Jump-Start Your Retirement Plan, September 2014 - Live Chats, Q&As: Free Advice on Retirement, Investing, Personal Finance -- Kiplinger

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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.

  • @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. 
  • Hi Ruth, congratulations on successfully saving for retirement! Yes, I think you are wise to give it a year with the resources you have. Very smart. I think your plan to pay off the loan as you've suggested is good.
  • 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.
  • @Ms. Y: I don't have a crystal ball to see what Congress is going to do (neither do they!) but my advice would be to proceed as planned and reevaluate if something actually changes with the law.
  • @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. 
  • I am 63 and I am a contract employee. My contract is scheduled to run out between now and the time I am 66. If I choose not to seek other employment will my Social Security benefit continue to increase until full retirement age even though I am making no contribution to the program?
  • parisorbust asks: Retiring overseas in a few year with all money in 401k/IRA. How can investments be managed when Fidelity/Vanguard/etc will not non US residents to purchase ANY investments (only sell).
  • @TN you should be making contributions to SS via self-employment taxes on your personal return if you are a 1099 employee. SS does pay more the longer you wait until you collect. 
  • @TN: Yes, assuming you qualify for SS benefits, your benefit will increase 7-8% annually depending on your year of birth until a maximum of 132% of your benefit at age 70. At that point, there's no advantage to continue waiting to claim SS.
  • TN - I hit post too early - look for the FAQ on the SS site (which is very good these days) and try question 7.
  • Parisorbust I'm not perfectly sure how to remedy that situation. I would start with an attorney that works with transnational or cross-border clients. I cannot imagine you are the first person to look to relocate abroad yet keep their investments in the US.
  • My mother is 98 years old. What kind of investments would be appropriate for her? We're thinking of bonds but feel she still needs some stock funds. She has some CD's but rates are low.
  • Why has my reit (VGSLX) dropped 8% during September
  • @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.
  • 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
  • @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. 
  • I am 57 years old and have both an individual IRA and company sponsored 401k plan. I understand that withdrawls from the IRA cannot start until 59.5 years of age but I read that I can start withdrawls as needed from the 401k once I turned 55. Is this true and what tax implications can I expect?
  • Ricardo - one more thought - a way to think about volatility is whether you are paid for it over time and it looks like long term that is true here.
  • 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.
  • Oops - tks, I misspoke - you said this was a 401(k) not IRA. Check the rules of your plan which dictate any distribution scheme. But I doubt it's available. My previous answer applies to IRAs. Sorry.
  • @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. 
  • I’m currently 60 years old and I want to retire at either 66 or 70. If my risk tolerance, is 60% Stocks & 40% Bonds. What asset class mix in my IRA portfolio should I be allocated in to ensure I’m properly diversified?
  • My SS at 66 FRA will be $2500 and $3,500 at 70 . Is it better to pay off my $200,000 mortgage with a 3.5% interest rate, and retire at 66 or don’t pay off the mortgage and live off the 200k and take SS at 70?
  • 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.
  • @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.
  • @tks - the 55 rule for 401(k) is that you must retire after 55. Check your plan documents if they have this provision, it's fairly common though. 
  • @tks There are other ways to avoid the 10% penalty as well if you need funds, but leaving money in the 401(k) that you'll need before 59.5 (assuming you separate from service after 55) is often times a good plan
  • I am currently 57 years old and have both an individual IRA and company sponsored 401k. I understand that I cannot withdraw $ until 59.5 years of age from IRA, but hear that I can from 401k as long as I am over 55. Is this true and what is the tax implications?
  • @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. 
  • @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.
  • Good point Robert! @Bob K: As Robert said, the risk tolerance is only one piece of the pie in terms of the information you should consider when putting together an overall investment plan!
  • @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. 
  • @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.
  • @tks What is you objective?
  • @Bob K: I'm personally a big proponent of entering retirement debt free so I'd say pay off the mortgage. But other advisors may feel differently.
  • 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.
  • Agree completely Tyler... paying off the mortgage is most often something people should target
  • 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.
  • @Vark77... you will need to run an income tax projection to know if you shouldn't tap retirement accounts. I see people in these situations with negative taxable income and they miss opportunities to withdraw on a low tax basis
  • 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?
  • Thomas Duffy, My objective would be to leave the funds in the 401k once I leave my current employer, and take 4% maximum out per calendar year as needed to supplement income as contractor before I turn 62 and collect SS and tap into the IRA.
  • Hi Ohio Buckeye, we run an excellent report in the office that considers birthdate, gender, PIA, spending needs, future earnings, etc. It compares available strategies to show you which one provides the most overall income from SS to your household. You may choose a different strategy for other reasons but clients find it quite helpful. Most fee-only planners would have a similar tool available to provide the report at a reasonable charge. I recommend you get specific guidance with your actual benefit, spending numbers.
  • @Vark77 it sounds like you have a lot of moving pieces, and I certainly can't say which accounts would be best to tap from an investment standpoint. I do think you appear otherwise are thinking about things correctly. Keep in mind the limitations on one-time partial withdrawals from the TSP. Also, try to coordinate your investment approach over your accounts. Some of your concerns are fairly (medicare costs) are likely minor compared to keeping your investment plan. While we want to incorporate taxes in the plan, don't put too much of the tax decision in front of the investment plan. 
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