Howard, I'm going to answer part of your question. The IRS has just ruled that a portion of an IRA (not to exceed 25% of the balance or $125,000 whichever is smaller) can be set aside into a "longevity annuity" that is then scheduled to make distributions at a later date (i.e. beyond the required minimum distribution age of 70 1/2). For example, you can set up such an annuity to delay payments until age 85. It is temporarily carved out of your IRA balance and not subject to minimum distributions at age 70 1/2, but of course must start to distribute at the age you've specified. This can help to preserve an IRA; it's not really meant to shield it permanently from minimum distributions. Because this is new you may want to consult a savvy advisor about this technique.
Howard, focus on total return needs for your investments compared to how much return volatility you can withstand and understand. Some people do move to a lower risk portfolio as they retire. Another concept is having three to five years worth of withdrawals in fixed income investments, i.e bonds, to provide some stability.
Howard - It's difficult to answer that question without knowing more about you and your portfolio. You should be aiming to get a rate of return from a diversified portfolio that will enable you retire successfully. Often you need to "back in" to this return by analyzing how much you will need in retirement, and then investing accordingly to see if the portfolio can sustain this distribution rate. For the IRA question, if you lower the balance by taking distributions before you are 70.5 (by "annuitizing"), then that will lower your RMDs; however, you are paying taxes on these distributions whenever they are made, so there is no benefit.
Howard - I was unaware of the strategy that Pat describes, so this changes the distrbution part of my answer somewhat.
Opps I did the same thing. Yes, once you reach FRA there is no earnings limitation so your benefits are not reduced. Also, you should also see a slight bump in your benefit due to the additional contributions to SS.
Don - SS benefits are based on the "35 years that you earned the most", so if your salary now is higher than it had been at some point, it may increase your benefits
Hassan, if you are on the Vanguard Web site, they have a risk tolerance questionnaire that will help you figure out how much of your funds to put into bonds versus stocks. Vanguard's index funds are good and cheap, and even their actively managed funds are not expensive.
Hassan - There are many study's that show active managers do not provide consistent enough returns to justify the additional fees over index funds. Vanguard is the leader in index funds, and you can get a well-balanced portfolio using their total bond and total stock offerings.
Hassan, some theories say that there are some efficient investment markets that make it more difficult for active managers to beat the market index. In a low interest rate environment there is a bond strategy to ladder the maturity of bonds over 5 to 10 years. So for a five year ladder, 20% in 1 year maturing bonds, 20% in 2 year maturing bonds and so forth. Must have enough critical mass, $250,000 or more for the bond component of the portfolio to implement this strategy, otherwise look at bond funds or ETFs.
Hassan - David brings up an excellent point on bond ladders. I agree, if you have the opportunity, this is a good interest rate environment for a bond ladder.
Hassan- I agree with Pat and Michael on the Vanguard funds as a good choice. Something else to consider depending on the amount of money you have to invest in bonds is seeking out an advisor who can help you with individual bonds with staggered maturities. If you hold the individual bonds, you know exactly what you back at maturity(unless bond defaults) vs a bond fund which is constantly turning over bonds and in a rising interest rate environment when the NAV of the fund falls and everyone gets worried and starts cashing out, fund managers have to sell bonds they otherwise would not have to satisfy redemptions and this can have a snowball effect on the falling NAV of the fund. You need to have enough to put into individual bonds so you can adequately diversify though and build a ladder of maturities. Another good fund option is Dimensional Fund Advisors which are low cost and have not experienced this bond net redemption issue like retail bond funds.
Dan, I am not aware of a simple formula to answer your question. An in-depth professional software system can analyze the time value of money difference between a variety of different approaches.
Dan, I agree with David - this can't be analyzed without knowing someone's specific situation, including their risk tolerance. You are right in terms of wanting a comprehensive analysis of all of the factors.
Dan - Excellent question. If I am reading it correctly, I think a big factor is whether you are taking these monies from a retirement account (i.e., monies taxed upon distribution), or an "investment account" (i.e., where you have more control over taxes upon distribution). If you are taking money from a retirement account, it is much worse because any distributions are taxed as ordinary income. If one is fortunate enough to have a sizable non-retirement (or "investment account') where there is a possibility of tax-free distributions to fund retirement, then by all means, wait as long as possible to take SS benefits and let the eventual benefit grow.
Dan, I agree with you there is some benefit to using other assets for income to delay receipt of a higher social security benefit. I am not aware of a specific formula but consideration should be given to the type of securities used, how they will be taxed - resulting in net incomes and of course life expectancy - difficult to predict but certainly you can model.
Dan, many times the analysis shows for those that expect to live past age 80 they are better served delaying Social Security to age 70. Even when considering the withdrawal on assets to cover the cash flow needs until age 70. This still has risk as an unexpected death can still occur before age 80 and caused a lower lifetime collection of benefits. Many lifetime differences in time value of benefits received is a difference of a few tens of thousands of dollars to the highest I've seen is a couple of hundred of thousand of dollars over 25 plus years.
bk9 - congratulations! You do deserve a pat on the back. I find that risk tolerance is much more of a personality factor (and this has been proven by research) rather that a function of your age., and in fact doesn't change with age. I would suggest going to the Vanguard Web site, which has a simple but good risk tolerance questionnaire, to see where your answers lead you. It may be that you will be comfortable all of your life with a fairly aggressive portfolio. The old rule of figuring out how much to hold in equities by subtracting your age from 100 is pretty much out the window, in my opinion. Of course, as you approach retirement you'll want to set yourself up with appropriate "buckets" of cash, short term investments and long term investments to meet your cash flow needs and to preserve your portfolio for the long term, but your overall allocation may not need as much tweaking as you think!
bk9, in the IRAs is the best place to trim some growth out of the equity side and begin lowering risk as you move toward taking some distributions in the near future to supplement cash flow if you begin working part time. You have mostly mutual funds it sounds like so selling out of one fund and buying another within that account shouldn't be difficult. Always be happy with selling for a profit in an IRA as the realized gain isn't taxed. Great job for your diligence providing these results.
bk9 - Congratulations on a healthy savings amount. Considering most of your funds are in retirement accounts, you do not have to worry about capital gains taxes, which is a good thing. Regardless of your age or risk tolerance, in my opinion, 90%-95% in equities is too much risk. I would look first to see where you have an "over allocation", like maybe in large cap US Stocks, and start to diversify away from this. Look at an asset where you may be under exposed like bonds or alternatives and move some of the large cap US into these. Continue to do this every three to six months until you get to a comfortable allocation.
Dennis, that approach allows you to build up different pools of money with varying taxations to have flexibility in the future as tax laws change.
bk9 - Nice job saving for retirement! Asset Allocation (how much you have in stocks and bonds) has been proven more than actual security selection to be the primary driver of return and accordingly risk. Without knowing more about your situation I would say your equity exposure is perhaps a little high. A good risk questionnaire and use of some online risk tools will help you better understand the risk you are taking based upon your current allocation and how that might change as you dial down your stock exposure. Selling is not a problem in an IRA. There's a chance you will time your rebalancing just right but it is not about timing the market. It is more so about establishing a portfolio you are comfortable with as you approach this important phase of life. Good luck!
todor, we would recommend that you seek a tax professional on your specific tax question on Foreign income taxation, exclusion and paying the tax in the best manner.
bk9- I would seek to move out of the large cap equities where that is your greatest allocation and move into bonds and alternatives as Michael suggest. You should have enough to build a bond ladder and I would add a healthy dose of alternatives, such as managed futures funds, which tend to have no correlation or negative correlation to the stock market. This could help soften the blow in a major market correction. We use alternatives to help mitigate risks in clients portfolios all the time.
Dennis - Ask your accountant or take look at your return to see how much of a benefit you are/would be receiving by increasing your contributions to a higher pre-tax (traditional) amount. In the 28% tax bracket, you are saving ~$2,800 for every $10,000 contribution. Weigh this against the future benefit of no taxes on distributions from a Roth. As you say, it is difficult to answer, but there may be some things to consider, such as if you are lucky enough to receive a pension when you retire, If so, then you may remain in a higher tax bracket in retirement and know that distribution will always be taxed at a high rate, there by justifying a higher contribution to a Roth now. Or if you do not have a pension and are expecting to be in a lower tax bracket in retirement, them maybe take advantage of higher pretax contributions now.
Normally traditional 401K for withdrawals before Roth IRA. Let the Roth IRA grow tax free as long as possible. In unusual tax years with high income or you need some cash with lower taxation to stay out of a high tax bracket then a Roth IRA withdrawal can make sense before the 401K is depleted.
fdwaller - Any funds distributed from a traditional 401k are taxed as ordinary income (i.e., similar to a salary). Distributions from a Roth are tax -free. It may be good to sit down with your accountant and ask him/her this question because determining which tax bracket you are in now, and which you will be in in the future can really help answer this question.
Two more hours down! Another big thank you to the advisers who have been with us this morning.
Hi, I'm Bobbie Munroe CFP, a NAPFA registered financial planner with offices in Atlanta and the Tallahassee area. My thanks to Kiplinger for giving us this opportunity to share unbiased advice with the Kiplinger readers.
As we head into the second part of the day, we have Mike Eklund, Delia Fernandez, Bobbie Munroe, Mark Wilson, and Peter Ashby. Welcome!
Hello everyone. Mark Wilson, APA, CFP(r) of The Tarbox Group in Newport Beach, CA joining the chat. Keep those questions coming.
It's probably best to go to www.napfa.org, enter your zip code and do a search. That's the website for the National Association of Personal Financial Advisors, or NAPFA, the national organization of fee-only planners.
As someone rapidly approaching retirement, does it not make good sense to devote a portion of my IRA to some higher dividend assets? Also, if one annuitizes part of his IRA, does that shield that amount from minimum distributions?
Howard, I'm going to answer part of your question. The IRS has just ruled that a portion of an IRA (not to exceed 25% of the balance or $125,000 whichever is smaller) can be set aside into a "longevity annuity" that is then scheduled to make distributions at a later date (i.e. beyond the required minimum distribution age of 70 1/2). For example, you can set up such an annuity to delay payments until age 85. It is temporarily carved out of your IRA balance and not subject to minimum distributions at age 70 1/2, but of course must start to distribute at the age you've specified. This can help to preserve an IRA; it's not really meant to shield it permanently from minimum distributions. Because this is new you may want to consult a savvy advisor about this technique.
Howard, focus on total return needs for your investments compared to how much return volatility you can withstand and understand. Some people do move to a lower risk portfolio as they retire. Another concept is having three to five years worth of withdrawals in fixed income investments, i.e bonds, to provide some stability.
And, as always, you can find a fee-only personal finance adviser in your area on napfa.org
Howard - It's difficult to answer that question without knowing more about you and your portfolio. You should be aiming to get a rate of return from a diversified portfolio that will enable you retire successfully. Often you need to "back in" to this return by analyzing how much you will need in retirement, and then investing accordingly to see if the portfolio can sustain this distribution rate. For the IRA question, if you lower the balance by taking distributions before you are 70.5 (by "annuitizing"), then that will lower your RMDs; however, you are paying taxes on these distributions whenever they are made, so there is no benefit.
Hi Hassan! This is Kiplinger's round-up of the best Vanguard funds for retirement savings:
Hassan- I agree with Pat and Michael on the Vanguard funds as a good choice. Something else to consider depending on the amount of money you have to invest in bonds is seeking out an advisor who can help you with individual bonds with staggered maturities. If you hold the individual bonds, you know exactly what you back at maturity(unless bond defaults) vs a bond fund which is constantly turning over bonds and in a rising interest rate environment when the NAV of the fund falls and everyone gets worried and starts cashing out, fund managers have to sell bonds they otherwise would not have to satisfy redemptions and this can have a snowball effect on the falling NAV of the fund. You need to have enough to put into individual bonds so you can adequately diversify though and build a ladder of maturities. Another good fund option is Dimensional Fund Advisors which are low cost and have not experienced this bond net redemption issue like retail bond funds.
Hi, I'm Bobbie Munroe CFP, a NAPFA registered financial planner with offices in Atlanta and the Tallahassee area. My thanks to Kiplinger for giving us this opportunity to share unbiased advice with the Kiplinger readers.
Hello everyone. Mark Wilson, APA, CFP(r) of The Tarbox Group in Newport Beach, CA joining the chat. Keep those questions coming.
It's probably best to go to www.napfa.org, enter your zip code and do a search. That's the website for the National Association of Personal Financial Advisors, or NAPFA, the national organization of fee-only planners.
