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.
Fees vary by region, could be anywhere from $75/hr on up, depending on the issue and scope of the engagement. And be sure to ask if they give hourly or project advice. Some advisors want a retainer or other relationship.
If you're looking for a personal finance adviser near you, check out www.NAPFA.org, you can also learn more about wealth building in our newly launched Wealth Creation channel at wealth.kiplinger.com.
FDWalker, I suggest that hourly clients visit me every two years for a checkup, just like the dentist (but more fun of course). I suggest that you try to do your first planning engagement soon as it will help you prepare for that retirement which will be here before you know it. Not all planners work hourly but many of us do. The rates vary quite a bit. An urban area is likely to cost you 150-250/hour while a rural area might be less. Your first engagement will likely be longer than subsequent ones as the advisor will already be familiar with your circumstances
fdwaller - Although true fee-only advisors do not sell products, not every fee-only advisor will work on an hourly basis. Check out napfa.org and make some phone calls to find out which will provide advice this way. Unfortunately, fees will vary greatly so you will have to ask.
Lolitta, my general guidance for an emergency fund is three to six (or nine) months of normal expenses saved up for an emergency. In other words, if your annual budget includes a vacation, you wouldn't necessarily include that need in an emergency fund.
Ryan, I try to come up with an overall portfolio that will address the needs as a couple. Then, when there is a big difference in risk tolerance, I put the more aggressive investments with the spouse that has the higher tolerance and vice versa.
Ryan, have you and your wife actually measured your risk tolerance? The Vanguard Web site has a risk tolerance questionnaire. That will help with allocations. I agree with Bobbie that you can do a "his and hers" allocation that, combined, makes sense for both of you.
Ryan, you also want to be mindful of asset placement. Put investments that are not tax favored in tax sheltered accounts: fixed income with interest and REITS for instance. Then put investments that are tax favored in your taxable accounts: things with capital gains and qualified dividends. This will actually make a significant difference over time. Now, it won't work out so that everything can be placed optimally but do what you can and increase your overall after tax return.
Ryan, if you have ROTH IRAS, I often suggest that the most aggressive investment be in that account to hopefully produce the most non-taxable income over time.
Ryan - Wasn't this addressed in your wedding vows? ("In sickness and in health, in aggressive and conservative portfolios...") :)
Your issue is common. Try to work together to come up with a plan *ahead of time* that will allow you to build an overall portfolio that you both can live with. Too often, couples change account risk/reward at the wrong times (i.e. selling when the markets drop). You'll want a mix that you both can sleep with over time.
Ken, I love the idea of having your daughter take out student loans because then she will feel like she has some skin in the game. You could do this with the entire intention of paying them off in full when she graduates (what a great gift). That said, I would probably go on and liquidate the amount needed sooner and keep cash even though it isn't paying much. 3 years is a short time horizon and I would keep any money I needed by then invested.
Ken, I would have her take out a loan. Most don't start charging interest until after graduation and since you have a low interest rate on your mortgage (that might be giving you a tax break), I wouldn't pay the mortgage just yet. This will give you some flexibility to pay off your daughter's loans in 3 years or if your circumstances change, the ability to fund your retirement
Ken, as for the mortgage, I think a paid off home in retirement is a fabulous thing, tax benefits be hanged. But is all this money (mortgage and education costs) coming from a taxable account? Do you have gains that will create a tax liability when you sell? If so, you need to visit with your CPA/tax preparer and/or financial planner to make sure you do this in a "tax wise" way. You don't want taxes to drive the boat but you do want to know the consequences and minimize the tax bill if possible. BTW, you are right that the market is up. But I thought that a year ago...and two years ago:-) You never know. But don't feel bad at all about selling at these high prices even if the market continues the bull run after you sell. Hindsight is 20/20.
Lucy you can often get better rates online. Have you looked at Ally Bank?
Lucy, congratulations on having your emergency savings accumulated. You can certainly do better with an online bank - and try checking out credit unions as well (as long as you qualify for membership).