suggest? Other than working :)
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