Donnaj - I'm not so sure that it is smart to roll a HUGH amount to a Roth but if you are in a lower tax bracket now than where you expect to be later, then it would make sense to fill up that lower bracket with a Roth conversion to lower to future RMD and the taxes that go with it. I do it for my clients all of the time. Robert makes a good point though. There are a lot of moving parts and we don't know where tax brackets will be in the future. Tread carefully
Donnaj, you probably need to work closely with a tax professional to help you understand how higher income from a Roth conversion may affect
the phaseouts of itemized deduction and exemptions.
DickP, LTC insurance is an area you’ll get many opinions about. I would advise speaking with a few people about it. If you’ve determined it is a good fit, there are also a few ways to get increases. You can buy an inflation rider, you can have a guarantee to buy more, you can self-insure part and insure part, or you can simply buy more now with no inflation. I’ve seen scenarios that work out differently for many. The best thing to do is get multiple quotes from agencies that specialize in this insurance.
Hi Dick, when you bought the LTC, did you do an analysis of your projected costs and what the insurance would cover? Once you have the insurance, it can be helpful to buy up since that is being offered without additional underwriting, yes? Do one more run - through analysis with the person who sold you the policy and see if it makes sense for you and your wife.
DickP - Let's assume you purchase a 5% compound inflation rider and the LTC daily benefit is $200/day. In 20 years, the true costs would balloon to $530/day. A policy without inflation adjustment as an option would be stuck at $200/day. So more money would come out of your savings to pay the difference. Your decision should be made in the context of the other pieces of your financial plan, including cash flow, life expectancy, etc.
DickP This is a tough one that many people struggle with. I do not believe that long term care insurance should be looked at as a stand alone issue. Do you own a home that you could sell and move into a continuing care community? Do you have other assets? Joint? Yours? Retirement accounts? Non retirement accounts? What is your family health history? The primary reason for having long term care insurance in the first place is to avoid impoverishing a healthy spouse or dependent. Lot's to consider here.
Wow, that first two hours flew by! A big than you to the NAPFA advisers who were on hand this morning.
With us now we have Michelle Mabry, Ian Boyce, David Strege, Michael Gibney, and Pat Jennerjohn. Welcome!
As always, you can find a fee-only personal finance adviser near you on www.NAPFA.com.
Hi, this is Pat Jennerjohn, fee only advisor in Oakland, California, joining the chat.
Peter, Is this a deductible 401K so she is contributing before tax money. Have her look into investing in three types of tax vehicles, deductible 401K, Roth IRA or 401K if available and then personal portfolio. Allows flexibility in the future for cash needs to manage taxation on withdrawals
Peter, depending on your daughter's income level a Roth IRA may be a good option. Assets in a Roth grow tax deferred and come out tax free. There also is no requirement for distribution at 70 1/2. Roth contribution income limitations are $131,000 if single, $193,000 MFJ. A Roth 401(k) could also be a good option.
Igor, not many of of advise on Structured Notes (which may tell a cautionary tale), but we may all agree to tread lightly as you appear to be doing and read any accompanying literature very carefully because structured notes have many moving parts and each one is different. Make sure know all fees involved, and Caveat Emptor
Igor- Structured Notes can be very complicated products and the terms vary greatly for each one. You need to understand the floor where you could not earn interest and the floor where you could lose principal and what the caps are. They are issued by major banks such as JP Morgan, BNP Paribas, Goldman, etc. The terms also vary as to whether they are being sold on a commission basis or with commissions stripped out. If you walk into a bank and buy them, it will include a commission and the terms are less favorable then those sold through fee based advisors. I would recommend because of the complexity of these investments that you seek out a fee-only advisor who has familiarity with using structured notes in their clients portfolios; however if you feel comfortable with your knowledge of the product you could purchase them through any major custodian such as TD Ameritrade or Schwab. Structured notes can be a great way to generate yield as part of your fixed income allocation especially in a low interest rate environment such as we are in, and fear of rising rates has many concerned about investing in traditional fixed income.
ChuckN, you are right to be wary of the advice regarding the annuity. In a sense, your pension already IS an annuity. If you were to take the lump sum, the best option would really be to roll it over to a rollover IRA. The advice about the annuity is not disinterested - commissions are involved for the advisor... With a rollover IRA, of course then you are responsible for properly investing this; the advantage is that you have more unrestricted access to your money. Or, if you feel that your employer's plan is sound, leave it there and then take the money out as a pension.
Chuck, the pension should have pension guarantees backing it. The pension and the annuity are similar approaches and the payouts should be very close. Taking lump sum cash to an IRA to investment in immediate annuity wouldn't make sense unless the annuity payout is much higher for a joint and 100% survivor benefit.
Sandra, the later you start the more of your income you have to save to build up a secure base for financial independence. 10% for people under 30 is a good rule of thumb.
Chuck, evaluating how to deal with a company pension requires careful analysis. The advice you are receiving from your advisor suggests transferring the risk from your employer defaulting to an insurance company and requires careful consideration. annuities also come with high fees and may not provide the 100% survivor payout you are seeking. How your decide to receive the pension also should be evaluated carefully. Your age, that of your spouse, other assets and required income need to be considered. Another option is rollover to an IRA an self management and control for distributions.
All good advice on the annuity question. One other thing to consider is if the existing pension is adjusted for inflation. If not, it will be important to understand the impact since you are young at 63. You potentially have 25+ years to go, so inflation should be a concern
SandraG, I've lately seen the "50/30/20" formula bandied about by advisors, and it seems like a good pattern to follow. Essentially, you spend 50% of your gross income on "needs" (mortgage, taxes, health care), 30% of your gross income on "wants" (discretionary items) and 20% goes to savings. The savings goal is ambitious, yet it encompasses not only saving to a retirement account (10% is a good start) but also saving to cover short term needs (the famous "emergency fund") and for the long term. Hope this helps!
Sandra, save as much as you can, early and often. Work on paying down debt which will free up cash for additional savings. Ensure you have an adequate emergency fund. Maximize contributions to 401(k) plans where possible since contributions are pre-tax and generally are matched by the employer (free money)
Sandra. Save until it hurts. If you have done a budget analysis, you should have an idea of how much you can "afford" to save. Also, if you have a 401k, save at least up to any matching contribution and try to max out.
fdwaller, we can't predict the changes that could be made to Social Security. Your year of birth determines when you will receive full benefits with no earned income test. If you start benefits before then your Social Security benefits are reduced if you have too much earned income. As you delay benefits they do increase 8% a year. There any many possibly ways to take benefits for single individuals and even more for couples.
fdwaller - This is a great question. If you do not need SS, or have an option to fund your retirement from a non-qualified (i.e., non-IRA 401k, etc.) then it may make economic sense to wait until full retirement age or maybe even 70 years old because the longer you wait the higher your monthly benefit. (Each year you wait, your benefit increases by ~8%). Funding from a non-qualified account is more tax advantageous because anytime you take money from IRA and the like it is taxed as ordinary income (like a salary)
Be careful of beginning Social Security benefits before your full retirement age if you will still have earned income.
fdwaller- When you start taking social security depends on how long you think your life expectancy is and your family history in part, and whether you will still be working when you are eligible for benefits. The longer you wait, the higher your benefit and under current law, you get an 8% increase for each year you wait to take it until age 70. If you are at full retirement age today, the break-even is about age 79 before you would get more benefit by delaying taking it. In other words, you should take at normal retirement age if you think you are going to die before age 79. This is just a general idea and based on social security rules today which will most likely change in 2032. It will be hard to predict what the laws will be then.
When to take social security requires careful consideration. Additionally there are many strategies to maximize benefits at full retirement age. Depending on your health and cash flow wait as long as possible if you are healthy since you ensure the maximum benefit over your lifetime. You also need to consider your spouse - their age, the difference in your ages and whether they qualify for benefits and the amount of their benefits. Coordination of benefits is required. Seek out an advisor who can help analyze and maximize benefits. Keeping benefits at 100% in the future will require an act of Congress.
I will take the first part of the question regarding your business. I would invest in myself first and borrow a little money to start your practice rather than wait. My daughter is in dental school and I told her the same thing. The sooner you start your own deal, the more you will make to save for your future and the more control you will have over your future.
Alan, There is a lot in your question. I'll tackle one piece. Tie your goals to how you invest your money. If you are trying to accumulate money to buy or start your own practice then keep those funds in lower risk investments. A higher mixture of bonds. Index funds is a way to participate as those market indexes perform. They could be bond or stock indexes so be aware of which type of index fund you use and what it is investing in as it fits with your goal.
Alan - Mortgages are often referred to as good debt. The interest rates are definitely in your favor, and you are borrowing at a rate that is essentially even lower than your nominal rate because of the potential tax deduction of mortgage interest. Consider: if you borrow at 3% and earn a rate of return higher than that, you are in good shape, So, not all debt is bad. Regarding investments, consider a well diversified portfolio of index funds that includes stocks because, although volatile, they are the only asset class (currently) that will outpace inflation
Alan, this is a complex question so I'm going to answer part of it and hope that my colleagues chime in on other aspects. The folks that you are listening to have very strong, and somewhat controversial, opinions that are contradictory, so I don't blame you for being confused by their advice. Let me just say that a mortgage is an honorable debt; big credit card balances run up for "stuff" are what you should concentrate on wiping out.
Alan, having a home mortgage paid off before you retire provides more financial security than carrying debt. At younger ages carrying only a home mortgage with a reasonable and deductible interest rate makes sense. Your itemized deductions need to exceed your standard deductions for the home mortgage interest paid to really be tax beneficial.
Alan, first, congratulations on paying off your loans. Whether you take your debt reduction further is a matter of preference. There is no doubt that the mortgage is costing you something despite the mortgage deduction but if you have a low rate it is a debt worth keeping. Here are some thoughts worth considering: Make an additional payment towards you mortgage each year, this should cut the mortgage payoff time by about half. Establish a safe emergency fund in case of disability and for additional savings. Set up a separate bucket of funds to which you contribute each month with a goal of using them for the down payment on your practice in the future. Save or invest whatever is left in a balanced mutual fund from Vanguard.