Jump-Start Your Retirement Plan, September 2015
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 17, from 9 a.m. to 5 p.m. ET.
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Welcome to September's Jump-Start Your Retirement Plan Q&A!During the event, expert financial advisors will answer questions across an array of topics, like:- Taxes and Retirement -- including gift taxes, estate taxes and wills
- Saving for Retirement -- IRAs, Roth IRAs and 401(k)s for those building a retirement nest egg
- Income in Retirement -- Social Security and income investing strategies from those in retirement and about to retire
- Other financial challenges -- from investing to saving for college to paying down debt
Talk to you soon! -
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My wife had some job changes resulting in a few 401k accounts at different recordkeeping agents. We consolidated with Fidelity, making investment choices among mutual funds, for majority of the assets. We have left a measurable amount (over $100k) on the sidelines in Money Market account, because I told her a couple years ago when the transfers took place "...certainly, the market will not go much higher than 15,000. When it heads down, we will jump in with periodic purchases, rather that put it all in at its "all time high". Well, it hasn't come down, only up. We have been on sidelines for about 2 years with this money, thinking market is way too high now to put it in. I'm frozen. What would be best approach? Set up dollar cost averaging with the assets and just make automated purchases, simply disregarding record high values of the Dow? I just feel we will put assets in, and only watch the bubble burst...not benefitting from having it on the sideline at that point. The proceeds represent 1/5 of her 401k and she is 51. Put another way, do we leave that amount in Money Market at this point? -
Good morning sidelines - I think lots of folks have a similar experience to yours of feeling they've 'missed' something on the upside. For what you've described, I think dollar cost averaging is a way to ease the psychological effects of volatility - not certain research shows that it results in a dramatically different outcome, however, if it gets you in and keeps you in the market for what is intended to be long term investing, that's a good thing. -
For anyone wondering about Money Market accounts:
Master the Money Market
www.kiplinger.comThe money market is a collective name that describes all the different ways in which governments, banks, corporations and securities dealers borrow and lend money for short periods.
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@sidelines I don't believe you can ever time the market. 15,000 isn't a relevant number to your goals and objectives. I would look at how much money you need for 5-10 years from the portfolio, have it invested conservatively, and position the rest for growth. You're out of balance so you can choose whatever way makes you comfortable to get back in, just have a plan and stick to it no matter what the market does. Your long-term money should be positioned to outpace inflation. -
HI Sidelines. Remember that your 401k accounts are meant for retirement and that typically you won't withdraw those assets until age 70 1/2. That means your wife has almost two decades of market ups and downs. If you all are more comfortable dollar cost averaging in, do it that way, but whatever you do, do it now! Get in the game! -
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Everything you ever wanted to know about 529 plans:
529 Plan FAQs
www.kiplinger.comWe've got answers to your frequently asked questions about 529 college-savings plans. -
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If your daughter decides not to go to college and you don't want to pass the account on to a relative (or yourself), you can always withdraw the money. Realize that the earnings are subject to a 10% penalty, but the principal you contributed you get back without any taxes or penalty.
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Hi Denise, I like to look at the college savings goal in the context of your overall plan. I think you are right to wonder about if a college fund is the right approach. Without knowing you, there are other options. A Roth IRA is often a good one if you qualify as it can help fund two goals. We may also see the idea of college change in the future; the calls for free community college, etc., may continue to expand, and meanwhile the costs can’t rise like they will forever! Technology may change college entirely. I’m also not a fan of giving up too much control over investments as is the case with 529 plans. But, they are a tool to consider.
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Denise, Robert makes a good point - 529 can be ideal for a dedicated college savings plan in that it's like an IRA for college savings. But where there is a question about suitability of college for a child (wish more parents would consider this as you are), it makes sense to consider alternatives.
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Denise- In most situations the accounts are owned by the parent who controls how the funds are used. If your daughter does not attend college and you use the funds for another purpose the only negative coonsequences are the EARNINGS are subject to income taxes PLUS a 10% penalty tax. I've seen some studies that sow that the benefit of the tax deferred earnings can outweigh that penalty.
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Amber – the amount of inflation is unknown, best to use higher assumptions in this advisors opinion! The best way to handle it is by having a diverse mix of assets that have historically kept up or outpaced inflation in your portfolio. Nothing correlates with inflation however, so assets will go up and down while inflation seems to always rise. It is a very long-term strategy. Other than keeping a long-term mortgage, this is about the best I think you can do.
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Hi Amber, a long time ago, financial planning involved a straight inflation number - today we've improved that to include purchasing inflation (milk, bread, gas), tuition inflation, and medical inflation. And then we stress test those assumptions with varying market returns. Recently of course, inflation has been quite low while historically closer to better than 4% as an average. Given that, you can 'kill' a plan pretty quickly by tweaking these numbers. It's a guess - but the reason to do scenario planning (moving that inflation dial around) is to understand it's impact.
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Hi Amber - You're wise to assume inflation will impact your retirement planning. While inflation has been very tame in recent years, it has averaged around 5% during a good part of the last century. It's more important to adjust your assumed investment return vis-a-vis your assumed inflation rate. So for example, we assume 3% annual inflation in our plans, but only 6% investment return. The key is keeping the proper corridor between the two numbers. If inflation averages 2% then our clients would need 5% return and so on.
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Amber, predicting inflation is a shot in the dark. We can always use historical numbers as a base, but the future is always an unknown. We always counsel clients to look at scenarios with low/mid/high inflation rates to see what the impact might be on their long-term plan in each scenario. Then we discuss what they can stomach in terms of each outcome. The risk of the portfolio may need to be adjusted (example - take on more risk to achieve a higher investment return) in order to outrun higher inflation.
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Currently age 60 and plan on retiring at age 62. Currently have Vanguard Roth 2020 Fund. Total worth of Roth 2020 fund is 20K.
Also have four stocks - Altria, Phillip Morris, Kraft Heinz and Mondelez in taxable Vanguard Brokerage Account. Total worth of Brokerage account is approx 93K.
Would it be prudent to sell some, or all of stocks in taxable account over a two year period of time and transfer proceeds of sale to the 2020 Roth fund?
Roth is not primary source of retirement income as I have a 401K, military retirement, and defined pension from current job. House is paid for.
Thank you
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Hi semperfiblue, I can't give specific investment advice here, but if you're eligible it's always good to shelter money in a Roth (assuming you've had it over 5 years before you withdraw). Note you're moving a lot from equities to bonds, and also note that most Retirement Target Date funds change their allocation somewhat substantially to bonds upon hitting the target date. Make sure that's your intention.
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semperfiblue - First of all, thank you for your service to our great country. Without knowing the basis of the 4 individual stocks that you mentioned, it is difficult to say if it's wise to sell them and recognize the capital gain. Your tax bracket will also come into play. You may contribute up to $6,500 per year to a Roth IRA at your age while you have earned income. Like Robert mentioned, you need to decide what stock/bond mix is appropriate for you to meet your goals before you convert equities to a more conservative bond fund.
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Hi Semperfiblue - First off, from a fellow veteran thank you for your service to our country. Now about your question. . .Selling stocks and placing the proceeds in a Roth IRA is a curious question because it assumes that you will have earned income and are eligible to contribute. The problem here is that you can't put $93,000 into a Roth IRA over two years. Instead I would consider the fact that your brokerage account is taking on both market risk and specific company risk by only holding four stocks. Please consider diversifying your risk and purchasing mutual funds instead. I'm not sure what your capital gains are for those stocks, but you will want to consider that in your decision. Good luck.
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Good morning Semperfiblue, as you probably know, we're not able to give specific investment advice in this online public forum, so like the others, I'll speak in general. Are you working off a plan? The reason I ask is because when we have a plan (and that would include an investment policy even if it's just a few paragraphs) the plan becomes the funnel through which we sift these kinds of decisions. Another aspect of that is the way we'd deal with individual stocks - when we buy them, we typically have a disciplined strategy in mind that includes at what price we sell them. The advantage of a fund like the Roth 2020 is the management is done for you - if that's your primary goal, it would accomplish that for those stocks as they get sold and then you hold the 2020 fund shares. I'd prefer you went back a few steps and develop the plan, an investment policy and then work off that.
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Find out if annuities are right for you:
Are Annuities Right for You?
www.kiplinger.comNot all annuities are alike, and some may not be appropriate for you. Take our quiz to see how much you know about these investment products. -
Jayesh, here is some advice on finding an annuity to fit your needs:
3 Ways to Guarantee Retirement Income for Life
www.kiplinger.comInsurers are rolling out a variety of guaranteed lifetime income products that they contend address baby boomers' desire for flexibility and choice. -
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This question is a combination of asset placement, and withdrawal ordering.
As part of my portfolio, I have a collection of bonds to fund necessary expenses for the next several years. As bonds they are in the qualified accounts, with stock holding in the taxable accounts. The bonds mature, and I want to move the proceeds to my checking account; but the general rule is to pull from the taxable accounts first. This means I am periodically selling the stock holdings in the taxable accounts, and buying the same stocks in the qualified accounts with the money from the matured bonds. This seems exceedingly complex in order to achieve asset placement and withdrawal ordering. Is there a simpler procedure that satisfies both asset placement and withdrawal ordering recommendations? -
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Jayesh, annuities are a tool to consider for retirement. In this advisors opinion they are often a tool that’s misunderstood and often oversold. I do not know what type of annuity this is, but I highly recommend you consider finding a NAPFA advisor who has no conflict to do a second-opinion before being locked into something like an annuity. Consider we would get a second opinion before making a TV or other major purchase. Make sure the product actually fits into your goals and needs before committing.
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Hi Bill, you're right - that is complex for the typical investor to manage on their own. An advisor would do this but if they are recommending and doing this, you'd know why and they'd be doing it for you. I'm trying to picture what you're doing and I can see there isn't enough information here. I'm a bit leery of recommending on a DIY distribution plan here without more facts -
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Bill- It is good to have assets in both taxable and tax deferred accounts, since it will give you the flexibility to balance distributions from the IRA and the taxable account to achieve your needed income for the year. By doing this, you will not need to take all dollars from either account and minimize purchases and sales and control how much income you recognize each year. This will allow you to control your taxable income and marginal tax bracket for the year.
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Bill – Bonnie’s absolutely right, this is very complex. A few general thoughts - I don’t agree with the general rule. There are many in retirement that pay lower and even 0% in capital gains on stocks who are better off taking money from IRAs and the bracket they are in. It is extraordinarily complex, as is the rebalancing part of your question. Another option depending on your tax status is to look at municipal bonds in the taxable account for some of the income need. I often look first though at trying to bracket maximize with ordinary income. Can work very well especially pre-Social Security / pensions.
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Bill - you are correct to think about asset location. That is putting assets that throw off income in tax-deferred accounts and other assets in the taxable accounts. We don't really have enough information about your individual situation to make a solid recommendation. Are you currently taking RMDs from the IRA? How old are you? What is your tax bracket? There are tax strategies to "fill" tax brackets, etc. You would be wise to have your CPA and financial advisor collaborate on this approach.
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