JR, credit companies will not settle with you until you have a few months of non payment. That is what hurts your credit score. You may not be able to get a loan or new card for a period of time.
Lee - Please refer back to what Pat said earlier about a bucket approach. Using simple math, let's assume your expenses are $55k and you will have $40k in SS income between you and your wife, so you will need to produce about $15k from your portfolio each year to fill in the gap. I'd encourage you to have three buckets -- a short, medium, and long term bucket. Have any funds you'll need within three years to be in your short-term (cash) bucket. Using our numbers, that would mean keeping $45k in cash. Then put about 7 years worth of funds in your medium-term bucket, which is invested in bonds. That would equate to $105k invested in bonds. Finally put any funds that you aren't going to need for at least 10 years in your stock, or long-term bucket.
Hi Arjyaman. For clients who are simply incapable of saving given their current cash flow, I think this is a cool idea. I imagine some people can be happy maintaining their standard of living while using future pay raises to start funding retirement. However, of course, I'm always anxious to point out the power of compounding and the benefit of starting to save ASAP. That, of course, is my preference.
Saving is a habit that should be developed as soon as possble. Commit the act of saving each month, even if 90% has to be withdrawn later to meet needs. Also, once savings start to accumulate, the appeal of that growing pile may prevent too much withdrawals. Behaviors can be modified with enough incentive.
Jon, it looks like you are comfortable. Don't feel obliged to put your money at risk! Connect with a NAPFA advisor. Or, you can talk with representatives at a respectable fund company such as Vanguard. They can help you put your money to work without incurring a scary level of risk , which to most folks, means the likelihood that they will have a permanent loss of capital.
Jon - Thanks for the additional information. First and foremost, I would encourage you to visit www.napfa.org to find a fee-only financial planner in your area. I also agree with Pat in that utilizing some low cost, tax-efficient mutual funds such as that offered by Vanguard might be a good place to invest those dollars.
This is Pat signing out for now!
Thanks for joining us, Pat!
Bill - Fantastic question. To my knowledge, the IRS won't allow you to "cherry pick" only the after-tax portion of your IRA when considering a rollover or a conversion. I believe you'll need to prorate any amount rolled over or converted between pre-tax and after tax funds. Pat, Deborah, is this your understanding as well?
As Bill said, you can't cherry pick the after tax portion. You can not roll over the after tax portion to ROTH tax free, they will prorate the funds and you will owe taxes on the convesion. I actually just had a client attempt this with his plan. No go. Talk with your plan again, remember, it is not their problem if the IRS audits this move.
Hi Dan. The answer to this question isn't the same for everyone. I love your idea of tax diversification, but be sure to consider whether you believe you will be in a higher or lower tax bracket during retirement. If we expect to be in a higher tax bracket in retirement, a higher percentage of Roth dollars makes sense to avoid paying taxes at that higher rate. Alternatively, if we think we will be in a lower tax bracket in the future, delaying taxes with the traditional IRA makes more sense. If we believe we may be in the equivalent tax bracket, I like more Roth dollars because they aren't subject to RMDs.
Dan, a lot of factors come into play with your question. We love ROTH accounts and they do offer many advantages in retirement. I agree with Lon, what tax bracket will you be in at retirement. Another factor, how long will you be eligible to continue ROTH contributions. If you think that your income will rise beyond the ability to fund ROTHs in the future, I would fully fund them now.
JLW, this is certainly the question of the day! I always shy away from bold moves such as this. It i a type of timing the market and there is no bell rung when it is time to get back in. Having said that, have you considered moving your longer term bonds into short duration ones? PIMCO and Vanguard have good funds in this duration.
Hi JLW. I'm a really boring financial advisor. I'm don't believe I am smart enough to anticipate future market movements, either on the stock or the bond side. Keep in mind, you may already be late to the game in that bonds have had a rough 12 month period. Additionally, keep in mind that people have been expecting interest rates to rise and bonds to suffer for years. However, bonds continued to be a worthwhile addition to a portfolio. I'm very much of the opinion that you should have an asset allocation between stocks and bonds that matches your risk tolerance and investment time horizon and stick to it.
However, I certainly don't mind Deborah's suggestion of scaling back the duration on your bonds. What do you recommend Deborah, 4-5 years?
Lon, we have been staying in the short to intermediate managed funds. Don't like index unmanaged funds right now as you need a good fixed income manager to navagate during these tough bond times.
I love Morningstar, and a lot of the information they offer is free...
Gwen, while there are many voices out there, stick to well known companies such as Morningstar and S&P. If you have a brokerage account, you can get a wide amount of information online without paying for it.
Chuck - Certainly utilizing an investment manager with expertise in this area is useful. For people who want to get more involved, purchasing individual bonds offers the advantage of the option to hold the bond to maturity in the event of continuously rising interest rates (and decreasing yields).
Chuck asked: With interest rates eventually rising, I plan to move a larger share of my portfolio from equities to bonds. The only way I know to do this is with bond mutual funds. Is this the best way for say a $50K investment within an IRA?
Chuck, the answer to question you asked is yes. As I have mentioned before, Vanguard and PIMCO have good funds. The question you didn't ask is when to make this move? As Lon and I have both stated, timing the market is a tough task. We don't know how long and steep rates will rise. We don't know if we will have a new Fed Chairman or woman next year. So, maybe the best thing to do is to dollar cost average into the bonds you have chosen to use.
Gwen, I believe this is a better question for an attorney. With my admitted limited knowledge of the subject, I believe you can transfer the assets to the trust; however, I don't believe this will make your children more likely to qualify for financial aid (unless the trust is an irrevocable trust moving funds out of your possession -- that may change things).
Sorry Provident, we don't see it in the queue. What's your question again?
Don't see yours either, zam. Can you try again?
Gwen, I agree, you need to speak to your attorney that established the trust.
Zam, sorry, there's a bit of a lag, but we've got both of your questions.
We received this query a few moments ago: Hi, I asked a question, it was posted, but credited to Arjyaman Roy. How did that happen?
Zam - Good question. Actually, if you retire early, you have the ability to take withdrawals from your 401k without penalty as early as age 55. However, if you decide to rollover funds from your 401k to an IRA, the 59.5 age restriction then applies. Also, you have the ability to withdraw the funds you have contributed to your Roth at any time -- you only can't withdraw the growth on the account early without a penalty. Still, having a taxable account to add to your tax diversification is never a bad idea!
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