Jump-Start Your Retirement Plan, September 2014
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, September 25, from 9 a.m. to 5 p.m. ET.
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How much money will I need when I retire. How can I make my inheritance work best for me? Can you help me refine and define my investment strategy? I have spent much time over the past few years (since my Mom's untimely death) trying to get a handle of investing. After tuning in and reading, I believe I understand the world of investing better. Now, I have to get into the game because I'm not earning enough. I'm single and I've got to make my money work smart! Thanks for any guidance you can offer me.
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Thanks for participating today an Rita
You are correct there is no set number for any of us.
The key is having sufficient cash flow in retirement to cover all our expenses -- many of the same ones we have now like housing costs, transportation, food. Plus the extras travel, increased entertainment etc. We have to be mindful that the cost of living will be significantly higher 25 years from now due to inflation. My expectation is that inflation will cause our cost of doing the same things we do now to double by 2034.
The way I like to think about is we will have
a certain amount that comes in from Social Security. If you have a pension you if will have that money
too. What we all have to plan for is
making up the difference from savings & investments, employment or reducing
life style expenses in retirement.Try the Kiplinger calculator to estimate the effects of inflation
on your lifestyle expenses. -
Jodi, these are great, but very deep and complicated questions... it sounds like you need to talk to an advisor about creating a personalized strategy that incorporates all of the concerns you have here. I would advise speaking to a NAPFA fee-only planner. To answer the question about how much you need to retire, we first need to answer how much 'income' you need from your portfolio. To help with that question, I recently saw a great video linked here. -
Hi Mike T - not sure how you would avoid having any annuity payment not taxed unless there is a portion of her own money in the distribution. Short of that, you'd be inheriting an annuity that is taxable at distribution. Have you read the contract or met with an agent who can explain any other options available in the contract? Otherwise, likely taxable . . . -
I retired in July, I just received a check for almost $9,000 for unused sick days. The taxes have been taken out. I have investments at about 1 million dollars, an pension and SS of abut $85.000. I would like to put a third of the money in an account that pays off a loan I have of about $70,000. I want the money to be used to go toward the payment of the loan each month. I feel I need a year to see how I do on the money I have for retirement.
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For anyone looking for a little supplemental money in retirement, check out these great dividend stocks:
10 Great Dividend Stocks to Own in Retirement-Kiplinger
www.kiplinger.comAn ideal stock portfolio for a retiree would be a diversified mix of strong companies that pay generous dividends. If the company sells products that are easily explained to the grandkids, that’s a plus. -
@MikeT. Life insurance paid during lifetime, even endowment contracts, will be partially taxable. You'll want to find out the basis in the policy (how much your Mom paid) since tax will only be owed on the tax deferred growth and not on the basis. There may also be a variety of payment options to receive the funds, allowing your Mom to stretch the payments (and the tax) over a number of years. A conversation with the insurance company about your Mom's options are a good place to start. -
Jodi, the best advice I can give with inheritances is to make it a part of your plan. It is a great gift that your Mother wanted you to use in the best possible way for you. Incorporate it with your other assets in a holistic approach towards your goals. If your investment goals have a long time horizon, you are correct, investing for growth is likely the right approach.
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If anyone else interested in retiring abroad, here's what you need to know:
How to Retire Abroad-Kiplinger
www.kiplinger.comIf your dream is to live overseas, we tell you what you need to know. -
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@i have just about made it - I think you are on the right track incorporating taxes into your withdrawal plan. Very, very generally, I often recommend maximizing the 15% tax bracket with withdrawals from pre-tax accounts, then taxable accounts. If you don't need the money, it may even make sense to convert some to a Roth account. I would recommend speaking to a holistic advisor and reviewing tax projections to determine the strategy. Keep in mind the taxes you'll have to pay on those withdrawals.
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@Betty: The appropriate investment depends on Mom's income needs. Whatever she needs for income, emergency, and health care expenses, keep in a conservative investment. CDs or short term bond fund would be reasonable. If there's a pretty good chance that she won't use the rest, and it's going to be inherited by the family, then it's reasonable to invest it as if it's the beneficiaries money already. It's not uncommon for our 90 year old clients to have a higher portion allocated to stocks since they won't use the money during their lifetime.
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Hi Ricardo, glancing at Morningstar's analysis of this index fund, it has really low expenses, is a good long term REIT index fund and is consistently more volatile than it's category peers. Assuming this is a long term holding for you, it looks like a solid choice in it's category. Due to the continuing pressure on RE prices, you may continue to see this
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@Betty - for whatever income she needs for the next 10 years, CDs are probably the best bet. If any of the portfolio beyond that is meant for gifting purposes, perhaps it is worth diversifying. It is very difficult to say without knowing her needs and goals, but I would simply be cautious if she is in touch with her accounts still what impact any fluctuation in value would have for her. It may not be worthwhile to maximize returns if it would cause her to worry over it.
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TKS - it's true but it's a calculation, usually far less than what one is hoping for because the calculation is similar to an annuity and if for any reason you interrupt the distribution scheme, the entire amount becomes taxable. We use this in very special circumstances only and nowhere else.
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@Ricardo real estate is a great diversifier, but we sometimes forget it can be volatile. You'll win by rebalancing into assets that drop swiftly. Look at what's gone up, and see if it makes sense to use this as an opportunity to buy into real estate.
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Ricardo, Its almost impossible to know why any security, let alone a fund holding over 130 positions moves in any direction. My question would be what was your objective when investing? Was it price appreciation? Income? A combination of both? What was your time horizon? Short term (5 years or less); medium term (5 - 10 years) or long term (10 years +)? Has anything changed in your objective? If so perhaps you should reevaluate if this position is still appropriate for you especially time horizon and income or growth.
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@TKS - An early withdrawal penalty of 10% is applied to withdrawals from IRAs before 59 1/2 and 401(k) before age 55. After age 55 for the 401(k), you also need to have terminated employment from the employer that sponsors the plan. You'll still owe income tax on the IRA or 401(k), it's simply the 10% penalty won't apply after age 55 or 59 1/2. Therefore, if you retire between 55 - 59 1/2, there's an advantage to leaving the money in the 401(k) rather than roll it to the IRA so you can avoid the 10% penalty.
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@bob k - I would look at your mix over all of your accounts, and use assets that work well in the IRA for that part (bonds, real estate, commodities). However, don't just rely on "risk tolerance" alone. I believe your assets should be aligned to your goals and needs, not how you answer a questionnaire. How you answer it today may be different than tomorrow.
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@Bob K: An appropriate allocation might include a decent portion of the stock % to domestic equities, with a tilt toward small/value mutual funds. You also might consider 1/4 or 1/3 of the stock allocation (15-20%) or so to international and emerging market stock mutual funds. As for the bond portion, you have a lot of options, but the combination of a good domestic and international bond index fund should suffice for diversification purposes.
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@bob k - the mortgage question is one where having a financial plan really helps, and working with a financial advisor who knows your values. I can agree having a long-term mortgage makes sense financially... however... many people prefer the feeling of not having that liability in retirement. It all depends on your assets, goals, needs in the context of an overall plan.
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@tks The tax implications will be the same at any time you take money from a qualified retirement plan. If you put the money in on a tax deferred basis you will pay the tax upon withdrawal. If you put in after tax contributions, and the plan allows you to take those dollars out, you would pay tax on the amount over your contribution (essentially your basis in those contributions) for the after tax portion only.
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We are planning to buy into a continuing care retirement community (CCRC) and want to choose the best way to pay a large entry fee from current assets. Because a large portion of the entry fee can count as a deductible medical expense, this also appears to be an opportunity to tap retirement funds with little or no income tax. I would appreciate your insights on the following:
Regarding which assets to tap for the entry fee (and which to retain as liquid reserves):
1. A large portion of the entry fee (perhaps 40% – 80%, depending on unit selected) will be paid from sale of our principal residence. This would have no income tax impact. I am inclined to pay the rest of the entry fee from other non-retirement assets to the extent possible and reasonable, and resist tapping IRAs. Does that bias make sense?
2. Which of the following liquid assets would be most sensible to tap? (The flip side is, which type(s) are best to retain as reserves––and how large a liquid reserve is sensible for a couple in a CCRC where fees include assisted living and skilled nursing if needed?)
• Our savings accounts and money market fund pay near-zero interest but are readily accessible when needed without affecting AGI.
• Our I-bonds (issue dates from 2001 to 2010) offer better returns, but are less conveniently accessed and tax would be due when redeemed. [Taxable accrued interest ranges from 9% to 54% of value (17% overall).]
• I’d like to keep some in our Tax-Managed Balanced Fund (VTMFX), but this is probably the least suitable as emergency funds due to unknown timing, value, and tax consequences. About 16% of current value is capital gain––mostly long-term.
• Is it reasonable to treat Roth IRAs as liquid asset reserves?
Regarding the possibility of saving income tax on IRA or federal employee Thrift Savings Plan distributions:
3. Whether or not we tap IRAs/TSP to pay the CCRC entry fee, it seems the medical deduction element of the fee presents a one-time opportunity to take some IRA/TSP money at a reduced income tax rate. Most years, I expect to be in the 28% bracket and to limit withdrawals to the RMDs. (My wife began RMDs in 2014. I must begin RMDs in 2016.) If the one-time deduction reduces taxable income to the 0% –15% brackets, which (if any) accounts should we consider tapping beyond RMDs?
• My TSP is 100% taxable.
• My traditional IRAs are about 78% taxable, and my wife’s are about 93% taxable, due to some nondeductible contributions.
I think some or all of any extra distributions could be in the form of conversion to Roth IRAs, allowing for continued tax-advantaged growth.
4. This question assumes that withdrawals from the TSP and partly-taxable IRA are treated separately. That is, when using Form 8606 to determine the taxable portion of IRA distributions, my TSP value does not enter the calculation. Is that accurate?
5. I am aware that, even with a lower taxable income from a large medical expense, a higher AGI from extra IRA/TSP distributions could trigger the 3.8% surtax on investment income, phase-out of itemized deductions and personal exemptions, and higher Medicare premiums. If I avoid those thresholds, am I on the right track with this scheme? I want to make sure I’m not mistaking “too good to be true” for “too good to pass up.”
Thank you. -
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Bob K, this might help... From Kiplinger's Sandy Block: Should you pay off the mortgage before you retire?
Should You Pay Off Your Mortgage Before You Retire?-Kiplinger
www.kiplinger.comPaying off your mortgage will bring peace of mind, but there may be better uses of your money in the short-term. -
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There is a 9 year age difference with my spouse. We are debt free, maximizing our contributions to IRAs and 401(k) accounts, and have $800,000 in retirement accounts. Currently we are both working with the first to retire in 5 years at age 66 with the second retiring 2 years later. We would like to get the maximum from social security and could use our retirement funds to fund early retirement for the younger spouse. What social security strategy would you recommend?
