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.
3rd & 7 37yd
3rd & 7 37yd
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Pete, as long as you are comfortable with the amount of volatility your portfolio has historically endured and you like the risk/return trade-off, I don't think you necessarily need to change things up just because you reach a certain age or are ready to retire. You simply want to make sure that any funds you are going to need over a short period of time (say within the next 3 years) are invested in something that can't decrease in value (money markets, CDs, etc.) while any funds you might need over the medium term (say, years 3-10) are invested in assets with relatively little down side (like bonds). That would enable you to keep any funds you don't need for at least 10 years in stocks, which would enable your equity positions to endure a significant amount of volatility before you need those funds. There is a significant probability that a basket of stocks will be worth less one year from now, but that probability is minimized when we question what their value will be 10 years from now.
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Will sometimes instead of choosing A or B, I look at C which is a combination of both. Indeed, you might choose funds or etfs for bond diversification (and yes, bond portfolios, like stock portfolios, should be diversified). But then you could also do a ladder with part of your money, Maybe you would look at corporate bonds: one that expires in 2 years, one in 4, one in 8 and one in 10. Each time one matures you would reinvest the money at the "then current" rate. If rates ever get real high again, you might choose to lock in in for a longer time using longer term bonds. How much per bond is variable. No less than $10K per bond for sure and probably not more than $100-$150K/bond (they do have individual risk which is why I would keep the number lower).
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Will, to buy an individual bond might be pricey. This comes down to access to the bond market. Would you be buying and holding or trying to trade? I wouldn't be keen on trading individual bonds unless you were trading in large lots. Buying and holding an individual bond might not be a bad idea if you can get a good rate and know your issuer. i.e. Lehman Brothers offered bonds with great interest rates but went belly up. If your not certain,
buying a bond fund might be a better approach. -
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Will, I think for most investors, the advantage of bond funds outweigh any potential drawbacks. You can get broad, global diversification, across multiple types of bonds at a very low cost with just a few funds (or less). But as Bobbie pointed out, who says it has to be one or the other? It might make sense for some folks to do a combination of the two, depending on your goals.
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Sounds great Joe. You are on top of it. If you are comfortable with how a portfolio like yours has performed historically during both the good times and the bad, then I think you are right where you want to be. Just constantly remind yourself of the level of volatility that you know your portfolio will occasionally endure, and stick to your guns when that volatility occurs.
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I am interested in what other advisors think of custodial taxable accounts for children. I'm not a big fan, mostly because they can do as they wish when they become of age (if they know about it:-) And it can hurt the financial aid process much more than money in a parents account.
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Craig, here's a link to the definition of "earned income" straight from the IRS... http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit/What-is-Earned-Income%3F
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Here's some info on Roth IRAs for kids, Craig. Note that they have to have earned income to have one.
Roth IRAs for Kids
www.kiplinger.comMy 16-year-old daughter earned money this year by teaching piano lessons to younger children. Can she set up a Roth IRA? Any suggestions where? -
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On the other hand, here is some information on different types of custodial accounts:
Ways to Give Money to Children
www.kiplinger.comCustodial accounts and trusts are ways to transfer cash to your kids. -
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To sum up the conversation on the custodial Roth, a child can contribute to a Roth IRA assuming they have earned income, regardless of their age. However, it cannot be a custodial account -- the child would essentially have the ability to access the money in the account and make whatever decisions regarding the account as they please. A parent wouldn't be able to prevent the child from withdrawing the funds. Is this fair to say?
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Alex, your wife might be ordinarily eligible for spousal benefits based on your Social Security record, but they will be reduced by two-thirds of her government pension not covered by Social Security. This is known as the Government Pension Offset, or GPO provision.
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Hi Joe, if your modified adjusted gross income turns out to be more than what is allowed in order to make a Roth IRA contribution, you'll likely need to withdraw the contributed funds, claiming the contributed funds to be an excess contribution. The custodian with whom you made the contributions to should be able to help you with this.
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Getting Around Income Limits for a Roth IRA
www.kiplinger.comAdvice on how to navigate income limits for a Roth IRA plan. -
Joe, if you don't already have a traditional IRA, you could choose to contribute to a traditional IRA rather than a Roth IRA, even though the contribution would likely not be tax-deductible. This would still allow you access to a tax-advantaged investment account -- except the advantage would be tax-deferred growth rather than tax-free growth. After taking this step, if you later determined that a Roth IRA fit your needs better, you could potentially convert the traditional IRA balance into a Roth IRA account. In doing so, you wouldn't need to pay taxes on any converted dollars that you have already paid taxes on. This strategy gets a little more complex if you already have money invested in a traditional IRA account.
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Sorry Jeff, loans on Roth IRAs aren't allowed. You can take a distribution from the account, but that would permanently reduce the value of your account as those dollars can't simply be repaid. Do you have access to a 401k or employer sponsored retirement plan? Your chances of being allowed to take a loan from those types of accounts is higher.
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Molly, I'm not an estate attorney, but my impression is that if something were to happen to you today (knock on wood), your accounts would find your way to your daughter even though she recently went through a name change. Still, you should update your beneficiaries as quickly as you can.
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Adam, there are advisors who work with software products such as Social Security Timing and others which allow them to give you a very close estimate of how much your Social Security will be reduced. Otherwise, as a general rule of thumb, the Windfall Elimination Provision, or WEP reduction, is limited to one-half of your pension from non-covered employment.
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Hi Adam, there was a comment below form Delia reading the Government Pension Offset. Here is a link as you will likely be subject to the offset and to learn more. http://www.ssa.gov/planners/retire/gpo.html
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As always, you can find a fee-only personal finance adviser near you at www.napfa.org
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