An article that I found on the internet that is important to investors regarding retirement account withdrawals.
6 Tips on Retirement Account Withdrawals by Emily Brandon
As consumers we have learned to play by other people's rules to avoid getting burned by fees. We try to use our own bank's ATM, get paranoid about how many minutes we are using up on our cellphones, and tuck money away into 401(k)'s and IRAs to lower our tax bills. But, after years of stashing cash in these retirement plans to avoid taxes, there is also a tax penalty if you don't take the money out in a timely manner--and it can bite.
Here is how you can avoid a hefty tax when drawing down money from your retirement accounts.
Keep track of your age.
Uncle Sam has been letting you accrue interest on the money in your IRA and 401(k) tax free for many years, and he finally wants to cash in. Everyone age 70 1/2 or older with a traditional IRA must take what is known as an annual required minimum distribution, or RMD, and it is taxed as income. The specific amount of the distribution changes from year to year. For 2007, the number is calculated by dividing the year-end balance of all your IRA and 401(k) accounts by your life expectancy as determined by the Internal Revenue Service.
If you fail to take that amount of money out of your IRA and report it as taxable income, the IRS imposes a 50 percent tax penalty and still taxes you anyway. So, if you are required to redeem $1,000 from your IRA and you fail to do so, the IRS claims $780: a $500 penalty for not making a withdrawal and the $280 income tax you should have paid on the income, assuming you are in a 28 percent tax bracket. IRA distributions are checked through mandatory IRS reporting.
These rules apply to 401(k)'s too, unless you are still working. But they don't affect Roth IRAs or Roth 401(k)'s because you've already paid taxes on contributions to those accounts.
Don't play the April Fool--avoid two distributions in the same year.
The year you turn 70 1/2, you have until April 1 of the following year to take your distribution. Every year after that, you have until December 31 to take your distribution. Many financial advisers recommend not waiting until the April 1 deadline to take your first distribution, because then you'd have to take two distributions in the same year. That would increase your income and might move you up to a higher tax bracket. "I would recommend beginning taking distributions in the year they turn 70 to avoid that possibility of having to take two distributions that are taxed as ordinary income in one year," says John Barton, an investment adviser for CenterPointe Wealth Management in Wichita.
Compare retirement accounts.
If you have multiple IRA accounts, you must include all the IRA balances in your distribution calculation, but you don't have to take money out of each one. "All the IRS cares about is that you take out the correct total fee and not the amount withdrawn from an individual account," says Jeremy Welther, a financial adviser for Brinton Eaton Wealth Advisors in Morristown, N.J. "If you have an account with higher fees, you may want to take it from that account as opposed to one that is doing better."
You can also choose based on an IRA's performance. "If you have invested in equities or stocks and have had remarkable performance, you may want to take your RMD from the gains that have been made there rather than giving them back to the market," Barton says.
But 401(k)'s are a different story. If you're still working, you can delay distributions until you retire no matter what your age. But RMDs must be calculated separately for your 401(k) and taken from that account, cautions Ed Slott, an IRA distribution expert and author of Your Complete Retirement Planning Road Map: "You generally want to roll it over to an IRA. You take control of your money; you don't have to call the company any time you do something."
Notify your heirs.
Even death doesn't eliminate required distributions. Beneficiaries of your retirement accounts must take them by the end of the year of death to avoid penalties, if the RMD had not already been taken that year. The first distribution amount is based on the age of the deceased IRA owner. The beneficiary's age is used thereafter.
If there are multiple beneficiaries, the account should be split into separate inherited IRAs by the end of the year following the year of death. That way, each person can use his or her own life expectancy for calculating distributions, Slott says. If this isn't done, the age of the oldest beneficiary is used to calculate distributions, which typically means higher taxes for the younger beneficiaries. And although Roth IRA owners do not have to take required minimum distributions during their lifetime, beneficiaries other than the spouse do. The distribution is still tax free.
Consider donations to nonprofits.
If you don't need the money, one way to avoid additional taxes is to donate your distribution of up to $100,000 to charity. But hurry: This provision of the Pension Protection Act expires on Dec. 31, 2007. If you transfer your RMD directly to your favorite charity, you don't have to pay income tax on that amount, says Mary Baldwin, a certified financial planner in Melbourne, Fla. "Most of my clients love to give. We send it straight to their church or Habitat for Humanity."
Colleges are a major beneficiary of these tax-free donations from IRAs and often solicit such gifts. "By naming us as beneficiary of your IRA, you can leave us a gift that is free of all income and estate taxes because we are a charitable organization," the website of Drake University reminds alumni and prospective donors, along with an example of a 73-year-old woman who turns over a $15,000 required distribution from her IRA to the university to avoid paying taxes on that income. The catch: You can't use these donations as a charitable deduction elsewhere on your tax return. "When you gift your IRA to charity, you don't get a charitable deduction for the distribution," Barton says. "I've found a lot more people wanting to get that deduction."
Save your distributions.
Of course, just because you must take money out of your IRA and pay income tax on it doesn't mean you have to spend it. If you don't need the money for immediate expenses, you can still save it for use further down the road when you might. "I try to position at least two years' worth of those distributions in a safe place such as a money market fund," Barton says. "I think it gives people a sense of confidence and a peace of mind to know those dollars they are going to have to take from their portfolio are in a very safe place."
Wednesday, February 6, 2008
Protection from Investment Scams
An article that I found on the internet that has information for all investors. It has contains the organizations to contact if you believe you have been the victim of investment fraud.
Protect Your Retirement From These Investment Scams by Kimberly Lankford
Retirees are being lured by Ponzi schemes, unsuitable annuities and over-hyped investment returns.
Ed and Ruthann Wolfe just wanted a safe place for their retirement savings. During his 32 years at the Rubbermaid plant in Wooster, Ohio, Ed had amassed more than $320,000 in his 401(k), all of it invested in low-risk Fidelity mutual funds.
After Newell bought Rubbermaid in 1999, early-retirement offers were made to more than 180 employees at the Wooster plant, including Ed, then 55. At the same time, many of his colleagues began attending investing seminars hosted by a Merrill Lynch broker, who was telling investors they could earn more money if they retired than if they stayed on the job. "There was a buzz going around the shop about how good this could be," recalls Ed. "We thought we couldn't afford not to do it."
The Wolfes turned over their entire $320,000 in retirement savings to the broker, with instructions to keep their money in low-risk investments because they needed to start making withdrawals right away. So they weren't concerned when the stock market tumbled in 2001.
Then they began hearing from friends whose investments had declined in value. Ruthann called the broker and was shocked to find out that they'd have to stop withdrawing money or go broke. Their retirement stash, which the broker had invested in high-risk Internet and tech companies, had plunged to less than $100,000. "I felt it could be the end of the world," says Ed, who went back to work driving trucks for two and a half years.
Cases similar to that of Rubbermaid's retirees have been cropping up across the country. "In the past two years, we've had about 100 formal disciplinary actions involving seniors," says Mary Schapiro, chief executive of the Financial Industry Regulatory Authority, which oversees U.S. securities firms.
In one high-profile case settled last summer, NASD (Finra's predecessor) fined Citigroup Global Markets $3 million and ordered the company to pay $12.2 million to more than 200 former employees of BellSouth. The regulators said Citigroup failed to adequately supervise a team of brokers based in Charlotte, N.C., who used misleading sales materials -- promising 12% annual returns -- during dozens of seminars for BellSouth employees from 1994 to 2002. Instead, more than $12 million in former employees' accounts evaporated during the bear market. "These are people who were persuaded to take retirement early -- who didn't have to and probably shouldn't have -- based on these misrepresentations," says James Shorris, of Finra's enforcement division. Citigroup says it is "working on all fronts to prevent a similar situation from occurring again."
Baby-boomers nearing retirement, and their parents, make irresistible targets for this kind of scam. "When you're looking at $16 trillion in retirement accounts changing hands in the next 15 to 20 years, that's a big market share for anybody," says Alabama Securities Commission director Joseph Borg. In a sweep of "free lunch" financial seminars, the Securities and Exchange Commission found unethical business practices in nearly half. In addition to promises of over-the-top investment returns, the most common scams include Ponzi schemes and sales of unsuitable annuities.
Retirees are vulnerable because they're looking for ways to stretch their income. Plus, many seniors are afraid to ask questions, consult with their children or complain to regulators. "A lot of people think they'll lose their independence if they admit they were taken advantage of," says Barry Lanier, chief of the bureau of investigations for the Florida Department of Financial Services. When Finra surveyed senior investors last year, only 56% of the victims who admitted to being defrauded said they had reported the incident.
The money that seniors have amassed is "usually irreplaceable," says Jacob Zamansky, a securities lawyer in New York City. "They can't afford to lose the principal, so they generally need to be conservative. Anything that doesn't meet that investment objective should be viewed very suspiciously."
Ed Wolfe hired Zamansky in 2002. A year later, after his case went to arbitration, he was awarded $310,000, including legal expenses. About 75 of his Rubbermaid colleagues also received settlements from Merrill Lynch. "Financially, we're pretty much back on track," says Wolfe. "But mentally, I'll never be the same."
Ignore the Hype
Be suspicious of any sales pitch that promises unrealistic returns. "Anytime you're talking about average returns of greater than 12%, you're not in the ballpark," says Jim Eccleston, a securities lawyer in Chicago. In the BellSouth case, not only were investors led to believe they could earn about 12% per year, they were also told they could afford to withdraw 9% of their funds annually for 30 years.
Before doing business with a broker, check his or her background using Finra's BrokerCheck tool. Look for disciplinary actions taken against the broker, as well as red flags -- for example, the broker has frequently changed firms.
If the adviser is a certified financial planner, check his or her credentials with the CFP Board of Standards. Also consult the Senior Investor Resource Center and the SEC's senior investor page.
Just checking whether the broker has a securities license can keep you out of serious trouble. "Maybe one in ten of our cases involve a licensed stockbroker," says Colorado securities commissioner Fred Joseph. Many of the most notorious purveyors of bogus investments never held a license.
In Wolfe's case, keeping good records made a big difference in the outcome. So keep a copy of any mailings you receive from a broker or handouts you get at a sales presentation. Take notes during your conversations. Talk with the broker about your investment goals and ask him or her to summarize your discussion in writing, recommends Tom Grzymala, a certified financial planner and expert witness in securities cases. "I want to see the account information about what type of investor you are," he says.
Losing money in the stock market doesn't necessarily mean there's been wrongdoing or that a crime has been committed, says Tracy Stoneman, a Colorado securities lawyer and author of Brokerage Fraud: What Wall Street Doesn't Want You to Know. Securities law looks at whether the broker made investments that were suitable for you. To determine that, a broker needs to know your goals, risk tolerance, tax status and whether you need ready access to your money, says Schapiro.
In return, you should ask the broker to rate an investment's risk on a scale of 1 to 10 and to put the answer in writing. If the investment starts to lose value, ask for a written explanation. "Put the brokerage firm on notice that the losses make you uncomfortable," says Stoneman. Writing down your concerns and faxing them to the broker and his supervisor "is a wonderful protection tool," she says.
If you continue to have problems, don't hesitate to complain to the brokerage firm and your state securities regulator (find contact information at www.nasaa.org). But even the SEC and Finra generally can't recover your losses. For that, contact a securities lawyer (www.piaba.org) to take your case to arbitration.
Be Cautious With Annuities
One night in 2005, Virginia LaValley called her son, Ken, and told him she had just made a new investment that was paying 7% annually. "I don't know a whole lot about investing," Ken admits. Still, he thought that his mother, then 75, was mentally sharp enough to make her own decisions. But when co-workers told Ken that earning a guaranteed 7% was unrealistic, he figured "something wasn't right."
When Ken started to investigate, he found that his mother had been duped into buying unsuitable annuity products -- the most common complaint insurance regulators handle. Florida's Department of Financial Services has 51 open investigations involving variable annuities, plus 105 investigations into equity-indexed annuities, a complicated product that ties payoffs to stock-market indexes while guaranteeing a minimum return.
Annuities themselves aren't necessarily bad. In fact, an immediate-payout annuity can provide lifetime income for seniors. But deferred annuities, such as variable and equity-indexed products (which are usually used for long-term retirement savings), can cause big problems if they're sold to people who need immediate access to their money. Many of these annuities levy a surrender charge if you try to withdraw your money within the first seven to ten years.
But seniors are tempting targets for the hard sell. Agents often get commissions of 4% to 7% for selling variable annuities, and 5% to 12% for equity-indexed products. An agent who convinces a retiree to roll over a $200,000 IRA into an annuity can earn as much as $24,000.
Commissions seem to have been the motive in the case of Virginia LaValley, who lives in Boynton Beach, Fla. The agent persuaded her to trade in almost $40,000 in annuities -- which had a minimum return of 3% and no longer had a surrender period -- in order to buy new equity-indexed annuities with a 2% minimum return and a brand-new surrender period of 15 years. Virginia would have paid a penalty if she had tried to withdraw the money before age 91, and she would have owed a whopping 19% surrender charge if she had taken out money within the first year.
To complicate matters, Ken began noticing signs of dementia in his mother. Always impeccable about keeping records, Virginia hadn't balanced her checkbook in months. Mounds of junk mail were heaped on her dining-room table, and she felt obligated to answer it all, sending more than 500 small checks to charities and sweepstakes in 2005.
On the advice of a reputable financial adviser his mother had consulted in the past, Ken contacted a lawyer. Working with the insurance company that issued the annuity, American Investors, they got Virginia's money back after providing medical records that proved she was suffering from dementia when she bought the annuity.
When Florida's Department of Financial Services investigated, officials discovered that the same salesperson had duped a number of people in their seventies and eighties into buying high-commission equity-indexed annuities with surrender periods that sometimes stretched past age 100. The state took away the agent's license and fined him $40,000, but many of the families are still trying to get their money back.
Build Your Case
Be skeptical of any claims made at a free-lunch seminar, a common sales tactic to get seniors into a one-on-one meeting. And don't trust a salesperson just because he or she has a professional designation that focuses on seniors. Such credentials sometimes require little more than paying a fee and passing an easy take-home test. (Look up the requirements for professional designations at Finra.org.)
Ask specifically about annuity surrender charges and how much money you can withdraw each year. Also ask about interest guarantees. Some annuities offer a bonus in the first year, after which the minimum guarantee drops to 2% or 3% -- much less than you'd earn on a bank certificate of deposit. Equity-indexed annuities have returns based on Standard & Poor's 500-stock index, but they pay out only a portion of the gains.
Take notes and ask for a written summary of everything you discuss with the salesperson. Just requesting paperwork could discourage an agent in search of an easy mark.
If you find that you or your parents were sold an unsuitable annuity, contact the insurance company. If you can provide evidence of mental incapacity, it may be easy to get your money back.Don't hesitate to call your state's securities department or state insurance department. "You can always weed out bad agents by telling them you'd like to call us and put us on speakerphone," says Cindy Hermes, who spent years in the consumer-assistance division of the Kansas Department of Insurance. If the agent balks, walk away.
Protect Your Retirement From These Investment Scams by Kimberly Lankford
Retirees are being lured by Ponzi schemes, unsuitable annuities and over-hyped investment returns.
Ed and Ruthann Wolfe just wanted a safe place for their retirement savings. During his 32 years at the Rubbermaid plant in Wooster, Ohio, Ed had amassed more than $320,000 in his 401(k), all of it invested in low-risk Fidelity mutual funds.
After Newell bought Rubbermaid in 1999, early-retirement offers were made to more than 180 employees at the Wooster plant, including Ed, then 55. At the same time, many of his colleagues began attending investing seminars hosted by a Merrill Lynch broker, who was telling investors they could earn more money if they retired than if they stayed on the job. "There was a buzz going around the shop about how good this could be," recalls Ed. "We thought we couldn't afford not to do it."
The Wolfes turned over their entire $320,000 in retirement savings to the broker, with instructions to keep their money in low-risk investments because they needed to start making withdrawals right away. So they weren't concerned when the stock market tumbled in 2001.
Then they began hearing from friends whose investments had declined in value. Ruthann called the broker and was shocked to find out that they'd have to stop withdrawing money or go broke. Their retirement stash, which the broker had invested in high-risk Internet and tech companies, had plunged to less than $100,000. "I felt it could be the end of the world," says Ed, who went back to work driving trucks for two and a half years.
Cases similar to that of Rubbermaid's retirees have been cropping up across the country. "In the past two years, we've had about 100 formal disciplinary actions involving seniors," says Mary Schapiro, chief executive of the Financial Industry Regulatory Authority, which oversees U.S. securities firms.
In one high-profile case settled last summer, NASD (Finra's predecessor) fined Citigroup Global Markets $3 million and ordered the company to pay $12.2 million to more than 200 former employees of BellSouth. The regulators said Citigroup failed to adequately supervise a team of brokers based in Charlotte, N.C., who used misleading sales materials -- promising 12% annual returns -- during dozens of seminars for BellSouth employees from 1994 to 2002. Instead, more than $12 million in former employees' accounts evaporated during the bear market. "These are people who were persuaded to take retirement early -- who didn't have to and probably shouldn't have -- based on these misrepresentations," says James Shorris, of Finra's enforcement division. Citigroup says it is "working on all fronts to prevent a similar situation from occurring again."
Baby-boomers nearing retirement, and their parents, make irresistible targets for this kind of scam. "When you're looking at $16 trillion in retirement accounts changing hands in the next 15 to 20 years, that's a big market share for anybody," says Alabama Securities Commission director Joseph Borg. In a sweep of "free lunch" financial seminars, the Securities and Exchange Commission found unethical business practices in nearly half. In addition to promises of over-the-top investment returns, the most common scams include Ponzi schemes and sales of unsuitable annuities.
Retirees are vulnerable because they're looking for ways to stretch their income. Plus, many seniors are afraid to ask questions, consult with their children or complain to regulators. "A lot of people think they'll lose their independence if they admit they were taken advantage of," says Barry Lanier, chief of the bureau of investigations for the Florida Department of Financial Services. When Finra surveyed senior investors last year, only 56% of the victims who admitted to being defrauded said they had reported the incident.
The money that seniors have amassed is "usually irreplaceable," says Jacob Zamansky, a securities lawyer in New York City. "They can't afford to lose the principal, so they generally need to be conservative. Anything that doesn't meet that investment objective should be viewed very suspiciously."
Ed Wolfe hired Zamansky in 2002. A year later, after his case went to arbitration, he was awarded $310,000, including legal expenses. About 75 of his Rubbermaid colleagues also received settlements from Merrill Lynch. "Financially, we're pretty much back on track," says Wolfe. "But mentally, I'll never be the same."
Ignore the Hype
Be suspicious of any sales pitch that promises unrealistic returns. "Anytime you're talking about average returns of greater than 12%, you're not in the ballpark," says Jim Eccleston, a securities lawyer in Chicago. In the BellSouth case, not only were investors led to believe they could earn about 12% per year, they were also told they could afford to withdraw 9% of their funds annually for 30 years.
Before doing business with a broker, check his or her background using Finra's BrokerCheck tool. Look for disciplinary actions taken against the broker, as well as red flags -- for example, the broker has frequently changed firms.
If the adviser is a certified financial planner, check his or her credentials with the CFP Board of Standards. Also consult the Senior Investor Resource Center and the SEC's senior investor page.
Just checking whether the broker has a securities license can keep you out of serious trouble. "Maybe one in ten of our cases involve a licensed stockbroker," says Colorado securities commissioner Fred Joseph. Many of the most notorious purveyors of bogus investments never held a license.
In Wolfe's case, keeping good records made a big difference in the outcome. So keep a copy of any mailings you receive from a broker or handouts you get at a sales presentation. Take notes during your conversations. Talk with the broker about your investment goals and ask him or her to summarize your discussion in writing, recommends Tom Grzymala, a certified financial planner and expert witness in securities cases. "I want to see the account information about what type of investor you are," he says.
Losing money in the stock market doesn't necessarily mean there's been wrongdoing or that a crime has been committed, says Tracy Stoneman, a Colorado securities lawyer and author of Brokerage Fraud: What Wall Street Doesn't Want You to Know. Securities law looks at whether the broker made investments that were suitable for you. To determine that, a broker needs to know your goals, risk tolerance, tax status and whether you need ready access to your money, says Schapiro.
In return, you should ask the broker to rate an investment's risk on a scale of 1 to 10 and to put the answer in writing. If the investment starts to lose value, ask for a written explanation. "Put the brokerage firm on notice that the losses make you uncomfortable," says Stoneman. Writing down your concerns and faxing them to the broker and his supervisor "is a wonderful protection tool," she says.
If you continue to have problems, don't hesitate to complain to the brokerage firm and your state securities regulator (find contact information at www.nasaa.org). But even the SEC and Finra generally can't recover your losses. For that, contact a securities lawyer (www.piaba.org) to take your case to arbitration.
Be Cautious With Annuities
One night in 2005, Virginia LaValley called her son, Ken, and told him she had just made a new investment that was paying 7% annually. "I don't know a whole lot about investing," Ken admits. Still, he thought that his mother, then 75, was mentally sharp enough to make her own decisions. But when co-workers told Ken that earning a guaranteed 7% was unrealistic, he figured "something wasn't right."
When Ken started to investigate, he found that his mother had been duped into buying unsuitable annuity products -- the most common complaint insurance regulators handle. Florida's Department of Financial Services has 51 open investigations involving variable annuities, plus 105 investigations into equity-indexed annuities, a complicated product that ties payoffs to stock-market indexes while guaranteeing a minimum return.
Annuities themselves aren't necessarily bad. In fact, an immediate-payout annuity can provide lifetime income for seniors. But deferred annuities, such as variable and equity-indexed products (which are usually used for long-term retirement savings), can cause big problems if they're sold to people who need immediate access to their money. Many of these annuities levy a surrender charge if you try to withdraw your money within the first seven to ten years.
But seniors are tempting targets for the hard sell. Agents often get commissions of 4% to 7% for selling variable annuities, and 5% to 12% for equity-indexed products. An agent who convinces a retiree to roll over a $200,000 IRA into an annuity can earn as much as $24,000.
Commissions seem to have been the motive in the case of Virginia LaValley, who lives in Boynton Beach, Fla. The agent persuaded her to trade in almost $40,000 in annuities -- which had a minimum return of 3% and no longer had a surrender period -- in order to buy new equity-indexed annuities with a 2% minimum return and a brand-new surrender period of 15 years. Virginia would have paid a penalty if she had tried to withdraw the money before age 91, and she would have owed a whopping 19% surrender charge if she had taken out money within the first year.
To complicate matters, Ken began noticing signs of dementia in his mother. Always impeccable about keeping records, Virginia hadn't balanced her checkbook in months. Mounds of junk mail were heaped on her dining-room table, and she felt obligated to answer it all, sending more than 500 small checks to charities and sweepstakes in 2005.
On the advice of a reputable financial adviser his mother had consulted in the past, Ken contacted a lawyer. Working with the insurance company that issued the annuity, American Investors, they got Virginia's money back after providing medical records that proved she was suffering from dementia when she bought the annuity.
When Florida's Department of Financial Services investigated, officials discovered that the same salesperson had duped a number of people in their seventies and eighties into buying high-commission equity-indexed annuities with surrender periods that sometimes stretched past age 100. The state took away the agent's license and fined him $40,000, but many of the families are still trying to get their money back.
Build Your Case
Be skeptical of any claims made at a free-lunch seminar, a common sales tactic to get seniors into a one-on-one meeting. And don't trust a salesperson just because he or she has a professional designation that focuses on seniors. Such credentials sometimes require little more than paying a fee and passing an easy take-home test. (Look up the requirements for professional designations at Finra.org.)
Ask specifically about annuity surrender charges and how much money you can withdraw each year. Also ask about interest guarantees. Some annuities offer a bonus in the first year, after which the minimum guarantee drops to 2% or 3% -- much less than you'd earn on a bank certificate of deposit. Equity-indexed annuities have returns based on Standard & Poor's 500-stock index, but they pay out only a portion of the gains.
Take notes and ask for a written summary of everything you discuss with the salesperson. Just requesting paperwork could discourage an agent in search of an easy mark.
If you find that you or your parents were sold an unsuitable annuity, contact the insurance company. If you can provide evidence of mental incapacity, it may be easy to get your money back.Don't hesitate to call your state's securities department or state insurance department. "You can always weed out bad agents by telling them you'd like to call us and put us on speakerphone," says Cindy Hermes, who spent years in the consumer-assistance division of the Kansas Department of Insurance. If the agent balks, walk away.
Riding Out a Market Freakout
An article that I found on the internet. It seems appropriate in light of the recent 20% drop in the S&P 500 index.
Riding Out a Market Freakout by Walter Updegrave
Instead of panicking and dumping stock funds in a downturn, be cool and rethink your strategy, says Money Magazine's Walter Updegrave.
Question: I'm 56 and have my most of my nest egg in stock funds. But with the stock market crashing so much lately, I've become concerned and am considering switching out of stocks. Do you think this is a good idea? - Sharon Bollmann
Answer: I certainly understand your apprehension about the stock market's behavior this year.
After reaching an all-time high in May, the Standard & Poor's 500 stock index - which is a better barometer for stocks overall than the more often watched Dow Jones Industrial Average - has undertaken a series of white-knuckle ups and downs that's made investing in stocks a bit like riding one of those loop-de-loop roller coasters.
And with a seemingly unending litany of bad news on the economic front - declining housing prices, ongoing subprime woes, a slowing economy - you can't help but wonder whether we're in for another stomach-churning dive from which it may take many months to recover.
This kind of situation is unsettling for all investors, but even more so for people like yourself who are nearing the end of their careers. After all, the last thing you want is to see the money you've worked so hard for, saved so diligently and invested so carefully get whacked with a big loss just when you're in the home stretch to retirement.
But this isn't the time to give in to fear. Rather, it's a time to re-assess your investing strategy and consider what you need to do to remain on track toward a secure retirement.
If you're like most people in their mid 50s, you probably have a good 10 or more years before you can realistically think about retiring. During that time, you've got to pull off a bit of a balancing act.
On the one hand, you don't want to do anything to unduly jeopardize the savings you've accumulated in 401(k)s and other retirement accounts. But you still need to make that money grow. It's not as if you'll only be investing until age 65.
After calling it a career, you'll probably spend another 20 or more years in retirement. Which means you still need to bulk up the value of your nest egg so it can generate enough income to maintain your purchasing power until you're well into your '80s or even longer.
So even though your gut may be telling you otherwise, you don't want to abandon stocks. Nor do you want to embark on what may seem like a plausible strategy of getting out now with the idea of jumping back in at a more opportune time in the future.
As I pointed out in a recent column, that sort of market timing is very difficult to do and can easily backfire. A better strategy is to decide on a mix of stocks and bonds that's likely to get you the long-term growth you need, but that also offers enough protection so that your nest egg isn't totally scrambled should stocks take even more of a hit.
The blend of stocks and bonds that's right for you will depend on a number of factors, including the size of your nest egg, the value of other resources you have to draw on (Social Security, a pension, home equity, cash value in life insurance policies, etc.) and how much risk you're comfortable taking.
But generally someone your age should have roughly two-thirds of your retirement portfolio in a diversified blend of stocks and the rest in bonds.
It's also important that you continue to contribute to 401(k) and other retirement accounts in the last stages of your career. That may not seem like a very sensible thing to do when the stock prices are falling and the economic outlook appears iffy.
But remember, the shares you buy while the stock market is down will likely be the ones that will have generated the biggest gains a decade or more down the road. And the money you invest during market setbacks could very well provide the spending cash you'll need in your later retirement years.
One final note. While I've tailored my answer to people like you who are nearing the end of their career, the fact is that a tumultuous market like this one presents a challenge no matter where you are in your retirement planning.
So for those of you out there who have more than 10 years before you'll call it a career, you can get a suggested retirement portfolio blend by clicking here, while anyone who's already retired can get a recommend mix by clicking here.
But whatever stage of retirement you're in, remember: no matter what the market is doing, you're always better off setting a reasonable strategy and following it rather than letting your gut or your emotions lead the way.
Riding Out a Market Freakout by Walter Updegrave
Instead of panicking and dumping stock funds in a downturn, be cool and rethink your strategy, says Money Magazine's Walter Updegrave.
Question: I'm 56 and have my most of my nest egg in stock funds. But with the stock market crashing so much lately, I've become concerned and am considering switching out of stocks. Do you think this is a good idea? - Sharon Bollmann
Answer: I certainly understand your apprehension about the stock market's behavior this year.
After reaching an all-time high in May, the Standard & Poor's 500 stock index - which is a better barometer for stocks overall than the more often watched Dow Jones Industrial Average - has undertaken a series of white-knuckle ups and downs that's made investing in stocks a bit like riding one of those loop-de-loop roller coasters.
And with a seemingly unending litany of bad news on the economic front - declining housing prices, ongoing subprime woes, a slowing economy - you can't help but wonder whether we're in for another stomach-churning dive from which it may take many months to recover.
This kind of situation is unsettling for all investors, but even more so for people like yourself who are nearing the end of their careers. After all, the last thing you want is to see the money you've worked so hard for, saved so diligently and invested so carefully get whacked with a big loss just when you're in the home stretch to retirement.
But this isn't the time to give in to fear. Rather, it's a time to re-assess your investing strategy and consider what you need to do to remain on track toward a secure retirement.
If you're like most people in their mid 50s, you probably have a good 10 or more years before you can realistically think about retiring. During that time, you've got to pull off a bit of a balancing act.
On the one hand, you don't want to do anything to unduly jeopardize the savings you've accumulated in 401(k)s and other retirement accounts. But you still need to make that money grow. It's not as if you'll only be investing until age 65.
After calling it a career, you'll probably spend another 20 or more years in retirement. Which means you still need to bulk up the value of your nest egg so it can generate enough income to maintain your purchasing power until you're well into your '80s or even longer.
So even though your gut may be telling you otherwise, you don't want to abandon stocks. Nor do you want to embark on what may seem like a plausible strategy of getting out now with the idea of jumping back in at a more opportune time in the future.
As I pointed out in a recent column, that sort of market timing is very difficult to do and can easily backfire. A better strategy is to decide on a mix of stocks and bonds that's likely to get you the long-term growth you need, but that also offers enough protection so that your nest egg isn't totally scrambled should stocks take even more of a hit.
The blend of stocks and bonds that's right for you will depend on a number of factors, including the size of your nest egg, the value of other resources you have to draw on (Social Security, a pension, home equity, cash value in life insurance policies, etc.) and how much risk you're comfortable taking.
But generally someone your age should have roughly two-thirds of your retirement portfolio in a diversified blend of stocks and the rest in bonds.
It's also important that you continue to contribute to 401(k) and other retirement accounts in the last stages of your career. That may not seem like a very sensible thing to do when the stock prices are falling and the economic outlook appears iffy.
But remember, the shares you buy while the stock market is down will likely be the ones that will have generated the biggest gains a decade or more down the road. And the money you invest during market setbacks could very well provide the spending cash you'll need in your later retirement years.
One final note. While I've tailored my answer to people like you who are nearing the end of their career, the fact is that a tumultuous market like this one presents a challenge no matter where you are in your retirement planning.
So for those of you out there who have more than 10 years before you'll call it a career, you can get a suggested retirement portfolio blend by clicking here, while anyone who's already retired can get a recommend mix by clicking here.
But whatever stage of retirement you're in, remember: no matter what the market is doing, you're always better off setting a reasonable strategy and following it rather than letting your gut or your emotions lead the way.
Best Type of IRA
An article I found on the internet on which type of IRA is best, Traditional or Roth IRA
Roth IRAs: Good for You or Not? by Andrea Coombes
Advisers debate whether Roths are the right move for many investors
If you've only got so much to put aside every year into a retirement account, you want to ensure you're stashing it in the best retirement-savings vehicle around. Does that mean a Roth IRA? A traditional IRA? Your standard 401(k) or, now, the Roth 401(k)?
Planners often say that, because Roth IRAs allow your money to grow tax-free -- the contributions you put in are after-tax but your investment returns are untaxed when you pull them out -- they trump traditional deductible IRAs, in which you enjoy a tax deduction now but pay taxes on your payouts later.
Similarly, advisers often say those who have a 401(k) at work should put as much into it as needed to get the full employer match, if there is one, and then stash the rest of their cash in a Roth. (Eligibility for Roth IRAs is restricted by income limits. Those income limits don't apply to the new Roth 401(k), but those plans are only available through employers, and not all companies offer them.)
One financial adviser challenges that conventional wisdom.
Roland Manarin, founder of Manarin Investment Counsel, in Omaha, Neb., says investors will watch their dollars grow faster in a tax-deferred account, such as a deductible IRA or a 401(k), because the tax-deferral allows savers to contribute more now than they can afford to contribute to an after-tax Roth -- and that greater savings rate compounded over years of investing equals a much bigger pot of money when it comes time to retire.
"To put $4,000 into a Roth, you have to effectively earn $6,000," because of taxes, Manarin said. "To put $4,000 into a regular [deductible] IRA, your take-home pay goes down by $3,000. What a huge difference," he said. "Let's turn it around: You put $4,000 in a Roth, that's the equivalent of putting $6,000 in a regular IRA. There's just no comparison."
Then, "you compound that difference over 20, 30 years. Now I'm facing retirement, I'm going to be in a lower tax bracket, I've got three times the money in my regular IRA versus the person in the Roth," Manarin said.
Plenty of other advisers disagree, some of them vehemently. The problem, they say, is that it's almost inevitable tax rates will jump higher in the years ahead.
Even with a bigger account balance in a tax-deferred account, "what if that compounded growth gets taxed at 50%, 60%, or 70%?" said Ed Slott, the Philadelphia-based host of and author of "Your Complete Retirement Planning Road Map."
"We have a multitude of financial crises -- health care, the death of defined-benefit pensions, 78 million aging baby boomers -- somebody's got to pay for this ...Taxes have to go up. We're probably in the lowest tax rates we'll ever see in our lifetime," Slott said.
"Having a Roth removes the uncertainty of what future tax rates might be," he said. Plus, he pointed out another benefit to Roth IRAs: "Once you hit age 70 1/2, with traditional IRAs, you have to take the money out and pay the tax," Slott said. "With Roths, there are no required distributions. That money can stay growing tax free for the rest of your life."
Certainly, traditional IRAs trump Roth IRAs in terms of total assets, but Roths are much newer, enacted into law in 1997, some 23 years after traditional IRAs, which were created in 1974 by the Employee Retirement Income Security Act.
About 30% of U.S. households owned a traditional IRA in 2006 versus about 13% who owned a Roth IRA, and traditional IRAs held a total of $3.7 trillion in assets, compared with $178 billion in Roth IRAs, according to the Investment Company Institute, a trade group of mutual-fund and other investment companies.
Uncertainty ahead
Income taxes could increase. Or, the tax code may change entirely. Some policymakers are calling for a consumption-based tax, for instance.
It's that tax-law uncertainty which prompts Mandarin and his colleagues to focus on tax benefits today, rather than in the future.
"That's another appeal to us of the traditional [deductible] IRA. You're getting the benefit today," said Aron Huddleston, a vice president of Manarin Investment Counsel.
"We would rather take what we can get today. There are proposals out there like the Fair Tax, the flat tax, the national sales tax, what if one of those takes over? There might not even be an income tax," Huddleston said. "Looking forward 30 years, who knows what the tax situation is going to look like?"
Others say that uncertainty means it's best to hedge your bets against a variety of outcomes. Planners call it "tax diversification," said Sheryl Garrett, a certified financial planner and founder of the Garrett Planning Network, in Shawnee Mission, Kan. "You're hedging: What if [tax rates] go up, what if they don't?"
Tax diversification entails contributing to your 401(k) plan at least up to the company match, and then owning a Roth on the side.
Another idea is to focus on a Roth when you're young, Huddleston said. Your 20s are likely to be your weakest earning years, and thus your lowest tax-bracket years. Then, once your income rises, and your tax rate too, leave the Roth alone and focus on contributing into your tax-deferred plan.
"When you're in your 30s, 40s, 50s, you're probably in some of your peak earning years, relative to the rest of your life," Huddleston said.
"Most likely you're going to be in a higher tax bracket. That means you'll be able to get more money working for you in a traditional IRA," he said. "At retirement, you won't be working, so the odds are your tax rate will be lower when you make the withdrawals."
Different outcomes
The answer to the question of "which investment vehicle" works best will vary dramatically depending on your own personal situation, as well as the tax-law situation when you retire, said Laurence Kotlikoff, an economist at Boston University.
"The results very much depend on your age and income levels" when you begin your retirement savings, he said.
Kotlikoff co-authored a research study in December titled "To Roth or Not to Roth, That Is the Question," answering that question by running a number of hypothetical savings situations through his retirement-planning software, ESPlanner.
In many of the hypothetical situations, a 401(k) (or a deductible IRA) trumped a Roth, although sometimes just slightly. In other cases, the Roth led to a better outcome. Often, the difference was only slight.
"A regular 401(k) beats a Roth for a majority of our stylized households, but both offer a significant improvement over fully taxed savings," Kotlikoff and his co-authors wrote in the paper.
"Of course, future changes to the tax code can increase or decrease the value of either type of account," the paper says. "We therefore recommend investing in a combination of both account types that is tailored to household circumstances and attitudes toward risk."
Still, to Manarin's mind, the benefit of Roths is overblown. "What drives me wild is when they talk people into cashing in their IRA, paying all those taxes and putting the money into a Roth. It just makes zero sense to do that."
Roth IRAs: Good for You or Not? by Andrea Coombes
Advisers debate whether Roths are the right move for many investors
If you've only got so much to put aside every year into a retirement account, you want to ensure you're stashing it in the best retirement-savings vehicle around. Does that mean a Roth IRA? A traditional IRA? Your standard 401(k) or, now, the Roth 401(k)?
Planners often say that, because Roth IRAs allow your money to grow tax-free -- the contributions you put in are after-tax but your investment returns are untaxed when you pull them out -- they trump traditional deductible IRAs, in which you enjoy a tax deduction now but pay taxes on your payouts later.
Similarly, advisers often say those who have a 401(k) at work should put as much into it as needed to get the full employer match, if there is one, and then stash the rest of their cash in a Roth. (Eligibility for Roth IRAs is restricted by income limits. Those income limits don't apply to the new Roth 401(k), but those plans are only available through employers, and not all companies offer them.)
One financial adviser challenges that conventional wisdom.
Roland Manarin, founder of Manarin Investment Counsel, in Omaha, Neb., says investors will watch their dollars grow faster in a tax-deferred account, such as a deductible IRA or a 401(k), because the tax-deferral allows savers to contribute more now than they can afford to contribute to an after-tax Roth -- and that greater savings rate compounded over years of investing equals a much bigger pot of money when it comes time to retire.
"To put $4,000 into a Roth, you have to effectively earn $6,000," because of taxes, Manarin said. "To put $4,000 into a regular [deductible] IRA, your take-home pay goes down by $3,000. What a huge difference," he said. "Let's turn it around: You put $4,000 in a Roth, that's the equivalent of putting $6,000 in a regular IRA. There's just no comparison."
Then, "you compound that difference over 20, 30 years. Now I'm facing retirement, I'm going to be in a lower tax bracket, I've got three times the money in my regular IRA versus the person in the Roth," Manarin said.
Plenty of other advisers disagree, some of them vehemently. The problem, they say, is that it's almost inevitable tax rates will jump higher in the years ahead.
Even with a bigger account balance in a tax-deferred account, "what if that compounded growth gets taxed at 50%, 60%, or 70%?" said Ed Slott, the Philadelphia-based host of and author of "Your Complete Retirement Planning Road Map."
"We have a multitude of financial crises -- health care, the death of defined-benefit pensions, 78 million aging baby boomers -- somebody's got to pay for this ...Taxes have to go up. We're probably in the lowest tax rates we'll ever see in our lifetime," Slott said.
"Having a Roth removes the uncertainty of what future tax rates might be," he said. Plus, he pointed out another benefit to Roth IRAs: "Once you hit age 70 1/2, with traditional IRAs, you have to take the money out and pay the tax," Slott said. "With Roths, there are no required distributions. That money can stay growing tax free for the rest of your life."
Certainly, traditional IRAs trump Roth IRAs in terms of total assets, but Roths are much newer, enacted into law in 1997, some 23 years after traditional IRAs, which were created in 1974 by the Employee Retirement Income Security Act.
About 30% of U.S. households owned a traditional IRA in 2006 versus about 13% who owned a Roth IRA, and traditional IRAs held a total of $3.7 trillion in assets, compared with $178 billion in Roth IRAs, according to the Investment Company Institute, a trade group of mutual-fund and other investment companies.
Uncertainty ahead
Income taxes could increase. Or, the tax code may change entirely. Some policymakers are calling for a consumption-based tax, for instance.
It's that tax-law uncertainty which prompts Mandarin and his colleagues to focus on tax benefits today, rather than in the future.
"That's another appeal to us of the traditional [deductible] IRA. You're getting the benefit today," said Aron Huddleston, a vice president of Manarin Investment Counsel.
"We would rather take what we can get today. There are proposals out there like the Fair Tax, the flat tax, the national sales tax, what if one of those takes over? There might not even be an income tax," Huddleston said. "Looking forward 30 years, who knows what the tax situation is going to look like?"
Others say that uncertainty means it's best to hedge your bets against a variety of outcomes. Planners call it "tax diversification," said Sheryl Garrett, a certified financial planner and founder of the Garrett Planning Network, in Shawnee Mission, Kan. "You're hedging: What if [tax rates] go up, what if they don't?"
Tax diversification entails contributing to your 401(k) plan at least up to the company match, and then owning a Roth on the side.
Another idea is to focus on a Roth when you're young, Huddleston said. Your 20s are likely to be your weakest earning years, and thus your lowest tax-bracket years. Then, once your income rises, and your tax rate too, leave the Roth alone and focus on contributing into your tax-deferred plan.
"When you're in your 30s, 40s, 50s, you're probably in some of your peak earning years, relative to the rest of your life," Huddleston said.
"Most likely you're going to be in a higher tax bracket. That means you'll be able to get more money working for you in a traditional IRA," he said. "At retirement, you won't be working, so the odds are your tax rate will be lower when you make the withdrawals."
Different outcomes
The answer to the question of "which investment vehicle" works best will vary dramatically depending on your own personal situation, as well as the tax-law situation when you retire, said Laurence Kotlikoff, an economist at Boston University.
"The results very much depend on your age and income levels" when you begin your retirement savings, he said.
Kotlikoff co-authored a research study in December titled "To Roth or Not to Roth, That Is the Question," answering that question by running a number of hypothetical savings situations through his retirement-planning software, ESPlanner.
In many of the hypothetical situations, a 401(k) (or a deductible IRA) trumped a Roth, although sometimes just slightly. In other cases, the Roth led to a better outcome. Often, the difference was only slight.
"A regular 401(k) beats a Roth for a majority of our stylized households, but both offer a significant improvement over fully taxed savings," Kotlikoff and his co-authors wrote in the paper.
"Of course, future changes to the tax code can increase or decrease the value of either type of account," the paper says. "We therefore recommend investing in a combination of both account types that is tailored to household circumstances and attitudes toward risk."
Still, to Manarin's mind, the benefit of Roths is overblown. "What drives me wild is when they talk people into cashing in their IRA, paying all those taxes and putting the money into a Roth. It just makes zero sense to do that."
Retirement Related Birthdays
I very important article that I found on the internet. Key dates to remember:
Six Birthdays You'll Either Love or Hate
by Michael Katz
When we're young there's always a birthday to look forward to, whether it's getting a drivers license at 16 or being able to buy a drink at 21. But there comes a point where most people stop looking forward to the next birthday.
But if you're approaching retirement age, there are several birthdays at which certain benefits and entitlements kick in, giving you something to look forward to as you hit your golden years. Here are six age milestones to mark on your calendar:
Age 59 ½
You may have been in preschool the last time you counted half birthdays, but the Social Security Administration still does. When you turn 59½, you can celebrate by starting your withdrawals from your retirement plan or IRA. You can finally do so without being subject to the 10% penalty you'd generally have to pay at a younger age.
Age 60
This is the earliest that a widow or widower can collect benefits from Social Security (if the surviving spouse is disabled, this benefit kicks in at age 50). As a general rule, early survivors benefits will give about the same total Social Security survivors benefits over the course of a lifetime. However, the installment amounts will be smaller to take into account the longer period you will receive them.
You can receive these benefits at any time between your 60th birthday and your full retirement age as a survivor. However, the earlier you start, the more your survivor's benefits are reduced -- they will dwindle at a fraction of a percent for each month before your full retirement age.
Age 62
Regardless of when you reach your full retirement age, you can choose to begin receiving social security retirement benefits at age 62. However, if you start taking benefits before your full retirement age, those proceeds will be reduced.
If your full retirement age is 67, then your starting benefits will be reduced by 30%. That percentage goes down the closer you get to your full retirement, with a 6.7% reduction for withdrawing at age 66. Age 62 also marks the point when you are old enough to qualify for a reverse mortgage.
Age 65-67
Somewhere between the ages of 65 and 67 is when you'll reach your full retirement age, which is when you can begin to collect full Social Security benefits. When your specific retirement age hits depends on how old you are. It was 65 for anyone born 1937 or earlier, and gradually increases to age 67 for anyone born on or after 1960. You can use this chart from the Social Security Administration to determine your exact retirement age.
Age 70
If you don't need to dip into your Social Security benefits when you hit full retirement age, you can delay your retirement, and your benefits will be increased based on your birth date. However, once you reach age 70, the benefit increase no longer applies, even if you continue to delay taking benefits.
Age 70 1/2
Another half birthday to celebrate at age 70½ is when you must begin taking your required minimum distributions from your IRAs, whether you've retired already or not. RMDs apply each year beginning with the year the account owner turns age 70 ½. The distributions are calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy.
Six Birthdays You'll Either Love or Hate
by Michael Katz
When we're young there's always a birthday to look forward to, whether it's getting a drivers license at 16 or being able to buy a drink at 21. But there comes a point where most people stop looking forward to the next birthday.
But if you're approaching retirement age, there are several birthdays at which certain benefits and entitlements kick in, giving you something to look forward to as you hit your golden years. Here are six age milestones to mark on your calendar:
Age 59 ½
You may have been in preschool the last time you counted half birthdays, but the Social Security Administration still does. When you turn 59½, you can celebrate by starting your withdrawals from your retirement plan or IRA. You can finally do so without being subject to the 10% penalty you'd generally have to pay at a younger age.
Age 60
This is the earliest that a widow or widower can collect benefits from Social Security (if the surviving spouse is disabled, this benefit kicks in at age 50). As a general rule, early survivors benefits will give about the same total Social Security survivors benefits over the course of a lifetime. However, the installment amounts will be smaller to take into account the longer period you will receive them.
You can receive these benefits at any time between your 60th birthday and your full retirement age as a survivor. However, the earlier you start, the more your survivor's benefits are reduced -- they will dwindle at a fraction of a percent for each month before your full retirement age.
Age 62
Regardless of when you reach your full retirement age, you can choose to begin receiving social security retirement benefits at age 62. However, if you start taking benefits before your full retirement age, those proceeds will be reduced.
If your full retirement age is 67, then your starting benefits will be reduced by 30%. That percentage goes down the closer you get to your full retirement, with a 6.7% reduction for withdrawing at age 66. Age 62 also marks the point when you are old enough to qualify for a reverse mortgage.
Age 65-67
Somewhere between the ages of 65 and 67 is when you'll reach your full retirement age, which is when you can begin to collect full Social Security benefits. When your specific retirement age hits depends on how old you are. It was 65 for anyone born 1937 or earlier, and gradually increases to age 67 for anyone born on or after 1960. You can use this chart from the Social Security Administration to determine your exact retirement age.
Age 70
If you don't need to dip into your Social Security benefits when you hit full retirement age, you can delay your retirement, and your benefits will be increased based on your birth date. However, once you reach age 70, the benefit increase no longer applies, even if you continue to delay taking benefits.
Age 70 1/2
Another half birthday to celebrate at age 70½ is when you must begin taking your required minimum distributions from your IRAs, whether you've retired already or not. RMDs apply each year beginning with the year the account owner turns age 70 ½. The distributions are calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy.
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