If you can fully fund either a traditional IRA or Roth IRA, then a Roth IRA probably makes the most sense. The below article gives good information for a Roth IRA.
Tips for Managing Your Roth IRA by Sue Stevens
Roth IRAs differ from traditional IRAs in that you put away aftertax money, you are not required to take Required Minimum Distributions, and when you take out the money in the future you won't owe any tax at all. Because you use aftertax money to make your contributions, you don't get a tax deduction like you would with a traditional IRA.
Eligibility to Make Contributions
The contribution maximum is the same for Roth IRAs as it is for traditional IRAs. For 2007, you can contribute $4,000--or $5,000 for investors over age 50. (You have until April 15 to make a 2007 contribution.) The contribution limit goes up for 2008--to $5,000 for those under 50 and $6,000 for those over 50. The income thresholds, however, are higher than they are for deductible contributions to a traditional IRA.
Singles may make at least a partial contribution to a Roth IRA if modified adjusted gross income is less than $114,000 (in 2008 that increases to $116,000). Married couples filing jointly may contribute as long as their modified AGI is below $166,000 (in 2008 that increases to $169,000). Married filing separately may only contribute if modified AGI is less than $10,000.
You can contribute past age 70 1/2 as long as you have earned income and are otherwise eligible. You do not have to take Required Minimum Distributions at age 70 1/2.
Contributions can be made in the year the income is earned or up to the filing deadline of your tax return, not including extensions (April 15 in most cases).
Tax Penalties on Roth IRAs
There are fewer potential penalties for Roth IRAs than there are with traditional IRAs. Because you are not required to take RMDs, you won't run into that nasty 50% penalty that you'll face if you don't take distributions from a traditional IRA on time.
You may, however, bump into the 10% early distribution penalty if you tap your Roth IRA before you're age 59 1/2. Here are the exceptions to that penalty:
You're disabled
You're an IRA beneficiary
You're a first-time homeowner and need to cover certain expenses
You have significant unreimbursed medical expenses
You're paying for medical premiums after losing a job
You have qualified higher-education expenses
IRS levy of a qualified plan
You're taking substantially equal periodic payments (same rules as under traditional IRA)
Claiming a Loss on Your Roth IRA
It is possible to take a deduction for a loss on your Roth IRA, but it may not make sense in every situation. The loss you can take revolves around your "basis," or the amount you've invested with aftertax money. You must withdraw the entire amount in your Roth to be eligible to claim a loss. Because the money you withdraw is a qualified distribution (a return of your own contributions) you would not owe a 10% penalty.
This type of loss is not like a capital loss on a taxable investment. With taxable capital losses you can deduct as much as $3,000 against ordinary income on your tax return and carry the rest of your loss forward indefinitely. With a Roth loss, you must use it in the year you generate it. So, if you sold your Roth in 2007 and realized a loss, you would claim it on your 2007 tax return. It goes on Schedule A and is subject to the 2% miscellaneous itemized-deduction threshold.
Think carefully before you liquidate your Roth IRA, however. For example, if your Roth is worth $20,000 and you pull it all out to recognize a loss, you'll only be able to put back $5,000 this year--the Roth contribution limit for 2008 ($6,000 for people over age 50). You would lose the advantage of having accumulated a greater balance in your account.
The same principle of taking a loss applies to nondeductible traditional IRA contributions, but not tax-deductible contributions. For more information, see IRS Publication 590.
Roth Distributions
You can always take out your contributions without paying income tax. After all, you paid the tax on that money before it was contributed to the Roth IRA.
For the earnings to be distributed tax-free (that is, qualified), you must hold for at least five years plus one of the following:
Attain age 59 1/2
Be a beneficiary of the IRA
Be disabled
Be eligible for a qualified first-time homebuyer withdrawal of as much as $10,000
There are ordering rules for taking nonqualified distributions out of a Roth IRA. To figure out how much tax you owe, you first subtract your regular contributions. If your distribution is more than your original contributions, then you look to any conversions you did, and finally to earnings on contributions.
Should You Convert Your Traditional IRA to a Roth IRA?
If you think income tax rates may go up in the future, you may want to consider taking part (or all) of your traditional IRA, paying tax now, and converting it to a Roth IRA.
To convert a traditional IRA to a Roth IRA, you pay the tax on the traditional IRA up front with money from a separate account. If you have to use money in your traditional IRA to pay the tax on the conversion, it will be considered an early withdrawal (assuming you are under age 59 1/2), and you will owe a 10% penalty on it.
Converting to a Roth doesn't have to be an all-or-nothing proposition. You can convert part of your traditional IRA. You should consider a conversion if you expect tax rates to go up, to avoid taking Required Minimum Distributions at age 70 1/2, or to be able to contribute longer.
There can be several advantages to converting your traditional IRA to a Roth, but what has stopped many people (until recently) is the fact that if your AGI is more than $100,000, you can't convert.
Begining in 2010, however, anyone will be able to convert a traditional IRA to a Roth, regardless of income level. To take advantage of that opportunity, more people are now making nondeductible traditional IRA contributions so that they can build up the amount they will be able to convert in the future (in this scenario, you would only pay tax on the earnings of the nondeductible contributions because the contributions are made with aftertax dollars).
Keep in mind there are always potential disadvantages of converting a traditional IRA to a Roth IRA--like the possibility of a totally new tax system that would change the rules. If we have a flat tax or a consumption tax in the future, it may turn out to be a mistake to pay more income tax now.
Roth 401(k) Accounts
In 2006, companies started offering Roth 401(k) options. A Roth 401(k) is a variation on a traditional 401(k) retirement plan with some of the characteristics of a Roth IRA. More and more firms are now offering this type of plan.
Just like the traditional 401(k) plan, Roth 401(k) contributions are limited to $15,500 in 2008 ($20,500 if over age 50). Your contributions can be split between the traditional and Roth plans.
You'll get an income-tax savings through traditional 401(k) contributions, but not with Roth 401(k) contributions. But unlike a Roth IRA, there are no income limitations on contributions to a Roth 401(k). So for those of you with higher incomes, this may be an alternative to making nondeductible traditional IRA contributions. A Roth 401(k) does require that you take required minimum distributions at age 70 1/2, but you can avoid that if you roll your Roth 401(k) over to a Roth IRA.
Wednesday, February 27, 2008
Gameplan to Become a Millionaire
If someone gave you a gameplan on how to become a millionaire, would you follow it? I found this article that gives good advice and deserves your attention. Notice it involves preparation, hard work, wisdom, and discipline.
12 steps to become a millionaire
You don't have to own the company or be a CEO. Here's how to build a rich nest egg one paycheck at a time.
By Kiplinger's Personal Finance Magazine
A number of the people profiled in "Millionaires tell how they did it" made their millions as entrepreneurs. But working for the Man doesn't mean you have to be a wage slave or resort to buying lottery tickets to strike it rich. The trick is to maximize your income on the job (and know when to move on), make the most of your employee benefits and tax breaks and use that extra money to start investing.
1. Keep your eyes peeled for better ways to do your job. Streamline a procedure, shave costs, create a new profit center, become an expert on a specific topic, volunteer for a company committee -- anything that will make you stand out as a prime candidate for a promotion or a pay boost.
2. Don't be afraid to negotiate. In a study of master's degree graduates from her university, Carnegie Mellon economics professor Linda Babcock found that those who negotiated their first salary boosted their pay by 7.4% compared with those who didn't bargain.
3. Get your ducks in a row and your numbers on paper. If possible, quantify how much your efforts add to the company's bottom line. If that's not feasible, spotlight your value with comparable salaries for workers in your position from a Web site, such as Salary.com, or from a professional association.
4. Plot your strategy when it's time to move on. Create a professional-looking page on MySpace that tells prospective employers why you're an exceptional candidate, recommends John Challenger of the outplacement firm Challenger, Gray & Christmas. And don't neglect more conventional networking: Join a professional association or show up at school reunions toting business cards.
Milk your benefits
5. Contribute as much as you can to your 401(k) and other tax-deferred retirement plans. You'll not only build a bigger nest egg, but you'll also cut your tax bill. In the 25% federal tax bracket, every $1,000 you contribute to a 401(k) trims your taxes by $250. And you'll save on state income taxes, too.
6. Flex your tax-saving muscle. Contribute pretax dollars to a flexible spending account to pay for dependent care or out-of-pocket medical expenses. If you set aside $1,500 per year and you're in the 25% bracket, avoiding federal income and Social Security taxes means Uncle Sam will subsidize almost $500 of your expenses.
7. Review your tax withholding. If you're expecting a refund this spring, you're having too much tax withheld from your paycheck -- and making an interest-free loan to Uncle Sam. That's no way to become a millionaire. Put more money in your pocket and then filling out a new Form W-4.
8. Stash savings in a Roth IRA if you're eligible. Withdrawals in retirement, including decades of compounded earnings, will be tax-free. This year, income-eligibility limits for a Roth increase to $114,000 for individuals and $166,000 for married couples.
Invest like crazy
9. Don't delay. The quicker you get a jump on putting money aside, the easier it will be to stuff a seven-figure cushion. If you start at age 25, for example, investing $286 per month will get you $1 million by age 65, assuming you earn 8% annually.
10. Invest automatically, either through your employer's retirement plan or by setting up a regular deposit to a mutual fund or broker. You'll never miss the money, and you'll avoid two big mistakes: buying too much when stock prices are high and not buying at all when prices fall.
11. Watch for fund fees. The more you pay, the tougher it is to earn an above-average return. The typical hedge fund, for example, takes 20% of any gains, a huge hurdle to overcome. A better bet: no-load mutual funds with expense ratios of 1% or less. If you trade individual stocks, watch those commissions.
12. Keep it simple. Be wary of get-rich-quick schemes or sales pitches for complex investments, such as oil-and-gas partnerships, that trade on the millionaire cachet to lure investors into buying high-fee products they don't understand. Most millionaire households accumulate their wealth over the long term by sticking to a regular investing plan in a balanced portfolio.
12 steps to become a millionaire
You don't have to own the company or be a CEO. Here's how to build a rich nest egg one paycheck at a time.
By Kiplinger's Personal Finance Magazine
A number of the people profiled in "Millionaires tell how they did it" made their millions as entrepreneurs. But working for the Man doesn't mean you have to be a wage slave or resort to buying lottery tickets to strike it rich. The trick is to maximize your income on the job (and know when to move on), make the most of your employee benefits and tax breaks and use that extra money to start investing.
1. Keep your eyes peeled for better ways to do your job. Streamline a procedure, shave costs, create a new profit center, become an expert on a specific topic, volunteer for a company committee -- anything that will make you stand out as a prime candidate for a promotion or a pay boost.
2. Don't be afraid to negotiate. In a study of master's degree graduates from her university, Carnegie Mellon economics professor Linda Babcock found that those who negotiated their first salary boosted their pay by 7.4% compared with those who didn't bargain.
3. Get your ducks in a row and your numbers on paper. If possible, quantify how much your efforts add to the company's bottom line. If that's not feasible, spotlight your value with comparable salaries for workers in your position from a Web site, such as Salary.com, or from a professional association.
4. Plot your strategy when it's time to move on. Create a professional-looking page on MySpace that tells prospective employers why you're an exceptional candidate, recommends John Challenger of the outplacement firm Challenger, Gray & Christmas. And don't neglect more conventional networking: Join a professional association or show up at school reunions toting business cards.
Milk your benefits
5. Contribute as much as you can to your 401(k) and other tax-deferred retirement plans. You'll not only build a bigger nest egg, but you'll also cut your tax bill. In the 25% federal tax bracket, every $1,000 you contribute to a 401(k) trims your taxes by $250. And you'll save on state income taxes, too.
6. Flex your tax-saving muscle. Contribute pretax dollars to a flexible spending account to pay for dependent care or out-of-pocket medical expenses. If you set aside $1,500 per year and you're in the 25% bracket, avoiding federal income and Social Security taxes means Uncle Sam will subsidize almost $500 of your expenses.
7. Review your tax withholding. If you're expecting a refund this spring, you're having too much tax withheld from your paycheck -- and making an interest-free loan to Uncle Sam. That's no way to become a millionaire. Put more money in your pocket and then filling out a new Form W-4.
8. Stash savings in a Roth IRA if you're eligible. Withdrawals in retirement, including decades of compounded earnings, will be tax-free. This year, income-eligibility limits for a Roth increase to $114,000 for individuals and $166,000 for married couples.
Invest like crazy
9. Don't delay. The quicker you get a jump on putting money aside, the easier it will be to stuff a seven-figure cushion. If you start at age 25, for example, investing $286 per month will get you $1 million by age 65, assuming you earn 8% annually.
10. Invest automatically, either through your employer's retirement plan or by setting up a regular deposit to a mutual fund or broker. You'll never miss the money, and you'll avoid two big mistakes: buying too much when stock prices are high and not buying at all when prices fall.
11. Watch for fund fees. The more you pay, the tougher it is to earn an above-average return. The typical hedge fund, for example, takes 20% of any gains, a huge hurdle to overcome. A better bet: no-load mutual funds with expense ratios of 1% or less. If you trade individual stocks, watch those commissions.
12. Keep it simple. Be wary of get-rich-quick schemes or sales pitches for complex investments, such as oil-and-gas partnerships, that trade on the millionaire cachet to lure investors into buying high-fee products they don't understand. Most millionaire households accumulate their wealth over the long term by sticking to a regular investing plan in a balanced portfolio.
Wednesday, February 20, 2008
Preparing for Retirement Expenses
In the past some wisdom was that a retiree during retirement needed about 70% of their pre-retirement income. I think this is wrong and under estimates what will actually be needed. I think you need to plan for a higher amount. The key difference now is the future cost of medical expenses that are growing much faster than inflation. It is better to plan for a higher level of expenses and have money left over than come up short.
Bottom Line: Save early, save often, & get professional help.
Most Americans Unprepared for Retirement by David Goldman
A majority of American workers will not be able to maintain their current standard of living after they retire, according to a report released Tuesday.
The Center for Retirement Research (CRR) estimates 61% of households are "at risk" of being unable to live the way they would like and pay for their health care when they get old.
CRR considers consumers to be "at risk" if their savings, Social Security and pension benefits combined will fall at least 10% short of the income needed in retirement to support the same standard of living they enjoyed while working.
Previous reports have considered health care to be a cost that retirees factor in by "rearranging their basket of consumption" - that is, spending less on consumer goods.
CRR's study assumes that people want to spend the same amount on goods in retirement that they do now and that they consider health insurance and the added health care costs associated with growing old to be an additional expense.
"People take the notion of health care for granted," said Andrew D. Eschtruth, associate director for external relations at CRR. "The basic assumption of this report is that retirees think they will eat the same kind of foods, travel the same - or more - and buy the same clothes."
If that's the case, then there is cause for concern. Health care costs continue to increase dramatically, far outpacing wage increases year over year.
Additionally, out-of-pocket health care costs for most consumers rise significantly upon retirement. The report assumes that people recognize the burden of health care costs once they retire; however, those retirees to whom the added expense comes as a surprise will have to reduce their spending on consumer goods and spend much more on health care.
Many workers do not have a realistic estimate of how much they will need to spend on health care when they retire, according to a 2007 study by the Employee Benefit Research Institute (EBRI).
The study shows that 84% of employees estimated they and their spouse will need to accumulate less than $250,000 for retiree health costs, 32% of whom thought they would need less than $100,000.
But according to the EBRI, couples will need to save about $300,000 in retirement to cover health expenses, assuming they live to average life expectancy and Medicare benefits remain at current levels. For those who live to 95, that amount jumps to $550,000.
Why are people so inadequately prepared? With the shift from traditional pension plans to 401(k)s, the burden of preparing for retirement has shifted from employers to the employee.
Some workers aren't saving enough to prepare themselves for their golden years. Also, 30% of employees simply fail to sign up for 401(k) plans, according to insurance company Nationwide.
"A lot of people say, 'Oh yeah, my company told me to sign up for my 401(k); I'll do it tomorrow,' and they forget to sign up," said Eschtruth.
As a result, the government passed the Pension Protection Act in 2006 to encourage businesses to automatically enroll employees in their retirement plans.
But there are steps beyond saving that people can take to make make retirement planning easier and more affordable.
"Good physical health matters a great deal," said Paul Ballew, senior vice president of consumer insight and analytics at Nationwide. "Physical and financial health are connected, as being healthy lessens your chance of having high, unexpected medical expenses."
Households planning for retirement are also encouraged to seek professional advice."Save early and often, and take advantage of what's available to you," said Ballew. "But also speak to a professional who can help you achieve an adequate investment strategy for your golden years."
Bottom Line: Save early, save often, & get professional help.
Most Americans Unprepared for Retirement by David Goldman
A majority of American workers will not be able to maintain their current standard of living after they retire, according to a report released Tuesday.
The Center for Retirement Research (CRR) estimates 61% of households are "at risk" of being unable to live the way they would like and pay for their health care when they get old.
CRR considers consumers to be "at risk" if their savings, Social Security and pension benefits combined will fall at least 10% short of the income needed in retirement to support the same standard of living they enjoyed while working.
Previous reports have considered health care to be a cost that retirees factor in by "rearranging their basket of consumption" - that is, spending less on consumer goods.
CRR's study assumes that people want to spend the same amount on goods in retirement that they do now and that they consider health insurance and the added health care costs associated with growing old to be an additional expense.
"People take the notion of health care for granted," said Andrew D. Eschtruth, associate director for external relations at CRR. "The basic assumption of this report is that retirees think they will eat the same kind of foods, travel the same - or more - and buy the same clothes."
If that's the case, then there is cause for concern. Health care costs continue to increase dramatically, far outpacing wage increases year over year.
Additionally, out-of-pocket health care costs for most consumers rise significantly upon retirement. The report assumes that people recognize the burden of health care costs once they retire; however, those retirees to whom the added expense comes as a surprise will have to reduce their spending on consumer goods and spend much more on health care.
Many workers do not have a realistic estimate of how much they will need to spend on health care when they retire, according to a 2007 study by the Employee Benefit Research Institute (EBRI).
The study shows that 84% of employees estimated they and their spouse will need to accumulate less than $250,000 for retiree health costs, 32% of whom thought they would need less than $100,000.
But according to the EBRI, couples will need to save about $300,000 in retirement to cover health expenses, assuming they live to average life expectancy and Medicare benefits remain at current levels. For those who live to 95, that amount jumps to $550,000.
Why are people so inadequately prepared? With the shift from traditional pension plans to 401(k)s, the burden of preparing for retirement has shifted from employers to the employee.
Some workers aren't saving enough to prepare themselves for their golden years. Also, 30% of employees simply fail to sign up for 401(k) plans, according to insurance company Nationwide.
"A lot of people say, 'Oh yeah, my company told me to sign up for my 401(k); I'll do it tomorrow,' and they forget to sign up," said Eschtruth.
As a result, the government passed the Pension Protection Act in 2006 to encourage businesses to automatically enroll employees in their retirement plans.
But there are steps beyond saving that people can take to make make retirement planning easier and more affordable.
"Good physical health matters a great deal," said Paul Ballew, senior vice president of consumer insight and analytics at Nationwide. "Physical and financial health are connected, as being healthy lessens your chance of having high, unexpected medical expenses."
Households planning for retirement are also encouraged to seek professional advice."Save early and often, and take advantage of what's available to you," said Ballew. "But also speak to a professional who can help you achieve an adequate investment strategy for your golden years."
Job Change Protect Retirement Assets
Changing Jobs? What to do with your 401(k), 403(b), etc.? The answer is do not spend it, keep it invested for the appropriate timeframe. When you are changing jobs, it is a great time to seek professional guidance.
Three Ways to Protect Your 401(k) in a New Job by Kelsey Abbott
At any given time, millions of Americans are in the process of changing jobs, with millions more thinking about taking the leap.
The average U.S. worker has held 10 jobs by the time he or she hits age 40, U.S. Secretary of Labor Elaine L. Chao recently noted.
When you move from one job to another, you have the opportunity to improve your financial situation on several fronts.
But job changes can be complicated. If you're not careful, your 401(k) and medical benefits can suffer some damage in the transition.
When you leave a job, you might be tempted to cash out your 401(k) plan. That's a bad idea. If you're under age 59 1/2 -- as most people who change jobs are -- you'll have to pay a 10% penalty for taking an early withdrawal.
What's more, you will have to pay taxes on the money you withdraw -- and the money might push you into a high tax bracket, making the hit even worse. And you'll give up the potential for future tax-deferred growth on those savings. In short, you'll be shooting yourself in the foot.
Here are three options that make more sense:
1. Leave your money in your former employer's retirement plan.
Most employers will give you this option as long as you have at least $5,000 in your 401(k) plan. This option may be a good one if you won't immediately be eligible for your new employer's plan -- or your new employer doesn't have one. Otherwise, most financial advisors recommend consolidating your retirement savings into your new account for simplicity's sake.
2. Roll your current 401(k) or other retirement savings plan into your new employer's plan.
Ask your new employer when you will be eligible for the firm's retirement savings plan, and find out what you should do to facilitate the transfer of assets from your old plan to your new one.
Make sure that your old employer writes rollover checks to your new plan administrator -- not to you. Reason: If the check is in your name, the plan administrator must withhold 20% of the account balance for taxes.
True, you can get that money back when you file your income taxes, but only on two conditions: You must deposit an amount equal to 100% of the original amount into your new account, and you must do so within 60 days of receiving the check. That means you'll have to come up with 20% out of your own pocket while you wait for your refund!
Worse, if you fail to make the rollover within 60 days, the transfer will be treated as a withdrawal -- which means you'll owe taxes on all of it, and you will have given up the chance to defer future taxes on the money those savings earn.
Your new employer will give you a form that lets you select "direct rollover" (or something similar), which means that the money will go directly from your old account to your new account.
3. Move the money from your old employer's 401(k) into a rollover IRA.
A rollover IRA might be for you if your new employer doesn't offer a retirement savings plan. Again, make sure the check is written to the new account rather than to you. That way you'll avoid withholding -- as well as the risk of missing the 60-day deadline and being forced to pay taxes on the full amount.Keep your rollover IRA separate from any other IRAs and don't make any new contributions to it. (You can maintain another IRA for future contributions.) That way you will retain the option of rolling the money in your rollover IRA back over into a future employer's retirement savings plan.
Three Ways to Protect Your 401(k) in a New Job by Kelsey Abbott
At any given time, millions of Americans are in the process of changing jobs, with millions more thinking about taking the leap.
The average U.S. worker has held 10 jobs by the time he or she hits age 40, U.S. Secretary of Labor Elaine L. Chao recently noted.
When you move from one job to another, you have the opportunity to improve your financial situation on several fronts.
But job changes can be complicated. If you're not careful, your 401(k) and medical benefits can suffer some damage in the transition.
When you leave a job, you might be tempted to cash out your 401(k) plan. That's a bad idea. If you're under age 59 1/2 -- as most people who change jobs are -- you'll have to pay a 10% penalty for taking an early withdrawal.
What's more, you will have to pay taxes on the money you withdraw -- and the money might push you into a high tax bracket, making the hit even worse. And you'll give up the potential for future tax-deferred growth on those savings. In short, you'll be shooting yourself in the foot.
Here are three options that make more sense:
1. Leave your money in your former employer's retirement plan.
Most employers will give you this option as long as you have at least $5,000 in your 401(k) plan. This option may be a good one if you won't immediately be eligible for your new employer's plan -- or your new employer doesn't have one. Otherwise, most financial advisors recommend consolidating your retirement savings into your new account for simplicity's sake.
2. Roll your current 401(k) or other retirement savings plan into your new employer's plan.
Ask your new employer when you will be eligible for the firm's retirement savings plan, and find out what you should do to facilitate the transfer of assets from your old plan to your new one.
Make sure that your old employer writes rollover checks to your new plan administrator -- not to you. Reason: If the check is in your name, the plan administrator must withhold 20% of the account balance for taxes.
True, you can get that money back when you file your income taxes, but only on two conditions: You must deposit an amount equal to 100% of the original amount into your new account, and you must do so within 60 days of receiving the check. That means you'll have to come up with 20% out of your own pocket while you wait for your refund!
Worse, if you fail to make the rollover within 60 days, the transfer will be treated as a withdrawal -- which means you'll owe taxes on all of it, and you will have given up the chance to defer future taxes on the money those savings earn.
Your new employer will give you a form that lets you select "direct rollover" (or something similar), which means that the money will go directly from your old account to your new account.
3. Move the money from your old employer's 401(k) into a rollover IRA.
A rollover IRA might be for you if your new employer doesn't offer a retirement savings plan. Again, make sure the check is written to the new account rather than to you. That way you'll avoid withholding -- as well as the risk of missing the 60-day deadline and being forced to pay taxes on the full amount.Keep your rollover IRA separate from any other IRAs and don't make any new contributions to it. (You can maintain another IRA for future contributions.) That way you will retain the option of rolling the money in your rollover IRA back over into a future employer's retirement savings plan.
Tuesday, February 12, 2008
Optimize Retirement Funds
Below is an article about how to optimize a 401(k) plan. In reality this advice applies all retirement accounts. The emphasis in this article is that you need to know the specifics in your investments and your time horizon. If the time horizon is greater than 8 years, the minimum and maximum return of stocks outperform bonds. You need to invest to meet your time horizon.
Four Ways to Optimize Your 401(k) by Mike Woelflein
The stock market's wild gyrations make this a good time to check on your 401(k).
No panic moves, mind you.
Instead, put your portfolio through its paces to make sure it's doing what it needs to do to help you reach retirement in good financial shape.
Here are four pieces of advice worth taking:
1. Consider Being More Aggressive
Recent events notwithstanding, stocks perform better than other investment vehicles over time. The typical stock fund averaged a 10.4% annual return from 1926 to 2005, compared with 3% for inflation, less than 6% for bond funds and less than 4% for Treasuries. And while stocks can be volatile, the risk of holding them diminishes over time.
Stocks have outpaced both bonds and Treasury bills during more than 75% of rolling five-year periods since 1926, according to Ibbotson Associates, a Chicago-based investment research firm owned by Morningstar. Look at 10-year periods, and stocks won 85% of the time. For 15-year periods, the percentage jumps to 92%. Your allocation to stocks should match your time horizon and risk tolerance.
Remember: your target date should not be the year you retire. Your retirement may well last for decades, and during that time your portfolio will need to grow enough to stand up to inflation, including rising health-care costs. Bottom line: Even as you approach and pass the end of your working years, don't be afraid to emphasize growth -- meaning stocks.
2. Expand Your Horizons
Today's 401(k) plans tend to offer a broad array of investment possibilities. Consider whether your portfolio is taking advantage of them. Investment vehicles such as emerging-market stocks, high-yield "junk" bonds and small company stocks offer superior growth over the long run. They may seem risky -- and in isolation they are. But when you hold them with other investments, they can actually reduce your overall risk. That's because these asset classes tend to zig when other segments of the financial markets zag. As a result, they can help smooth out the year-to-year returns of your portfolio even as they increase your potential for long-term gains.
3. Identify Losers and Overlapping Funds
Review each fund in your portfolio, and compare it to others in the same category both inside and outside your plan. For example, how does your small-cap growth fund compare with other funds that hold shares of small growth companies? (You can find this info at websites such as Lipper.com, Morningstar.com and fund-company or 401(k) plan sites.)
Compare both returns and volatility over one, three and five years, with an emphasis on the longer term. While you're at it, look for fund overlap, which occurs when two funds are concentrated on the same stock or sector. For example, if you hold several funds that have invested heavily in technology stocks or long-term bonds, you could be overexposed to a decline in those sectors.
4. Coordinate Your 401(k) With Other Accounts
Let's say that your plan's options in some categories aren't appealing. In that case, consider investing in the plan's strongest funds, then diversifying into other categories through an IRA or taxable accounts.The bottom line: As a retirement account, your 401(k) should focus on the long term. But tweaking your holdings can improve that long-term outlook -- and might also offer some shelter from the market gyrations that will occur in the meantime.
Four Ways to Optimize Your 401(k) by Mike Woelflein
The stock market's wild gyrations make this a good time to check on your 401(k).
No panic moves, mind you.
Instead, put your portfolio through its paces to make sure it's doing what it needs to do to help you reach retirement in good financial shape.
Here are four pieces of advice worth taking:
1. Consider Being More Aggressive
Recent events notwithstanding, stocks perform better than other investment vehicles over time. The typical stock fund averaged a 10.4% annual return from 1926 to 2005, compared with 3% for inflation, less than 6% for bond funds and less than 4% for Treasuries. And while stocks can be volatile, the risk of holding them diminishes over time.
Stocks have outpaced both bonds and Treasury bills during more than 75% of rolling five-year periods since 1926, according to Ibbotson Associates, a Chicago-based investment research firm owned by Morningstar. Look at 10-year periods, and stocks won 85% of the time. For 15-year periods, the percentage jumps to 92%. Your allocation to stocks should match your time horizon and risk tolerance.
Remember: your target date should not be the year you retire. Your retirement may well last for decades, and during that time your portfolio will need to grow enough to stand up to inflation, including rising health-care costs. Bottom line: Even as you approach and pass the end of your working years, don't be afraid to emphasize growth -- meaning stocks.
2. Expand Your Horizons
Today's 401(k) plans tend to offer a broad array of investment possibilities. Consider whether your portfolio is taking advantage of them. Investment vehicles such as emerging-market stocks, high-yield "junk" bonds and small company stocks offer superior growth over the long run. They may seem risky -- and in isolation they are. But when you hold them with other investments, they can actually reduce your overall risk. That's because these asset classes tend to zig when other segments of the financial markets zag. As a result, they can help smooth out the year-to-year returns of your portfolio even as they increase your potential for long-term gains.
3. Identify Losers and Overlapping Funds
Review each fund in your portfolio, and compare it to others in the same category both inside and outside your plan. For example, how does your small-cap growth fund compare with other funds that hold shares of small growth companies? (You can find this info at websites such as Lipper.com, Morningstar.com and fund-company or 401(k) plan sites.)
Compare both returns and volatility over one, three and five years, with an emphasis on the longer term. While you're at it, look for fund overlap, which occurs when two funds are concentrated on the same stock or sector. For example, if you hold several funds that have invested heavily in technology stocks or long-term bonds, you could be overexposed to a decline in those sectors.
4. Coordinate Your 401(k) With Other Accounts
Let's say that your plan's options in some categories aren't appealing. In that case, consider investing in the plan's strongest funds, then diversifying into other categories through an IRA or taxable accounts.The bottom line: As a retirement account, your 401(k) should focus on the long term. But tweaking your holdings can improve that long-term outlook -- and might also offer some shelter from the market gyrations that will occur in the meantime.
Monday, February 11, 2008
Nine Retirement Killers
The last blog was on the things that can give you a successful retirement. This article that I found gives the opposite side of the story, retirement killers. The article makes some very good points and is easy to read.
Nine Retirement Killers by Robert Brokamp
Retirement is the No. 1 goal of investors. Yet, looking at the numbers, it's clear that many investors are undermining their good intentions with unfortunate actions. Here are nine mistakes to avoid if you want your retirement dreams to become a reality.
1. Cracking your nest egg before retirement. A study by Hewitt Associates found that 45% of workers cash in their 401(k)s when they switch jobs. In other words, they take the money -- paying income taxes and a 10% penalty if they're not yet 59 1/2 years old -- rather than leave it in a retirement account. That's no way to build the retirement of your dreams.
When you change jobs, you can transfer the money in your employer-sponsored retirement plan to an IRA, which will allow the money to continue growing tax-deferred. You might also be able to leave the money in your old plan or transfer it to the plan at your new job, depending on the plans' rules. But your best bet is the IRA. You'll have many, many more investment choices, usually at far lower costs.
2. Spending your retirement money way too early. Cashing in your 401(k) at a young age isn't the only way for your retirement to meet an early demise. Not saving enough in the first place will guarantee that your retirement will be DOA. Of course, no one wants to be told to "save" -- it's so boring, so ungratifying, almost Puritanical.
But this is what low-savers (and non-savers) are really doing: They're spending their retirement now -- which may mean they won't be able to retire at all. Buy that Coach purse now, or buy time in retirement tomorrow. Take a Carnival cruise this year, or take time off several years from now. Those are the choices you have to make. Building a nest egg isn't a decision of whether to consume, but when to consume. Do it now, and you won't be able to do it later without having to work for a paycheck.
3. Having no clue about how much to save. According to the 2007 Retirement Confidence Survey from the Employee Benefits Research Institute, only 43% of workers have calculated how much they need to retire. But you can't get to where you want to go if you don't know how to get there. You need a plan.
4. Spending your retirement savings too fast. If you've made it to retirement, congrats! You've amassed enough money to create your own portfolio-generated paycheck. Excellent work.
But you can't take it too easy, because you'll receive a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you won't outlive your savings? Just 4% a year. That's the withdrawal rate that would have sustained a mix of stocks and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 4% a year could have your portfolio beating you to the grave.
5. Not giving a hoot about asset allocation. And speaking of mixing stocks and bonds, nothing can wound a retirement like bad investment decisions, whether it's owning too much of one stock, letting emotions take over, chasing the latest fad, or letting short-term events affect your long-term strategy.
You basically have two choices: You can be a master stock-picker like Warren Buffett or Peter Lynch and try to find the next Wal-Mart. Or you can broadly diversify your assets, mostly via low-cost index funds such as Vanguard Total Stock Market (VTSMX). This way, you enjoy hefty exposure to giants like Apple (Nasdaq: AAPL), CVS Caremark (NYSE: CVS), and Medtronic (NYSE: MDT) as well as to mid- to small-sized growth firms such as Priceline.com (Nasdaq: PCLN) and SanDisk (Nasdaq: SNDK). But until you've established your skill at finding great investments, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio.
6. Letting Uncle Sam eat your retirement. There are many types of investments and investment accounts, and they all have their own quirks when it comes to taxes. Not knowing all the rules can lead to too much taxation -- and less money for retirement.
For example, profits from stocks that are held for at least a year will be taxed as long-term capital gains -- a rate no higher than 15%. Interest from corporate bonds, on the other hand, is taxed as ordinary income -- a rate as high as 35%. Yet many investors keep their stock investments in their tax-advantaged accounts and their bonds in regular, taxable accounts. That just doesn't make sense. Asset location can be just as important as asset allocation.
7. Depositing your retirement in your fatty deposits. As Americans' savings rate has dropped, our obesity rate has risen. Just a coincidence? All I can say is, the more we stuff our faces, the less we can stuff our IRAs. So before you make your next visit to the Olive Garden, find out how much you need to save every month to retire when you want, how you want. Then make sure that amount gets deposited in your retirement accounts. If you get that far, then visit the Olive Garden as a reward. You deserve it.
8. Paying too much for help. There's nothing wrong with getting financial advice. If we Fools didn't think investors could use ideas, feedback, and answers, we wouldn't be here.
But we firmly, strongly, passionately believe that such help should be objective and affordable.
Paying too much for advice (especially if it's bad or at least conflicted) does a lot for your broker's retirement, not yours. Paying just 1% a year on a $100,000 portfolio over 20 years could result in your forking over more than that amount in fees. That's a hundred grand that could have been in your pocket. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it. But if you're paying 1% or 2% a year to lose to an index fund -- as most mutual fund managers do -- then you're better off taking control of your own investments.
9. Retiring permanently when you really just needed a break. If you're in your 60s, you should plan on living at least another two decades. Can you stand full-time leisure for 20 years? Sure, it may sound good now, but many retirees find they get pretty bored after a while. But by then, they have already severed many of their professional ties. Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners. Or the possibility of working on a project basis, allowing you to take several months off each year. Or maybe just a one-year sabbatical. Explore your options before you no longer have them.
Nine Retirement Killers by Robert Brokamp
Retirement is the No. 1 goal of investors. Yet, looking at the numbers, it's clear that many investors are undermining their good intentions with unfortunate actions. Here are nine mistakes to avoid if you want your retirement dreams to become a reality.
1. Cracking your nest egg before retirement. A study by Hewitt Associates found that 45% of workers cash in their 401(k)s when they switch jobs. In other words, they take the money -- paying income taxes and a 10% penalty if they're not yet 59 1/2 years old -- rather than leave it in a retirement account. That's no way to build the retirement of your dreams.
When you change jobs, you can transfer the money in your employer-sponsored retirement plan to an IRA, which will allow the money to continue growing tax-deferred. You might also be able to leave the money in your old plan or transfer it to the plan at your new job, depending on the plans' rules. But your best bet is the IRA. You'll have many, many more investment choices, usually at far lower costs.
2. Spending your retirement money way too early. Cashing in your 401(k) at a young age isn't the only way for your retirement to meet an early demise. Not saving enough in the first place will guarantee that your retirement will be DOA. Of course, no one wants to be told to "save" -- it's so boring, so ungratifying, almost Puritanical.
But this is what low-savers (and non-savers) are really doing: They're spending their retirement now -- which may mean they won't be able to retire at all. Buy that Coach purse now, or buy time in retirement tomorrow. Take a Carnival cruise this year, or take time off several years from now. Those are the choices you have to make. Building a nest egg isn't a decision of whether to consume, but when to consume. Do it now, and you won't be able to do it later without having to work for a paycheck.
3. Having no clue about how much to save. According to the 2007 Retirement Confidence Survey from the Employee Benefits Research Institute, only 43% of workers have calculated how much they need to retire. But you can't get to where you want to go if you don't know how to get there. You need a plan.
4. Spending your retirement savings too fast. If you've made it to retirement, congrats! You've amassed enough money to create your own portfolio-generated paycheck. Excellent work.
But you can't take it too easy, because you'll receive a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you won't outlive your savings? Just 4% a year. That's the withdrawal rate that would have sustained a mix of stocks and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 4% a year could have your portfolio beating you to the grave.
5. Not giving a hoot about asset allocation. And speaking of mixing stocks and bonds, nothing can wound a retirement like bad investment decisions, whether it's owning too much of one stock, letting emotions take over, chasing the latest fad, or letting short-term events affect your long-term strategy.
You basically have two choices: You can be a master stock-picker like Warren Buffett or Peter Lynch and try to find the next Wal-Mart. Or you can broadly diversify your assets, mostly via low-cost index funds such as Vanguard Total Stock Market (VTSMX). This way, you enjoy hefty exposure to giants like Apple (Nasdaq: AAPL), CVS Caremark (NYSE: CVS), and Medtronic (NYSE: MDT) as well as to mid- to small-sized growth firms such as Priceline.com (Nasdaq: PCLN) and SanDisk (Nasdaq: SNDK). But until you've established your skill at finding great investments, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio.
6. Letting Uncle Sam eat your retirement. There are many types of investments and investment accounts, and they all have their own quirks when it comes to taxes. Not knowing all the rules can lead to too much taxation -- and less money for retirement.
For example, profits from stocks that are held for at least a year will be taxed as long-term capital gains -- a rate no higher than 15%. Interest from corporate bonds, on the other hand, is taxed as ordinary income -- a rate as high as 35%. Yet many investors keep their stock investments in their tax-advantaged accounts and their bonds in regular, taxable accounts. That just doesn't make sense. Asset location can be just as important as asset allocation.
7. Depositing your retirement in your fatty deposits. As Americans' savings rate has dropped, our obesity rate has risen. Just a coincidence? All I can say is, the more we stuff our faces, the less we can stuff our IRAs. So before you make your next visit to the Olive Garden, find out how much you need to save every month to retire when you want, how you want. Then make sure that amount gets deposited in your retirement accounts. If you get that far, then visit the Olive Garden as a reward. You deserve it.
8. Paying too much for help. There's nothing wrong with getting financial advice. If we Fools didn't think investors could use ideas, feedback, and answers, we wouldn't be here.
But we firmly, strongly, passionately believe that such help should be objective and affordable.
Paying too much for advice (especially if it's bad or at least conflicted) does a lot for your broker's retirement, not yours. Paying just 1% a year on a $100,000 portfolio over 20 years could result in your forking over more than that amount in fees. That's a hundred grand that could have been in your pocket. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it. But if you're paying 1% or 2% a year to lose to an index fund -- as most mutual fund managers do -- then you're better off taking control of your own investments.
9. Retiring permanently when you really just needed a break. If you're in your 60s, you should plan on living at least another two decades. Can you stand full-time leisure for 20 years? Sure, it may sound good now, but many retirees find they get pretty bored after a while. But by then, they have already severed many of their professional ties. Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners. Or the possibility of working on a project basis, allowing you to take several months off each year. Or maybe just a one-year sabbatical. Explore your options before you no longer have them.
Friday, February 8, 2008
Ten Traits that Give You Wealth
If you knew the 10 traits or behaviors that made a person wealthy, wouldn't you share them? The money game is being played everyday. Here are some plays for the game that should be beneficial.
Ten Traits That Make You Filthy-Rich by Jeffrey Strain
Saving money isn't all about whether or not you know how to score screaming bargains.
It has more to do with your attitude toward money.
Just think of those who don't fit the filthy-rich stereotype. People like Warren Buffett.
As explained in the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko, personal finance has as much to do with people's traits as it does with money. Many millionaires, in fact, have frugal ways.
Understanding how personal traits can influence your finances is an essential ingredient for building wealth.
Here are 10 key traits:
1. Patience
Patience is one of the most important traits when it comes to saving money.
This means waiting until the first wave of product hype has passed, keeping a car for an extra few years before getting another one and waiting until something you want fits into your budget instead of putting it on credit.
Patience is often the difference between creating savings and being in debt. Having the patience to wait until you find a good deal is a cornerstone of good finances.
2. Satisfaction
When you're satisfied, there is no reason to spend money on nonessentials. The sole purpose of commercials is to make you believe that buying a product or service will make you happier, wealthier, better looking or improve whatever isn't bringing you satisfaction.
People spend because they want to capture the excitement shown in advertisements. When you are satisfied with what you have and your life (not trying to live like those on TV), your finances will be in a lot better shape.
3. Organization
Being organized can make you more productive and ensure that all the many issues pertaining to personal finances are addressed.
It means not paying late fees, not buying two of everything, knowing deadlines that can affect your finances and getting more done in less time. All these can greatly benefit your finances.
4. Discipline
You need the discipline to continue to save money for specific, long-term goals every month.
Personal finance isn't a way to get rich quick, but is a disciplined execution of your lifetime plans.
5. Reflectiveness
It's important to be able to look at your financial decisions and reflect on their results.
You're going to make financial mistakes. Everyone does.
The key is to learn from those mistakes so you don't make them again, or recognize if you keep repeating them.
6. Creativity
The economy and our earnings don't always match our expectations.
Unexpected developments wreak havoc to elaborate financial plans. When this happens, changes are needed to deal with the new circumstances. Creativity is essential to accomplish this.
Creativity allows you to make something last longer rather than purchasing it when you don't have the money. It means juggling money to stay out of debt rather than simply paying with a credit card. It means finding a cheaper alternative when money is tight.
In these ways, creativity plays a large role in keeping finances in order.
7. Curiosity
Having curiosity helps you learn, study and improve yourself.
The curiosity of wanting to know more, to take the time to study and then take what is learned and put into practice is an important process that is driven by curiosity.
8. Risk-Taking
To build wealth, one needs to be willing to take risks. This doesn't mean uncalculated risks. It means weighing all the options and taking calculated risks when appropriate.
The stock market has risks involved, but over the long term, history shows that it provides good returns on money that is invested wisely. Those who fear risk altogether end up saving money in accounts that likely lose money to inflation in the long run.
9. Goal-Oriented
The importance of setting and working toward goals is obvious. If you don't know where you are going, it's difficult to get there. It helps your personal finances immensely if you have money goals and are motivated to reach the goals that you have set for yourself.
Those who lack goals don't have a road map to take them to the financial destination they want.
10. Hard- and Smart-Working:
Creating wealth and staying out of debt rarely comes about without a lot of hard work.
Many people might hope that the lottery will solve all their financial problems. The true path to financial freedom, however, is to work hard to earn money while educating yourself to continue to have more value and increase your salary.
You may not possess all of the above traits. But knowing them can help you make changes so that you nourish the ones that you have and obtain the ones you're missing.Ultimately they will help you with your personal finances and create a plan to accumulate the wealth you desire.
Ten Traits That Make You Filthy-Rich by Jeffrey Strain
Saving money isn't all about whether or not you know how to score screaming bargains.
It has more to do with your attitude toward money.
Just think of those who don't fit the filthy-rich stereotype. People like Warren Buffett.
As explained in the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko, personal finance has as much to do with people's traits as it does with money. Many millionaires, in fact, have frugal ways.
Understanding how personal traits can influence your finances is an essential ingredient for building wealth.
Here are 10 key traits:
1. Patience
Patience is one of the most important traits when it comes to saving money.
This means waiting until the first wave of product hype has passed, keeping a car for an extra few years before getting another one and waiting until something you want fits into your budget instead of putting it on credit.
Patience is often the difference between creating savings and being in debt. Having the patience to wait until you find a good deal is a cornerstone of good finances.
2. Satisfaction
When you're satisfied, there is no reason to spend money on nonessentials. The sole purpose of commercials is to make you believe that buying a product or service will make you happier, wealthier, better looking or improve whatever isn't bringing you satisfaction.
People spend because they want to capture the excitement shown in advertisements. When you are satisfied with what you have and your life (not trying to live like those on TV), your finances will be in a lot better shape.
3. Organization
Being organized can make you more productive and ensure that all the many issues pertaining to personal finances are addressed.
It means not paying late fees, not buying two of everything, knowing deadlines that can affect your finances and getting more done in less time. All these can greatly benefit your finances.
4. Discipline
You need the discipline to continue to save money for specific, long-term goals every month.
Personal finance isn't a way to get rich quick, but is a disciplined execution of your lifetime plans.
5. Reflectiveness
It's important to be able to look at your financial decisions and reflect on their results.
You're going to make financial mistakes. Everyone does.
The key is to learn from those mistakes so you don't make them again, or recognize if you keep repeating them.
6. Creativity
The economy and our earnings don't always match our expectations.
Unexpected developments wreak havoc to elaborate financial plans. When this happens, changes are needed to deal with the new circumstances. Creativity is essential to accomplish this.
Creativity allows you to make something last longer rather than purchasing it when you don't have the money. It means juggling money to stay out of debt rather than simply paying with a credit card. It means finding a cheaper alternative when money is tight.
In these ways, creativity plays a large role in keeping finances in order.
7. Curiosity
Having curiosity helps you learn, study and improve yourself.
The curiosity of wanting to know more, to take the time to study and then take what is learned and put into practice is an important process that is driven by curiosity.
8. Risk-Taking
To build wealth, one needs to be willing to take risks. This doesn't mean uncalculated risks. It means weighing all the options and taking calculated risks when appropriate.
The stock market has risks involved, but over the long term, history shows that it provides good returns on money that is invested wisely. Those who fear risk altogether end up saving money in accounts that likely lose money to inflation in the long run.
9. Goal-Oriented
The importance of setting and working toward goals is obvious. If you don't know where you are going, it's difficult to get there. It helps your personal finances immensely if you have money goals and are motivated to reach the goals that you have set for yourself.
Those who lack goals don't have a road map to take them to the financial destination they want.
10. Hard- and Smart-Working:
Creating wealth and staying out of debt rarely comes about without a lot of hard work.
Many people might hope that the lottery will solve all their financial problems. The true path to financial freedom, however, is to work hard to earn money while educating yourself to continue to have more value and increase your salary.
You may not possess all of the above traits. But knowing them can help you make changes so that you nourish the ones that you have and obtain the ones you're missing.Ultimately they will help you with your personal finances and create a plan to accumulate the wealth you desire.
Retiring Gracefully, More to Life than Money
Another article that gives good non financial advice. In life, your perception of your finances influence your perspective. Count your blessings and not your anxieties.
Boomers: How to Age Gracefully by Dan Kadlec
Everybody knows about the sandwich generation. That's us. We have kids in college and aging parents who may need financial help. We - the boomers - are smashed in between, trying to pay for it all and save a little something for our retirement too. No surprise - it isn't going so well. Only about 40% of boomers have managed to save $100,000 or more, and hardly anyone is maxing out a 401(k) plan.
We've managed to ignore the financial challenges associated with aging for a long time; until recently they've mostly been in our future. But for more and more of us the future is now, and the stress is starting to show. A Money Magazine survey found boomers less satisfied at this time in life than previous generations - with our finances, our careers, our health and even our marriages. We aren't just singing, "I can't get no satisfaction." We're living it.
Still, things aren't as dire as they seem. It's time to identify what's bothering you and take some action. Is it your job? Lack of savings? Not being able to retire anytime soon? If it's your marriage that's leaving you flat, you'll have to go elsewhere for guidance. But for the money stuff, try this:
Consider the root cause
Part of the problem may simply be that our expectations started out so high. We were, after all, the generation that was going to change the world. And because of our sheer numbers, businesses have long devised products and services to address our every problem and cater to our every whim. We're the most educated, pampered generation in American history. We work hard and feel entitled to live well.
Yet we have real obstacles to living the good life that our parents didn't face - the decline of pensions, job security and affordable health care, just to name a few. Many of us are waking to our first chronic aches and pains and realizing that 50 isn't the new 30 after all. In one recent study, boomers had more trouble lifting 10 pounds and walking stairs than previous generations at this age. Are you kidding - after all those health clubs we joined?
Instead of bellyaching about your fate, though, you'll feel a lot better if you focus on a few concrete steps that you can take to improve your lot. Start with the most important challenge: your health. So...
Move your body
Our health issues are real, the result of a sedentary lifestyle. Two-thirds of Americans are now overweight, a condition that leads to excessive joint wear (can you say hip replacement?), high cholesterol and high blood pressure (contributors to chronic illness).
Poor health is a financial risk as well as a physical one. Fidelity estimates that the average couple who retire at 65 will need $215,000 to pay their health-care costs for the rest of their lives.
But a big chunk of those costs is preventable, says Colin Milner, CEO of the International Council on Active Aging. From age 50 on, just walking 30 minutes three times a week can cut the cost of health care by $2,000 a year, according to a study by HealthPartners, an HMO.
"We've manufactured physical activity out of our society with things like elevators and computers," Milner notes. Simple daily routines such as taking the stairs instead of an escalator or parking your car at the far end of the lot can make a big difference.
Adjust your expectations
You wouldn't expect to run a marathon when you haven't been training, and you shouldn't expect to own a second home or retire early when you haven't been saving aggressively. Take stock of your financial assets and job skills, then get real about how far they'll take you and how soon you can get there. Are you on a job track that will lead to significantly more income? Is your nest egg large enough for a fabulous retirement? For a clue, see our retirement calculator.
If the answer comes as a rude blow to your imagined future, you need to change the picture or change what you're doing to make it happen. If lack of money is the problem, for instance, take advantage of catch-up provisions that let you sock away an extra $5,000 a year in tax-deferred accounts once you turn 50.
Maybe it's time to stop supporting your healthy adult children. Or downsize your home and move to a less expensive area. Or - egad! - cut some of your leisure spending. The best way to put more cash in your coffers: Retire later than you planned. "Every extra year you work is a 'twofer,'" says David Certner, legislative policy director at AARP. "It's a year that you make money and don't spend savings."
Make a bold move
What if the source of your dissatisfaction isn't how much (or little) money you have but how you live your life? Maybe you regret not having a more fulfilling career or how little time you get to spend with your family. Well, it's not too late to reinvent your career to focus on work you'll actually enjoy, conducted on your terms.
I scored that dream arrangement two years ago, when I resigned from my full-time position at Time magazine but held on to a role as a contributing writer (later adding my column at Money Magazine to my regular freelance gigs). That gave me the freedom I wanted to write as little or as much as I chose, for whoever was interested, and to spend more time at home before my three teens flee the nest for good in a few years.
Maybe your bold move will be different, turning a hobby into a small business or your industry knowledge into a consultancy. Employers such as Boeing and IBM increasingly will work with you to downsize your career so you gain flexibility while still generating income. Second acts are powerful financial solutions.
Stop window-shopping
In happiness surveys, people in relatively poor nations often score higher than folks in the U.S. Why? Their neighbors tend to be poor too, and they do not feel disadvantaged in the comparison. However, "boomers are always comparing themselves to others and focusing on what they don't have," says Stephen Pollan, co-author of It's All in Your Head: Thinking Your
Way to Happiness.
Cut it out. One neighbor may have more, but another probably has less. Odds are you live a rich life - richer than your parents did. Just look at your house, cars, personal technology and travel and leisure and medical options. You may not have everything you want but, as the song goes, if you try sometimes, you just might find you get what you need.
Boomers: How to Age Gracefully by Dan Kadlec
Everybody knows about the sandwich generation. That's us. We have kids in college and aging parents who may need financial help. We - the boomers - are smashed in between, trying to pay for it all and save a little something for our retirement too. No surprise - it isn't going so well. Only about 40% of boomers have managed to save $100,000 or more, and hardly anyone is maxing out a 401(k) plan.
We've managed to ignore the financial challenges associated with aging for a long time; until recently they've mostly been in our future. But for more and more of us the future is now, and the stress is starting to show. A Money Magazine survey found boomers less satisfied at this time in life than previous generations - with our finances, our careers, our health and even our marriages. We aren't just singing, "I can't get no satisfaction." We're living it.
Still, things aren't as dire as they seem. It's time to identify what's bothering you and take some action. Is it your job? Lack of savings? Not being able to retire anytime soon? If it's your marriage that's leaving you flat, you'll have to go elsewhere for guidance. But for the money stuff, try this:
Consider the root cause
Part of the problem may simply be that our expectations started out so high. We were, after all, the generation that was going to change the world. And because of our sheer numbers, businesses have long devised products and services to address our every problem and cater to our every whim. We're the most educated, pampered generation in American history. We work hard and feel entitled to live well.
Yet we have real obstacles to living the good life that our parents didn't face - the decline of pensions, job security and affordable health care, just to name a few. Many of us are waking to our first chronic aches and pains and realizing that 50 isn't the new 30 after all. In one recent study, boomers had more trouble lifting 10 pounds and walking stairs than previous generations at this age. Are you kidding - after all those health clubs we joined?
Instead of bellyaching about your fate, though, you'll feel a lot better if you focus on a few concrete steps that you can take to improve your lot. Start with the most important challenge: your health. So...
Move your body
Our health issues are real, the result of a sedentary lifestyle. Two-thirds of Americans are now overweight, a condition that leads to excessive joint wear (can you say hip replacement?), high cholesterol and high blood pressure (contributors to chronic illness).
Poor health is a financial risk as well as a physical one. Fidelity estimates that the average couple who retire at 65 will need $215,000 to pay their health-care costs for the rest of their lives.
But a big chunk of those costs is preventable, says Colin Milner, CEO of the International Council on Active Aging. From age 50 on, just walking 30 minutes three times a week can cut the cost of health care by $2,000 a year, according to a study by HealthPartners, an HMO.
"We've manufactured physical activity out of our society with things like elevators and computers," Milner notes. Simple daily routines such as taking the stairs instead of an escalator or parking your car at the far end of the lot can make a big difference.
Adjust your expectations
You wouldn't expect to run a marathon when you haven't been training, and you shouldn't expect to own a second home or retire early when you haven't been saving aggressively. Take stock of your financial assets and job skills, then get real about how far they'll take you and how soon you can get there. Are you on a job track that will lead to significantly more income? Is your nest egg large enough for a fabulous retirement? For a clue, see our retirement calculator.
If the answer comes as a rude blow to your imagined future, you need to change the picture or change what you're doing to make it happen. If lack of money is the problem, for instance, take advantage of catch-up provisions that let you sock away an extra $5,000 a year in tax-deferred accounts once you turn 50.
Maybe it's time to stop supporting your healthy adult children. Or downsize your home and move to a less expensive area. Or - egad! - cut some of your leisure spending. The best way to put more cash in your coffers: Retire later than you planned. "Every extra year you work is a 'twofer,'" says David Certner, legislative policy director at AARP. "It's a year that you make money and don't spend savings."
Make a bold move
What if the source of your dissatisfaction isn't how much (or little) money you have but how you live your life? Maybe you regret not having a more fulfilling career or how little time you get to spend with your family. Well, it's not too late to reinvent your career to focus on work you'll actually enjoy, conducted on your terms.
I scored that dream arrangement two years ago, when I resigned from my full-time position at Time magazine but held on to a role as a contributing writer (later adding my column at Money Magazine to my regular freelance gigs). That gave me the freedom I wanted to write as little or as much as I chose, for whoever was interested, and to spend more time at home before my three teens flee the nest for good in a few years.
Maybe your bold move will be different, turning a hobby into a small business or your industry knowledge into a consultancy. Employers such as Boeing and IBM increasingly will work with you to downsize your career so you gain flexibility while still generating income. Second acts are powerful financial solutions.
Stop window-shopping
In happiness surveys, people in relatively poor nations often score higher than folks in the U.S. Why? Their neighbors tend to be poor too, and they do not feel disadvantaged in the comparison. However, "boomers are always comparing themselves to others and focusing on what they don't have," says Stephen Pollan, co-author of It's All in Your Head: Thinking Your
Way to Happiness.
Cut it out. One neighbor may have more, but another probably has less. Odds are you live a rich life - richer than your parents did. Just look at your house, cars, personal technology and travel and leisure and medical options. You may not have everything you want but, as the song goes, if you try sometimes, you just might find you get what you need.
Thursday, February 7, 2008
Tips for a Successful Retiring
Preparing for retirement includes non-financial issues. The below article does a good job of providing insight for making retirement more successful.
7 Tips for Retiring With Your Spouse by Emily Brandon
When couples first marry or have a child, the transition can be a bit bumpy. But once you adjust to your new routine, you often end up happier than you were before. The same goes for couples in retirement. The first months are often fraught with conflict.
A 2007 Fidelity study of 500 married couples ages 33 to 70 found that in more than 3 in 10 couples, husbands and wives gave completely different answers when asked at what age they would retire, what they expected their lifestyle to be, and whether they intended to work in retirement.
Some advance planning can help couples ease into retirement. Here are some topics for discussion.
Be prepared for staying home together
After years of spending mostly nights and weekends with your spouse, seeing him or her all day every day can be stressful. "If they are both retiring at the same time, they are faced with perhaps having to be in each other's faces, especially couples who have had a history of marital conflict," says Amy Pienta, a researcher at the University of Michigan.
Couples need to rework their old routines. "They have not been together much during the day, and so they have to renegotiate how much closeness or separateness they want in their activities," says Maximiliane Szinovacz, director of the Gerontology Institute at the University of Massachusetts-Boston. Szinovacz suggests coming up with zones of responsibility for household chores so you are not constantly stepping on your spouse's toes--or arguing about the best way to make the bed or load the dishwasher.
Get separate hobbies
Retiring to your home from a job where you felt important or needed, and where your opinion mattered, can make you feel your skills are no longer apt. "Work on your own projects in the basement or the garage, so you can be master of your domain in something you are interested in," recommends Scott Holtzman, a psychologist and author of Secrets of Happily Married Men, or claim a spot in the yard as your garden plot.
A part-time job or volunteer work outside the home can also make you feel more autonomous. "People seem to be happier and the marriage seems to go better when they have either a post-retirement job or are volunteering on a regular basis in some sort of civic engagement after retirement," says Phyllis Moen, a sociology professor at the University of Minnesota.
Both spouses should pursue their own interests just as they did when employed. "You both have to figure out something that you can still bring to the marriage that you can talk around over dinner," says Maryanne Vandervelde, a psychologist and author of Retirement for Two. "It tends to make it more interesting and more vibrant."
Keep hanging out with your friends
"People end their careers sometimes thinking that their buddies at work are their friends, and the truth is you never know when you retire if those people are your friends," Vandervelde says. Many office relationships fade away when you retire. But friendships outside the marriage are vital to a happy retirement. "It's important that you maintain social relationships," Moen says. "You need to think about making or nurturing relationships with other people." If you don't have many existing relationships outside the workplace, you can form new ones by joining a local organization, forming a coffee group, getting a consulting job, or volunteering.
Discuss where you want to live
There's a reason the TV show Green Acres has endured for decades. "There are lots of couples where one enjoys city living and one says, 'Let's cut our expenses and move an hour away,' " Vandervelde says. Nancy and Haines Gaffner, 68 and 74, respectively, ran a New York tech business before selling it and moving to Santa Fe, N.M. "I think that actually living in the place temporarily is a very good idea," says Nancy Gaffner, noting that they had no family or friends in Santa Fe before trying it out. "We rented a place out here for the month of February for two years before we were sure."
You should also consider the cost of living, proximity to family, availability of healthcare, access to cultural activities, and, of course, the weather. "We immediately got involved here meeting people and joining organizations that we thought we would be interested in," says Nancy Gaffner, which helped ease their transition. Now she helps with fundraising for several arts organizations, paints oils, plays tennis, skis, hikes, and takes literature courses at a local college. "But if she is thinking about traveling the world and he wants to spend retirement on the golf course with his buddies in town, there will need to be some compromises," says Szinovacz.
Budget time (and money) for the grandkids and your parents
When Margaret Moore, 68, a retired assistant superintendent of a school district in Bellevue, Wash., has friends over for dinner, "all of us talk about our aging parents. It's a major portion of life for fairly young retirees." Moore frequently discusses the health of her mother, 94, and mother-in-law, 93, and her guests share information about good retirement facilities for their parents. On other evenings Moore hosts Sunday dinners for five grandchildren who live nearby.
In the United States, 54 percent of people in their 60s and 70s provide financial support to their children, according to a study by HSBC Group, the Oxford Institute of Aging, and Harris Interactive. In addition, more than a quarter of 70-somethings have provided practical support with cleaning, shopping, cooking, and everyday tasks to a relative or friend and 13 percent have provided personal care like bathing, dressing, and nursing. "We're really the sandwich generation," Moore says.
Plan for the possibility of an unexpected retirement
A lot of workers don't retire voluntarily. "Many men are given buyouts quite unexpectedly, and that's something they weren't planning for and neither were their wives," Moen says. "They need to be planning for unexpected contingencies like downsizing or layoffs."
It can be hard to find another job if you're laid off in your 50s or 60s. "When you do go back to work, the hourly wage is about 25 percent less, and the newer job is less likely to have both pension benefits and health benefits," says Richard Johnson, a principal research associate for the Urban Institute. "If one spouse is laid off and the other still has a job, the other spouse tends to work longer."
Some employees have to leave the workforce earlier than planned because of health problems. "While there is this tendency for married couples to retire together, when one becomes sick that tends to keep the other one working because he or she needs to work to pay the bills," Johnson says.
Talk with each other about money
Couples also need to consider the ages at which they will become eligible for pensions and Social Security, and when they can begin making penalty-free withdrawals from retirement accounts. "Because husbands tend to be older than their wives, the wives will be eligible later for everything," cautions Szinovacz.
Nearly half of both men and women say they are in agreement with their spouse or partner about saving for retirement, according to a Harris Interactive/Wall Street Journal online survey, but almost a quarter of working adults say they have never discussed how much they need to put aside. Those who took the time to talk to their spouse were most likely to be on the same page.Waiting to claim Social Security can increase benefit amounts. And couples in particular have various options for maximizing their benefit.
7 Tips for Retiring With Your Spouse by Emily Brandon
When couples first marry or have a child, the transition can be a bit bumpy. But once you adjust to your new routine, you often end up happier than you were before. The same goes for couples in retirement. The first months are often fraught with conflict.
A 2007 Fidelity study of 500 married couples ages 33 to 70 found that in more than 3 in 10 couples, husbands and wives gave completely different answers when asked at what age they would retire, what they expected their lifestyle to be, and whether they intended to work in retirement.
Some advance planning can help couples ease into retirement. Here are some topics for discussion.
Be prepared for staying home together
After years of spending mostly nights and weekends with your spouse, seeing him or her all day every day can be stressful. "If they are both retiring at the same time, they are faced with perhaps having to be in each other's faces, especially couples who have had a history of marital conflict," says Amy Pienta, a researcher at the University of Michigan.
Couples need to rework their old routines. "They have not been together much during the day, and so they have to renegotiate how much closeness or separateness they want in their activities," says Maximiliane Szinovacz, director of the Gerontology Institute at the University of Massachusetts-Boston. Szinovacz suggests coming up with zones of responsibility for household chores so you are not constantly stepping on your spouse's toes--or arguing about the best way to make the bed or load the dishwasher.
Get separate hobbies
Retiring to your home from a job where you felt important or needed, and where your opinion mattered, can make you feel your skills are no longer apt. "Work on your own projects in the basement or the garage, so you can be master of your domain in something you are interested in," recommends Scott Holtzman, a psychologist and author of Secrets of Happily Married Men, or claim a spot in the yard as your garden plot.
A part-time job or volunteer work outside the home can also make you feel more autonomous. "People seem to be happier and the marriage seems to go better when they have either a post-retirement job or are volunteering on a regular basis in some sort of civic engagement after retirement," says Phyllis Moen, a sociology professor at the University of Minnesota.
Both spouses should pursue their own interests just as they did when employed. "You both have to figure out something that you can still bring to the marriage that you can talk around over dinner," says Maryanne Vandervelde, a psychologist and author of Retirement for Two. "It tends to make it more interesting and more vibrant."
Keep hanging out with your friends
"People end their careers sometimes thinking that their buddies at work are their friends, and the truth is you never know when you retire if those people are your friends," Vandervelde says. Many office relationships fade away when you retire. But friendships outside the marriage are vital to a happy retirement. "It's important that you maintain social relationships," Moen says. "You need to think about making or nurturing relationships with other people." If you don't have many existing relationships outside the workplace, you can form new ones by joining a local organization, forming a coffee group, getting a consulting job, or volunteering.
Discuss where you want to live
There's a reason the TV show Green Acres has endured for decades. "There are lots of couples where one enjoys city living and one says, 'Let's cut our expenses and move an hour away,' " Vandervelde says. Nancy and Haines Gaffner, 68 and 74, respectively, ran a New York tech business before selling it and moving to Santa Fe, N.M. "I think that actually living in the place temporarily is a very good idea," says Nancy Gaffner, noting that they had no family or friends in Santa Fe before trying it out. "We rented a place out here for the month of February for two years before we were sure."
You should also consider the cost of living, proximity to family, availability of healthcare, access to cultural activities, and, of course, the weather. "We immediately got involved here meeting people and joining organizations that we thought we would be interested in," says Nancy Gaffner, which helped ease their transition. Now she helps with fundraising for several arts organizations, paints oils, plays tennis, skis, hikes, and takes literature courses at a local college. "But if she is thinking about traveling the world and he wants to spend retirement on the golf course with his buddies in town, there will need to be some compromises," says Szinovacz.
Budget time (and money) for the grandkids and your parents
When Margaret Moore, 68, a retired assistant superintendent of a school district in Bellevue, Wash., has friends over for dinner, "all of us talk about our aging parents. It's a major portion of life for fairly young retirees." Moore frequently discusses the health of her mother, 94, and mother-in-law, 93, and her guests share information about good retirement facilities for their parents. On other evenings Moore hosts Sunday dinners for five grandchildren who live nearby.
In the United States, 54 percent of people in their 60s and 70s provide financial support to their children, according to a study by HSBC Group, the Oxford Institute of Aging, and Harris Interactive. In addition, more than a quarter of 70-somethings have provided practical support with cleaning, shopping, cooking, and everyday tasks to a relative or friend and 13 percent have provided personal care like bathing, dressing, and nursing. "We're really the sandwich generation," Moore says.
Plan for the possibility of an unexpected retirement
A lot of workers don't retire voluntarily. "Many men are given buyouts quite unexpectedly, and that's something they weren't planning for and neither were their wives," Moen says. "They need to be planning for unexpected contingencies like downsizing or layoffs."
It can be hard to find another job if you're laid off in your 50s or 60s. "When you do go back to work, the hourly wage is about 25 percent less, and the newer job is less likely to have both pension benefits and health benefits," says Richard Johnson, a principal research associate for the Urban Institute. "If one spouse is laid off and the other still has a job, the other spouse tends to work longer."
Some employees have to leave the workforce earlier than planned because of health problems. "While there is this tendency for married couples to retire together, when one becomes sick that tends to keep the other one working because he or she needs to work to pay the bills," Johnson says.
Talk with each other about money
Couples also need to consider the ages at which they will become eligible for pensions and Social Security, and when they can begin making penalty-free withdrawals from retirement accounts. "Because husbands tend to be older than their wives, the wives will be eligible later for everything," cautions Szinovacz.
Nearly half of both men and women say they are in agreement with their spouse or partner about saving for retirement, according to a Harris Interactive/Wall Street Journal online survey, but almost a quarter of working adults say they have never discussed how much they need to put aside. Those who took the time to talk to their spouse were most likely to be on the same page.Waiting to claim Social Security can increase benefit amounts. And couples in particular have various options for maximizing their benefit.
Not to Late for a 2007 IRA
It is very important to know the last date that to contribute to an IRA and the maximum amount. You can contribute until April 15th of the following year. The amount for 2008 is $5,000 or $6,000 depending upon your age during the year.
The following article does a good job of explaining details:
Ask the Expert: Not Too Late for a 2007 IRA by Walter Updegrave
Question: I'd like to reduce my tax liability for 2007. Can I still make a contribution to my 401(k) or to an IRA and have it count toward the 2007 tax year? Or is too late for me to do that now? --J. Scott
Answer: As far as your 401(k) is concerned, the answer is no. You can't make a contribution in 2008 and have it count as if you had made it last year. That said, now is an excellent time to reconsider the percentage of salary you're saving this year with an eye toward boosting it so that you don't find yourself scrambling again next year.
Fortunately for you, as well as other procrastinators out there, the story is different when it comes to an IRA. You can still stash up to $4,000 ($5,000 if you're 50 or older) in an IRA and have the contribution count toward the 2007 tax year, as long as you do so by the April 15th tax filing deadline. Just be sure that you make it clear to the brokerage firm, mutual fund company or bank you're dealing with that the contribution is for the 2007 tax year.
As long as you do that, you'll retain the option of also making a contribution for this tax year, which, by the way, can be even larger, since the ceiling for IRA contributions for the 2008 tax year is $5,000, plus an extra $1,000 catch-up contribution for anyone 50 or older.
The ABCs of IRAs
Given the way you've phrased your question, I assume that you're primarily interested in doing a traditional deductible IRA. And, hey, if the prospect of saving some bucks on your taxes is what it takes to get you to save more money for retirement, I'm jiggy with that.
But you might think about doing a Roth IRA instead. True, contributing to a Roth won't shave your tax tab this year. But there are several other advantages to a Roth, among them the fact that it effectively allows you to save more money as well as hedge your tax exposure in retirement.
Of course, all this talk about deciding between a traditional deductible IRA and a Roth, assumes that you're actually eligible to do either or both. In fact, that depends on a variety of factors, including your income and whether or not you're covered by a workplace plan (which you apparently are). If you're married, your spouse's income and access to retirement plans at work can also come into play.
One way to figure out if you're eligible for a traditional deductible or Roth IRA and, if so, how much you can contribute is to pore over IRS Publication 590: Individual Retirement Arrangements. Or you can cut to the chase and go to an online calculator like this one.
Deductible or nondeductible
By the way, if it turns out that you're not eligible for a deductible IRA or a Roth, you always have the option of doing a nondeductible IRA (assuming, that is, you have earned income). Until recently, I probably wouldn't even have brought up this option since I think most people can do as well or better by investing in tax-efficient mutual funds.
As the result of a tax law change in 2006, however, nondeductible IRAs can be a conduit for getting money into a Roth IRA (although you've got to wait until 2010 to actually make the transfer). In any case, if you're definitely boxed out of a traditional deductible IRA and a Roth IRA, you may want to consider contributing to a nondeductible IRA and later converting to a Roth. (For details on that maneuver, click here.)
Bottom line:
One way or another you should be able to contribute to an IRA. So don't put it off any longer. Get thee to a mutual fund company, a brokerage firm or even a bank before April 15th and fund that IRA. Come retirement time, you'll be glad you put the extra bucks away.Are you on track for an early retirement? Tell us why at millionaire@cnnmoney.com. Include your financial details and your family could be profiled in a future column of our Millionaire in the Making series.
The following article does a good job of explaining details:
Ask the Expert: Not Too Late for a 2007 IRA by Walter Updegrave
Question: I'd like to reduce my tax liability for 2007. Can I still make a contribution to my 401(k) or to an IRA and have it count toward the 2007 tax year? Or is too late for me to do that now? --J. Scott
Answer: As far as your 401(k) is concerned, the answer is no. You can't make a contribution in 2008 and have it count as if you had made it last year. That said, now is an excellent time to reconsider the percentage of salary you're saving this year with an eye toward boosting it so that you don't find yourself scrambling again next year.
Fortunately for you, as well as other procrastinators out there, the story is different when it comes to an IRA. You can still stash up to $4,000 ($5,000 if you're 50 or older) in an IRA and have the contribution count toward the 2007 tax year, as long as you do so by the April 15th tax filing deadline. Just be sure that you make it clear to the brokerage firm, mutual fund company or bank you're dealing with that the contribution is for the 2007 tax year.
As long as you do that, you'll retain the option of also making a contribution for this tax year, which, by the way, can be even larger, since the ceiling for IRA contributions for the 2008 tax year is $5,000, plus an extra $1,000 catch-up contribution for anyone 50 or older.
The ABCs of IRAs
Given the way you've phrased your question, I assume that you're primarily interested in doing a traditional deductible IRA. And, hey, if the prospect of saving some bucks on your taxes is what it takes to get you to save more money for retirement, I'm jiggy with that.
But you might think about doing a Roth IRA instead. True, contributing to a Roth won't shave your tax tab this year. But there are several other advantages to a Roth, among them the fact that it effectively allows you to save more money as well as hedge your tax exposure in retirement.
Of course, all this talk about deciding between a traditional deductible IRA and a Roth, assumes that you're actually eligible to do either or both. In fact, that depends on a variety of factors, including your income and whether or not you're covered by a workplace plan (which you apparently are). If you're married, your spouse's income and access to retirement plans at work can also come into play.
One way to figure out if you're eligible for a traditional deductible or Roth IRA and, if so, how much you can contribute is to pore over IRS Publication 590: Individual Retirement Arrangements. Or you can cut to the chase and go to an online calculator like this one.
Deductible or nondeductible
By the way, if it turns out that you're not eligible for a deductible IRA or a Roth, you always have the option of doing a nondeductible IRA (assuming, that is, you have earned income). Until recently, I probably wouldn't even have brought up this option since I think most people can do as well or better by investing in tax-efficient mutual funds.
As the result of a tax law change in 2006, however, nondeductible IRAs can be a conduit for getting money into a Roth IRA (although you've got to wait until 2010 to actually make the transfer). In any case, if you're definitely boxed out of a traditional deductible IRA and a Roth IRA, you may want to consider contributing to a nondeductible IRA and later converting to a Roth. (For details on that maneuver, click here.)
Bottom line:
One way or another you should be able to contribute to an IRA. So don't put it off any longer. Get thee to a mutual fund company, a brokerage firm or even a bank before April 15th and fund that IRA. Come retirement time, you'll be glad you put the extra bucks away.Are you on track for an early retirement? Tell us why at millionaire@cnnmoney.com. Include your financial details and your family could be profiled in a future column of our Millionaire in the Making series.
Wednesday, February 6, 2008
2007 Wall Street Bonus, Fleecing Investors
An excerpt from the January 18, 2008, Charlotte Observer article, Bonuses fall along with bank profits.
"The New York Comptroller on Thursday estimated the bonus pool paid by the securities industry to employees in New York City reached $33.2 billion, down 2% from a record 2006. The average bonus was about $180,420, although payouts range from hundreds of dollars for clerks to millions of dollars for top performers and executives."
"Bloomberg News on Thursday calculated a bigger number for year-end bonuses: $39 billion for the top five New York firms."
Yes, the number was billions with a b. Yes, the city is New York alone. Yes, $39 billion for the top 5 firms in New York. Yes, the average was $180,420.
Question: Where did the money come to pay these answers?
Answer: From investors who are buying and selling
Thought: Why not stop trading and start investing and put this money in your pocket? Isn't that an investor's objective, to put money in their pocket?
Stop watching shows on CNBC like Cramer and Fast Money. While these shows are very entertaining, their purpose is to get an investor to trade, or speculate, rather than to invest for the longer term
"The New York Comptroller on Thursday estimated the bonus pool paid by the securities industry to employees in New York City reached $33.2 billion, down 2% from a record 2006. The average bonus was about $180,420, although payouts range from hundreds of dollars for clerks to millions of dollars for top performers and executives."
"Bloomberg News on Thursday calculated a bigger number for year-end bonuses: $39 billion for the top five New York firms."
Yes, the number was billions with a b. Yes, the city is New York alone. Yes, $39 billion for the top 5 firms in New York. Yes, the average was $180,420.
Question: Where did the money come to pay these answers?
Answer: From investors who are buying and selling
Thought: Why not stop trading and start investing and put this money in your pocket? Isn't that an investor's objective, to put money in their pocket?
Stop watching shows on CNBC like Cramer and Fast Money. While these shows are very entertaining, their purpose is to get an investor to trade, or speculate, rather than to invest for the longer term
How to Keep Your Cool in a Down Market
From the February 2008, Money Magazine.
Amid the recent market swings, Mondy asked some top financial minds how they stay calm during the turbulence. - Carolyn Bigda
" I remind myself that to get the market return, you're going to have to lose money every now and then. Even Warren Buffet loses money." - William Bernstein, author , The Four Pillars of Investing
"I don't watch financial TV shows. That's sport not investing. Sure, one game means a lot to the [New England] Patriots, but their lives are season to season. Investors' lives are measured in decades." - John Brennan, CEO, Vanguard
"I watch entertainment television. I probably know a lot more about celebrities than you'd think an economist would. But it keeps the panic down. And panic is the enemy." - Diane Swonk, chief economist, Mesirow Financial
These quotes give a good perspective on long term investing.
Amid the recent market swings, Mondy asked some top financial minds how they stay calm during the turbulence. - Carolyn Bigda
" I remind myself that to get the market return, you're going to have to lose money every now and then. Even Warren Buffet loses money." - William Bernstein, author , The Four Pillars of Investing
"I don't watch financial TV shows. That's sport not investing. Sure, one game means a lot to the [New England] Patriots, but their lives are season to season. Investors' lives are measured in decades." - John Brennan, CEO, Vanguard
"I watch entertainment television. I probably know a lot more about celebrities than you'd think an economist would. But it keeps the panic down. And panic is the enemy." - Diane Swonk, chief economist, Mesirow Financial
These quotes give a good perspective on long term investing.
Retirement Account Withdrawals
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."
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."
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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