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Color of Money Book Club
Thursday, March 30, 2006; 2:00 PM
Michelle Singletary hosted author Stan Hinden for a discussion about this month's Color of Money Book Club selection -- "How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire."
Michelle writes that Hinden, a longtime financial reporter for The Washington Post, shares what he did right and most importantly what he did wrong in making his choices.
A transcript follows.
Read Michelle's past Color of Money columns .
Michelle Singletary: Hello all. We've got a lot of questions so let's get started.
Rockville, MD: I read the first edition of Stan's book and was really taken aback at the decision to take a single life pension, rather than one that would continue if your wife survived you. I've read dozens of personal finance books over the past 6 or 7 years, and none of them has recommended doing that, unless maybe your spouse is in hospice or is independently wealthy. It could end up a winning bet if you outlive her, but what a risk for her! What made you decide on the single-life pension?
Stan Hinden: As I wrote in my book, I took the single life annunity and today I am sorry that I did so. I should have taken a pension with a spousal benefit. At the time, we were not sure about our retirement income--I didn't do my homework as well as I should have. And the question I failed to address was what would happen to Sara's income if I were to die. When I finally looked at that picture, it was unfavorable but too late.
Michelle Singletary: And don't be too harsh on Stan. His mistakes is a lesson for us all. Also keep in mind a lot of these decisions depend on a lot of factors. I read how he made the decision and based on how he and Sara were thinking it did make sense at the time. Of course in hindsight it doesnt' but then that's why they call it "hindsight."
Washington D.C.: Hi Michelle - Off topic question if I may. Why on earth does the IRS want you to put your SS number on your tax payment check? Don't they realize that with all the people that will handle that check it's one of the prime methods of identity theft? And I suppose if I don't write it on the check, they will.
Michelle Singletary: Good point. I do wish they would find another way to identify us. Why don't you pay electronically then you wouldn't have a paper check floating around out there.
Washington, D.C.: Good morning! Is there a regular schedule for the "Color of Money" chats?
washingtonpost.com: You can read transcripts of past chats and check for future discussions online here .
Michelle Singletary: There is. Every other Thurs. at noon. But this week I had an apt. that forced me to delay it.
If you subscribe to my weekly e-letter you can keep up to date of the chats and more.
Virginia Beach, Virginia: Hi Stan -
Both my husband and I read your book and really enjoyed it. One question though - when you were talking about your monthly income and outgo, you didn't mention whether or not you have a mortgage. Our plan is to have ours paid off prior to retirement. What do you recommend? Thanks!
Stan Hinden: Yes, we do have a mortgage. Fortunately, it represents only about one-third of the value of our home. And I thought that it would be a good thing to have the mortgage-interest deduction. But, truthfully, I am beginning to have second thoughts about it. I was looking at my statement the other day and found that we had paid $4,000 in interest last year. That is a good deduction of course. But if I didn't have the mortgage, I would have saved that amount of money. Also, if a husband dies first, his widow will have to pay the mortgage and if her income decreases when her husband dies, then she might be better off without the mortgage.
Old folks boogie: Hi Mr. Hinden: I'm considering early retirement in part because I think they're gonna make us work our whole lives in the future. I guess the biggest concern is medical coverage (I'm under 54), does it keep costing more and can they tap your retirement savings for payment? How then, would you live? thanks
Stan Hinden: The trend on the cost of medical care is up,up, up. And there does not appear to be any way to slow it down, as yet. So at your age, I would be prepared to pay for medical coverage before you reach Medicare age. And after that I would be prepared to pay for medigap and, or, an HMO plan, plus a certain amount for prescription drugs. As for tapping into your retirement savings for payment, I am not sure about that. I have heard of some states trying to make relatives pay back the cost of nursing home care for their parents who were on Medicaid. But I haven't heard of anyone trying to tap into your savings or other assets to pay regular medical bills.
washingtonpost.com: You can sign up for Michelle's weekly personal finance e-letter here .
Albuquerque, NM: Hi Michelle,
What are your thoughts for teachers who are stuck with 403 (b) plans that are mostly limited to high fee variable annuity choices? Thank you.
Michelle Singletary: I think it sucks (excuse my language).
If there is a match put in enough for that and after that I would put my money else where (IRA, ROTH)
And complain -- loudly. Get your colleagues to complain. There is no reason for them to limit your choices like that.
Alexandria, VA: Right now, I am having a hard time striking a balance with saving for retirement and saving for non-retirement goals (kids, college, home renovations, etc.). Do you think maxing out IRA and 401(k) contributions every year will be too much? My husband thinks it is and figures reducing our contributions would make it easier to save (i.e. SPEND) for our non-retirement desires. I disagree and figure if we can max out our retirement options and still have money to do things, even at a scaled back level, we will be fine. Thoughts?
Stan Hinden: My motto: SAVE, SAVE, SAVE. It is very tough, I know, to give up luxuries to sock that money away in the bank or in investment funds. But you are facing college costs and more for your kids. And inflation is always with us. And it truly erodes the value of your savings over the years. I would max out every IRA and 401 (k) type savings plan, even if it means delaying other things you want. One of these days, you will be happy you did.
Michelle Singletary: I totally agree. Save as much as you can first for your retirement. Then for college, etc.
Richmond, VA: Hi Michelle, thanks for writing columns about finance issues that actually matter to the average person. My question is regarding your recent article on the inept Credit Reporting Agencies. Why does this issue not seem to be getting addressed by Congress? Do you know if it is on anyone's agenda? It's very important and it effects us in so many ways. There shouldn't be 3 different CRA's, there should be one. These companies should be non-profit and designed to serve the greater good of the public. They should be highly regulated and the information should be accurate. They also need to start regulating all these ridiculous interest only loans being offered to people who its not suitable for. This is going to come back and bite people and it's a shame.
When is the government going to step up and tackle the real domestic issues in this country?
washingtonpost.com: Michelle's past columns are online here .
Michelle Singletary: The gov't and Congress will step up when we complain.
I totally agree with you. But since when are consumers treated fairly?
Takoma Park, MD: I've often wondered how retirement planners come up with percentage of income needed in retirement (e.g. 80 - 90%) compared to one's working years. I looked at all my deductions on my paystub, assumed continuing taxes and medical, discarded the rest, and commuting expenses, and came up with 82%. Does that make sense? What about additional expenses in retirement to "keep yourself busy"?
Stan Hinden: Well, this gets pretty tricky. I know that the 80 percent rule didn't work for us. For several reasons. Our health care expenses in retirement are much higher than when we were working--and getting higher as we age. Then, when you reach 70.5 years, you have to start taking money out of your IRA rollovers and other tax-deferred plans. And that is 100 percent taxable. Also, you may have to pay taxes on up to 80 percent of your Social Security income. Finally, in retirement, we wanted to travel and the cost of having fun adds up. So it's easy to spend more in retirement than when you are working
Arlington, VA: Hi, Michelle - I'm sorry this isn't directly related to the book. My husband and I just pulled our credit reports in preparation for talking to lenders for our first home. I found that my report includes duplicates for several accounts. My wallet was stolen last year, so orignal accounts still appears "open" for several (a few do show "lost or stolen"). The one negative point myfico.com noted for me was that I had too many accounts. Should I try to correct this, or not bother since there will never be debt shown on those original accounts?
(admittedly, my score was 820 so this is not a big deal, maybe it's a pride thing that they still had to ding me on something!).
Michelle Singletary: 820!
Yup too much pride. The top score is 850. At 750 you are golden.
Go look at houses.
Washington, DC: I think one of the sad ironies of life is that so many people spend their entire lives planning for they day they can leave their jobs and then when that day comes, either they convince themselves they can't leave or they don't live long enough to leave.
Michelle Singletary: So isn't the answer then to plan your life for now and later? I think so.
Alexandria, VA: As I approach retirement (10-yrs off) I met with my bank's planner, and actually paid for a financial plan from Ameriprise. Both encouraged me to buy an annuity--and aside from the tax benefit--still don't understand why this is such a great option. Can you recommend some reading for me? My concern is that the recommendations are more product based--good for the seller--than for me.
Stan Hinden: Your instincts are correct. Annunities can be complicated and contain features that might not be favorable. That does not mean that they are not useful under the right circumstances. I don't have the name of a book on annuities handy but I am sure that a Google or Amazon search will turn up several books that could be helpful. So I suggest that you investigate annuities very carefully before you buy one. Make sure it is right for you now--and in the future.
Mt Pleasant, SC: OK, you have your 401K and or IRA.
You retire at 59 1/2.
What's the best most efficient way to get the money out?
Consider tax implication, long life expectancy, maximum performance of the Funds you are into.
Tom from MtP SC
Stan Hinden: Tom: Interesting question. The standard answer is that you want to keep the money in your 401(k) and IRA accounts as long as possible because it is growing tax-deferred. Taking money out means you will have to pay tax on that money. So when you retire, the idea is to move your money from your 401(k) plan into a IRA rollover plan, so it stays tax-deferred. Now, if you need some of your savings to live on, then you will have to take a series of distributions, which is somewhat complicated but can be explained by most investment advisers or accountants. In any event, try to take out the least amount so your savings continue to grow.
Fort Washington MD: With Social Security shaky, pensions drying up, health insurance becoming unaffordable, what advice do you give 40-55 year olds? I am sadden that retirement appears to be leading to a hardscrabble life for even the most prepared individuals with health insurance as the unknown factor.
Stan Hinden: Well, I can tell you what I tell my baby boomer kids, who are in the 40-55 year age range. First, try to organize and solidify your career path, so that you are headed upward. Second, work for a company with good benefits and/or the federal government. Three, save hard, even if means making some sacrifices. Four, invest wisely and don't overlook the potential of careful real estate investing. I think if you do all of those things, you will be able to survive the difficulties that will surely accompany retirement in the years to come.
Arlington, VA: I have money in a Roth and Traditional IRA and the rate of return has been marginal. I have been putting money into this fund (Fidelity Destiny II) for 7 years off and on. How can I reallocate this money with another financial institution without making a withdrawal?
Stan Hinden: I believe that you can ask the company that holds your accounts to transfer them to another mutual fund company. If you call the company that you want to transfer the account to, they will generally help you do it, or do it for you.
Arlington, VA: I hope you won't mind a non-book related question, but I'm a little desperate here and I trust your advice. Our HOA has voted in 15K in special assessments (yes per homeowner!) since 2003. Another 15-20K special assessment is almost certainly coming this spring. My husband and I are having trouble deciding how to handle this. We are generally in good shape financially, we both contribute the maximum amount to our 401k plans, and have about 25K in emergency savings. If we decide to stay in the house, we could just pay the special assessment outright, but that would really deplete our emergency fund. We have about 300K in equity, so we could also get a home equity loan to pay the special assessment (we'd also love to remodel our kitchen). Our financial advisor advises us to sell and move if we'd like to move (I'm a little worried about selling right before a big special assessment for a big HOA construction project) or to refinance and take cash out (we would take a hit on this because our current mortgage interest rate is 5.25% and we know rates are higher than that now). What would you advise? Thanks!
Michelle Singletary: I don't think you should deplete your emergency fund. You never know what could happen. If you don't want to move (and I completely understand) then in this case you might consider refinancing and pulling money out plus what you might spend on the kitchen. But don't pull out more than you need. If you can aggressively save instead of using all debt to pay the assessment pay part in cash and the other in home equity funds.
But perhaps looking down the road you should get on the board of your community association and put a stop to these large assessments.
Upper Marlboro, MD: Stan and/or Michelle...what is your best advice on when to start collecting Soc Security. I always heard that taking it as soon as you were eligible was the best; but upon retirement (at 62), my advisor said to wait....and gave me a couple of references that said you did collect more income by waiting......(looking forward to reading your book!)
Stan Hinden: Thank you. The book spells out the various options for taking Social Security. The main point is this: If you want and need for your SS income to be the highest possible, then wait until you are 70. You get a bonus for each year you wait. On the other hand, if you have lots of other income, you could take it at 62 (with a 20 percent plus deduction) or at full retirment age (now 65 plus). I suggest that you study your options carefully.
San Rafael, CA: I know investing for people my age--over 60, call for putting
anywhere from 40 percent to 60 percent or more into bonds.
I bought three bond funds a couple of years ago, and have
seen them go down in basis value (minus the dividends).
Would it be better to just put everything in a money market
account paying nearly 4 percent?
Stan Hinden: My philosophy is that if you are in your sixties, you probably have 15 to 20 years or more to live in retirement. And that means that you need to keep your money growing in order to make up for the impact of inflation. So even at your age--even at my age, I'm in my seventies--you would want to get the growth that you can get from stocks. So what you need to do is work out a portfolio that gives you both bonds and stocks and reserves a money market fund for money that you may need in the short term.
Washington, DC: Stan --
My boyfriend and I are looking at our financial situation in the long term. We bought a house and have 401Ks at our jobs (i also participate in a defined benefit). We have a joint savings account and our own investments. We don't plan on having children. Do you have any other suggestions for long term saving?
Stan Hinden: My view is that first you should max out your 401(k) savings, and then if there is any extra money, put it into Roth IRAs because you pay the taxes upfront but don't have to pay taxes on them when you withdraw the money. Also review your investments and check out the "target date" funds that are offered by many mutual fund companies. They are geared to the year in which you will retire. But each mutual fund company has different parameters for how they run their funds. But it's worth looking at.
Vienna, VA: Because of our combined income being over a certain level, we cannot contribute to IRA and other retirement accounts. We contribute the maximum allowable for 401(k). What investment do you think best for retirement that minimize tax burden? Thx.
Stan Hinden: A number of mutual fund companies have funds that make a special effort to avoid creating taxable income for investors. Index funds usually fall in this category because they have low expenses. But you can ask fund companies to tell you which of their funds are tax-conscious funds and avoid creating tax bills for their shareholders.
washingtonpost.com: That's all the time we have for today's discussion. Thanks for joining us.
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