Sam: Yes, it sounds counter productive. How much longer do you plan on working? What kind of business do you own?
Sam, I would want you to talk to your tax advisor regarding your required minimum distributions. It makes sense to me to make the contribution, if you can, so as to offset the income tax liability of taking the distribution.
Travel man, younger/brand new retirees always seem to spend a bit more, if for no other reason than there are surprise expenses they didn't anticipate (helping kids/family/car breaks down, etc.). They often cut down on spending in their 80s and beyond, except for medical, of course.
Travel Man, we talk about this a lot before the retirement. There are 3 phases of retirement: Go Go, Slow Go, and No Go. In the Go Go years you are likely to spend much more than in the later years...family trips, dreams fulfilled. So we use model a base retirement income with extra money for perhaps the first 10-15 years. If we have done a good job of projecting expenses, it should all come out just fine. But do think about it, in retirement you have so much more time to shop or do hobbies that cost money.
Travel Man: It is common that clients spend more than they planned on because their lifestyle can be so different. If you are not working all day, you are probably spending money renovating your house, travelling, or spoiling the grandkids.
Travel Man - I suggest to clients that their commuting costs are replaced with higher travel and entertainment expenses until their health changes. Then they might spend more on higher out of pocket costs and prescriptions.
Travel Man: By working with an advisor, someone to hold you accountable, you can work together to develop a financial plan.
Sam: One option for you is to check to see if your 401(k) has an in-service distribution option. If so, you may be able to roll part (or all) of your 401(k) balance to an IRA. While you will still have to take RMDs, you may have access to more funds than in your 401(k).
Travel man, I find the people who have the most difficulty with retirement are the ones who make a lot of money. They're used to spending more and can't get used to cutting back. So Peter makes a good point, that's the role of the financial advisor.
Travel Man - You may want to track your spending BEFORE retirement to be sure that your retirement plan is sustainable. More and more clients can't tell me what they need to spend; but, of course, it's my job to help them figure it ou.
Delia is right. For some reason, those who make more often have an extravagant lifestyle while working with little idea of how big the pile needs to be to fund that kind of spending after retirement. They get a couple of million in the bank and are shocked that may only provide $80-100K in retirement income ....and they are used to taking home over 300K, sometimes much more. Those who live more modestly while working are much more likely to maintain their standard of living.
Travel Man, Celeste makes an excellent point about spending. It's well known among planners that most people don't know what it costs them to live, and therefore have a heck of a time trying to plan how much to save for retirement. I see Bobbie's making the same point.
Kitty Momma - What percentage of your bonds are junk quality? Less than 20-25% I hope?
Maybe Kiplinger needs to write an article on retirement planning for those spending $300k+. I actually had one of those clients tell me they "lived pretty modestly."
KittyMomma: There are many diversified bond funds out there. Check out the Vanguard Total Bond fund.
When calculating retirement expenses we usually look at what they are spending now as a total dollar amount and then add and subtract as necessary. For instance, if the house is going to be paid off, you can reduce the amount by the mortgage payment (but be sure to keep the taxes and insurance in there). Then, the Go Go money is for all the extras. They budget accordingly.
I love the Vanguard Total Bond Fund. I love most of the Vanguard Funds.
KittyMomma: Junk bonds will generally perform well in strong economic conditions because the companies that produce these types of bonds are thriving. In economic recessions, these types of companies are less able to weather the storm because of lack of capital and cash reserves. Thus, as Celeste mentioned, your exposure to Junk bonds should be low relative to your exposure to investment grade bonds- corporates and munis.
Good point, Bobbie. I like to tell clients that there's only three places we put our money; we either save it, pay it in taxes or spend it. So if I have the client's tax return w/w2s and there's no other savings outside of a 401k or deductible IRA, it's pretty easy to figure out what the client's spending.
KittyMomma: Good point! Let me check.
Reader question: I would like to set up a Roth IRA but struggling with what mutual funds to go with through say like Vanguard or Fidelity or TIAA etc. I am 50 and can contribute the max per year at this time. Any suggestions and also I have a 457 from a previous employer that I could roll over. It has about 16K in it. Am I able to roll that whole amount over and still contribute the maximum amount in one year? Thanks
Kiplinger, first off, be careful if you're considering rolling over that 457 plan and you're younger than 59 1/2. There is no early withdrawal penalty on those funds.
Kiplinger reader, I'm a huge fan of Vanguard's low-cost funds. I'd definitely consider using them.
Kiplinger - when you're just setting up your investment portfolio and you have less than $20-25K you might want to consider starting with an asset allocation, target retirement type fund. Vanguard has the Life Cycle and the Target Retirement. The other option is to mix it yourself with
Vanguards Total Stock, Total Bond and Total International Stock funds.
Kiplinger Reader: You can roll your 457 plan into a qualifed plan or traditional IRA as long as the 457 plan allows it (and you have not started taking periodic payments from the 457). In terms of Roth IRA investments- generally, I recommend to clients that your Roth IRA should be slighlty more aggressive than your other investment/retirement accounts. The Roth IRA grows tax-free over time (and withdrawals are tax free), so growth is beneficial in the account. If you are making a $6,500 contribution to a new account- I would recommend a balanced or retirement fund like Celeste mentions so that you can have broad exposure to the various equity and bond markets.
Thanks David, I am going to look at that list.
Kelly we definitely include international bonds as part of our fixed income allocation.
KittyMomma: You are right. It looks like many of the "diversified" bond funds are heavily invested in US Government Bonds. Take a look at a new fund, Vanguard Total Intl Bond Index as a fund to create your own fixed income solution. There is a reason why many of the bond funds have high exposure to US Government bonds, it is a core holding for many fixed income strategies.
Cappy, I'm not sure if you need to covert. It depends on what income you have besides social security. There might not be a tax problem to avoid with a ROTH conversion.
Cappy - Whether or not to convert an IRA to a Roth requires a look at your tax brackets, how long the money will be invested before your withdraw the funds, if you don's consider the benefits to pass on to the next generation.
Cappy: Converting your IRA to a Roth IRA account is dependent on several factors. The top one is your total current income for the year. We recommend that clients talk to their accountant to complete a projection to see the tax ramifications of a roth conversion. If you are in a high marginal bracket, the taxes on the conversion may be prohibtive. If you expect to be in a lower bracket once your wife retires, that may be the time to evaluate the conversion again.
Cappy: What do you perceive the advantages are for a ROTH conversion? Usually, a little time (10 years) helps make the conversion analysis look like a good idea.
Cappy: Also keep in mind that a conversion could bump up federal AND state tax rates in a given year.
Patrick, you have to roll it to a traditional IRA first and then convert it to a ROTH.
Travel man, younger/brand new retirees always seem to spend a bit more, if for no other reason than there are surprise expenses they didn't anticipate (helping kids/family/car breaks down, etc.). They often cut down on spending in their 80s and beyond, except for medical, of course.
Travel Man, we talk about this a lot before the retirement. There are 3 phases of retirement: Go Go, Slow Go, and No Go. In the Go Go years you are likely to spend much more than in the later years...family trips, dreams fulfilled. So we use model a base retirement income with extra money for perhaps the first 10-15 years. If we have done a good job of projecting expenses, it should all come out just fine. But do think about it, in retirement you have so much more time to shop or do hobbies that cost money.
Sam: One option for you is to check to see if your 401(k) has an in-service distribution option. If so, you may be able to roll part (or all) of your 401(k) balance to an IRA. While you will still have to take RMDs, you may have access to more funds than in your 401(k).
Reader question: I would like to set up a Roth IRA but struggling with what mutual funds to go with through say like Vanguard or Fidelity or TIAA etc. I am 50 and can contribute the max per year at this time. Any suggestions and also I have a 457 from a previous employer that I could roll over. It has about 16K in it. Am I able to roll that whole amount over and still contribute the maximum amount in one year? Thanks
Yes, at Kiplinger, we're big fans of Vanguard, too. And here are our favorites from Vanguard: Best Vanguard Mutual Funds
