Maximize Your Money With Kiplinger and NAPFA, September 2016 - Live Chats, Q&As: Free Advice on Retirement, Investing, Personal Finance -- Kiplinger

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Maximize Your Money With Kiplinger and NAPFA, September 2016

Kiplinger is teaming up with the National Association of Personal Financial Advisors (NAPFA), whose planners will answer questions about tax preparation, filing and more. Submit your questions here and get free personalized financial advice on Thursday, September 15, from 9 a.m. to 5 p.m. ET.

    What is the "fear" about investment withdrawals that get you to the next tax bracket? There is much discussion about avoiding that but what if someone gets there by just a small amount? The impression I get is that hitting another tax bracket it to be avoided at all cost, but what is the real impact?
    KC, your pension income does not affect your Social Security benefit. Only earned income. It looks like you want to take your Social Security benefit at age 62. For most people that's not a good idea. Your benefit will be permanently reduced. Think about what you want to do in retirement and how much money you need right now. It might help if you consulted with a NAPFA professional who can explain your options. You could be making a very expensive mistake.
    Kcbrewmeistef, Any taxable income (including your pension) has the potential to increase the amount of your Social Security benefits that will be taxed. However, pensions are not considered earned income for purposes of reducing your SSI benefits before full retirement age.
    Jeffrey, Yes it does get stepped up.
    Scott, maybe - it can be nice to have rental income and it can be a pain to have a long distance rental. After you interview and price property managers to be the landlord in your absence, do the numbers still work?
    Jays, you've asked 2 questions 1) are you safe not investing and 2) did you make a mistake taking SS at 62. 1) no way to know unless we know a lot more and specifically how much you spend - that informs whether you 'need' to take any market risk for what we project is your longevity. Inflation, while low for the last several years has a historical rate of 4.22% - if we return to that or something higher, a lot of folks will struggle to buy milk.
    2) Probably common knowledge now that taking SS at 62 permanently reduces your benefits and the current growth rate on delaying benefits between full retirement age (FRA) and age 70 is currently 8% (hard to duplicate in the markets as a sure thing over a < 5 year period!). And you only have to live to about 81 to have won the bet on if it was worth delaying benefits.
    Jays, what do you think about inflation going forward? Our currency has changed every 50-75 years, and with it has come periods of inflation. In addition, we have never had as many unfunded future liabilities as a country as we do today, and we are not covering the costs any longer by borrowing or taxing, so we will be paying the bills via inflation. You are taking a major risk - the risk that inflation won't happen. There's no reason to have money you aren't spending over the next 5 years in a money market. Even if rates were higher, money markets always lose to inflation. I think you are likely mistaking stability with safety.
    Jays, to answer the Social Security question, my answer is "most likely" but there isn't anything you can do about it now. I will say that $2.7M will get most people through a comfortable retirement but it troubles me to see you keep all of that money in a money market fund. You can do so much more with that money. I believe your issue is not understanding how investments work. You don't have to get "burned" in the capital markets. It's a matter of understanding how they work and managing the risk that goes with them. You were smart enough to accumulate an impressive $2.7M. Take it one step further and find yourself a fee only financial advisor at www.napfa.org.
    Jays, one more thought - you may be smarter than many folks IF: they don't address the shortfalls soon. The last change to SS before the one in April 2016 took years to implement and the this most recent one took months. There is no 'politically protected age' at this point. They must reduce benefits, raise FICA rates, or delay benefits or some version of all 3. Who knows, you may be smart to take what you can get now.
    I'm born 05/1954 and my wife 07/1953. We both should live into our 90s and want to max social security. If my wife takes SS at her FRA and I wait until I'm 70, will she be able to switch and get half of my FRA amount after I begin collecting. I know she will not get half of the amount I receive at 70 but will she be deemed to get half of my FRA amount which is more than her's at FRA?
    Sammo, I HIGHLY recommend anyone considering an annuity go speak with a NAPFA, fee-only advisor for a second opinion. I meet too many clients after they realize what they've purchased is not in their interest, and they're usually stuck with a choice of holding onto a dud annuity and likely not making very much on it, or paying a major penalty to get out of it. Annuities can be very costly, and in order to overcome that cost they can take on a lot of risk.
    Sammo, I will also add to Frank's - you buy the contract, not the conversation. This is important because most annuity buyers never read the contract.
    "Lower-earning spouses who claim their own Social Security benefit before full retirement age take a cut of as much as 25%. But all's not lost. They can boost the payout when they collect a spousal benefit, and the size of the increase depends in part on the age at which they claim." Check it out:

    How Spouses Can Maximize Social Security Benefits

    www.kiplinger.comBut first, couples need to understand how it works.
    Hi John, I think they way you've asked the question is yes, however, let me invite you to ask a fee only planner to do an SS analysis for your household - it can be very illuminating.
    Tony, you could draw your IRAs down to $0 before reaching 701/2. That way you'd only have to take an RMD from your 401(k). You might also consider rolling your 401(k) over to an IRA. If all of your funds are in IRAs, you can calculate your total RMD across all accounts and just make one withdrawal to satisfy them. The determining factor for me would be what the investment options look like in the 401(k). Often the investment options in 401(k)s are more expensive than what you could buy in an IRA.
    I am 62 and have a Traditional IRA (250 k) and a ROTH IRA(27 k). I am looking for tax strategies over the next 8 years to keep the IRS out of my Traditional IRA upon reaching RMD age of 70.5
    Hi Jean, I applaud you for sharing your concerns even though you know it generally doesn't make sense to move in and out of the market. The most money is lost when people react to the drops in the market by going all to cash. I understand you are thinking of doing that now, before any potential corrections occur. But then when do you put the money back in? Usually we are already well into the recovery by the time people feel comfortable reinvesting in the market and they've missed the potential upswing. My suggestion to you is to look at how much of your target date funds are comprised of stock. Let's say it's 60% and your investments are worth $500,000. That means you have $300k in stock. If the stocks went to half, as they did in the Great Recession, your investments would go down in value by $150k. Could you tolerate that without being compelled to go to cash at the worst possible time? If not, move into a target date fund with less stock - not zero, but maybe not 60% either. Hope this helps.
    I am not aware of a reason but it is likely a futile exercise to look for reason in the tax code. Are you still working? If not, is you 401k plan more attractive than a self-directed IRA? Depending on the amount you wish to donate, this might tip the scales towards a rollover or a partial rollover.
    If one has a $1 million IRA in one of the large brokerages/banks, is it reasonable to split it between several custodians? IOW, should one be concerned about the FDIC/SPIC coverage limits.
    Andy, the "4% rule" isn't much more than a very rough rule of thumb. There have been many studies that come up with slightly different results but most of them to not address the tax characteristics of the funds you are withdrawing. As you are aware, $40k from an IRA is not that same as $40k from an atter-tax cash account.
    Ed, I frankly can't answer your question. Perhaps other advisors are more familiar with WEB. But there is a good reference material at www.ssa.gov /pubs/EN-05-10045.pdf Take the space out of the address after gov....that was the only way I could enter it.
    Ed - Social Security makes adjustments for non-covered pensions. It sounds like you will be impacted. A visit to your local Social Security office (with an appointment) might be a good idea.
    Andy,

    To answer your Q, the 4% does not say whether what you withdraw is sufficient for you to pay for your living expenses, taxes, and discretionary expenses. It merely suggests you take out 4% of the retirement savings in the first retirement year and adjust the withdrawal amount each subsequent year for inflation. If you do this, the rule claims, you have a high assurance that your retirement nest egg will last 30 years. In other words, how you use the 4% is up to you.

    That said, While I agree that Rules of thumb is an excellent way to do a quick check on where you stand with respect to your retirement readiness, I do not agree they are a substitute for a customized plan. Here are my views on this subject in a recent Kiplinger article

    uniquefinancialadvisors.com
    Joe, I would check with your current lender to see what they could do on a re-fi. Bankrate.org is a great place to compare current rates and offers in your area and they have a wealth of educational information. What is your current interest rate? Are you going to be able to lower it enough to make paying closing costs reasonable? Is your payment going to increase making your cash flow tighter? These are all things you want to consider.
    Gary - I'd be careful with the reported loss before doing any tax planning. Calculating the correct basis on a spinoff can be tricky and your custodian may not be reporting this accurately. If you are working with a tax professional, I'd chat with them before spending your potential tax refund.
    First off Joe, as a retiree, I'd shoot to be debt free if at all possible. Second, I've had the best luck going directly with local and regional banks for rates. Look at at APR or annual percentage rate. This is the actual rate after all fees are added. 
    Dick, I've had clients with luck using Healthcare.gov and getting a policy in the marketplace. That said, you could also ask a local agent, or even go to an association in your related field and ask if they have group coverage available. 
    I plan to use dividends from a couple of Bond funds to supplement my pension in retirement. To stay ahead of inflation, I plan to have 50-60% invested in stock funds, and then rebalance once a year. For the stock funds would it better to have a single Total Market Index fund or have a mix Large, Mid, and Small Cap Index funds. I suspect I will likely have more opportunity to transfer funds to the bond funds at time of rebalancing using a mix of Large, Mid and Small Cap funds rather than a single Total Market Index fund.
    Does that seem reasonable?
    Joe, you don't have to take the RMD until next year. Unlike a Traditional IRA, if you still have earned income, and meet income eligibility requirements, you can still contribute to a Roth IRA after 70 1/2, up to $6500/year.
    Victoria, I think what you're referring to is called the "credit utilization ratio" part of your FICO credit score. If so, there are actually multiple factors that play into this because not all credit is treated equally (i.e. credit cards are treated differently than mortgages and other installment accounts). In general though, it's best to have BOTH a low credit utilization per account and a low credit utilization overall.
    George, I think that finding this answer specifically for you is one of the best benefits of working with a planner. The answer is different for everyone. A REAL planner (CFP for instance and not someone who just decides to call themselves a planner) will review what you have (retirement income and investments) and what you want. Then they can determine how you need to invest to have the greatest probability of success. Many times I am able to show clients that they are more likely to be successful IF they invest more conservatively. Why take risk if you don't need to (you are the quarterback and you have the ball and a 2 point lead with 14 seconds left in the game---will you pass or take a knee?). Being more conservative though might fund all your requirements but it will probably leave you with less terminal money. So if leaving an inheritance is important, that might change the allocation. As for 60/40, alas some of my clients are so behind on savings as they anticipate retirement that they HAVE to take more risk, perhaps even more than that, to fund their goals. Go find out the right answer for YOU.
    Wade, I'm in favor of keeping duration, or the time it takes to pay off the bond, short. So I'm a fan of short term bond funds. As rates rise, short term funds will adjust faster than longer terms. 
    I have an old 403b account that my former employer put money into.. I already moved the other part that I put into... I am 44 and no longer work there. They are telling me I can't move that old part because its in an annuity?? Do I have any choice in this matter?? I would like to move it into an account where I get to choose the funds... Help
    Morgan, you can certainly start an account with less than $10,000. Many mutual fund companies offer low minimums and allow you to automatically purchase new shares each month through automatic transfers from your checking or savings account.
    Barney - I don't believe you will have a problem using form 706 and also showing 709 as a gift to your son. For future reference, I believe you could disclaim $70,000 of the inheritance from your wife and it might go to your son, but you'd probably want to check with an estate planning attorney first. 
    Ah George, it does make a difference that you can take the money from taxable accounts and can manage the taxable amount to some extent (and not pay ordinary income tax rates but better capital gains rates). As I said in an earlier answer, there are usually two ways to look at it. There is a technical answer that would say it is very likely you would make more in an investment account, even a conservative one, than the mortgage is costing you (3% is still a delicious rate). But the good answer might be that you would rest easier and be more resilient in market downturns if the mortgage was paid off. In my experience most people want to go with the good answer in their hearts. When you work with your accountant, see how much gain (or IRA distribution ) you could take without going into a higher bracket. Then pay it off over a few years if needed.
    Bruce, that is one way you could do it; however, what if there are no gains? Do you live off previous year's gains? Or do you add money back if you had a negative return? The important thing is to have a plan and stick to it. In bad times, you may have to make adjustments. 
    A suggestion for Jamie: you have everything working in your favor. You have your entire life in front of you so, after putting 6 to 12-month worth of cash aside in an MMA for emergencies, only think long term investments. You are smart: read "The Warren Buffet Way" and learn from the best. Invest in dividend paying stocks and in FB. Reinvest your dividends and they will compound. And pick one industry with the brighest possible future and learn everything you can, pick a few winners and hold them LT.
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