Financial Futures

Washington Post columnist Martha Hamilton was online Tuesday, Oct. 17 at Noon ET to discuss how to make smart decisions while preparing for retirement.

For this discussion, she was joined by Martha Priddy Patterson , director of Deloitte Consulting's benefits consulting practice. She is also the contributing editor of The 401(k) Handbook and the author of The Working Woman's Guide to Retirement Planning.

A transcript follows .

To read past Financial Futures columns, click here .

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Martha M. Hamilton: Hi, there, and welcome. Since I started the Financial Futures column last month, I've gotten lots of great questions from readers about financial planning for retirement.

My guest today is Martha Priddy Patterson who is a director with Deloitte Consulting's Human Capital practice and an expert on retirement and health benefits. She is an attorney and employee benefits consultant with 25 years of experience, a contributing editor to The 401(k) Handbook and the author of The Working Woman's Guide to Retirement Planning.

We'd love to talk to you about drawing Social Security based on an ex's earnings, long-term care insurance or anything else on your mind. But remember, I'm a reporter--not a financial adviser. I can't give you advice about specific investments.

And let me make a short pitch for your help on a couple of subjects I'll be writing about in the future: If you're thinking about selling financial assets now, ahead of the coming wave of baby boom retirements, or if you're wondering whether you should take Social Security early, and you're willing to talk about it on the record, please e-mail me at hamiltonm@washpost.com.

Let's go!

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Laurel, Md.: One issue that I don't often see discussed (or at least given the proper emphasis) about retirement saving is that all withdrawals from a traditional, non-Roth IRA are taxed as income at one's prevailing rate at the time. That means that if current tax rates still prevail then, the capital gains on a long-term stock holding would be taxed at 28% for most people, instead of the 15% rate for long-term capital gains in a taxable brokerage account.

To me, this implies that any very-long retirement investment (e.g. 20 years) should never be put in a traditional IRA, and should be tax-payed NOW by putting it into either a Roth IRA or a taxable account.

This, of course, doesn't consider what changes to tax rates might occur between now and then. But I can hardly imagine rates in the baby-boomer retirement era being lower than today.

Martha Priddy Patterson: You are correct that for those individuals who qualify for a Roth IRA, that it is the better savings retirement saving technique. But not everyone qualifies. With Roth 401(k)s available this year -- and more employers likely to adopt them -- this issue will be resolved and you are likely to see more discussion about this.

Still even with traditional IRAs and 401(k)s, the opportunities to grow money in a tax deferred account over a working life time (and into retirement until the money is withdrawing) is a significant tax saving.

Martha M. Hamilton: I think there is every likelihood of tax rates rising in the future to help reduce the deficits. The Roth IRA is looking good to me, too.

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washingtonpost.com: Parting Gift From a Dead Ex , by Martha Hamilton, Oct. 8

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Alexandria, Va.: Hello! What advice would you give to folks in the prime of their working years who are doing all the right things for themeselves. Minimal debt, maxing out on retirement contributions, maintaining emergency savings, saving up for major expenses like cars to avoid financing, etc. But some of us learned our good personal finance and retirement planning skills from everyone other than our parents. My greatest fear is that my father, with terrible credit and no personal savings, will end up on fixed incomes that won't cut it and I will have to take a hit on my own retirement plan to support him in his. Most financial planners and retirement planners won't take lower income folks with no savings on as clients and my father cetainly won't listen to my advice otherwise he would not have retired at age 60 with no savings and no idea how much his pension or SS will give him and have the extremely poor judgment in putting a contract offer in on a house pulling out over half the retirement plan money ($40k of $75k) the state has put in FOR him. Help!!

Martha M. Hamilton: Wow. That's quite a dilemma. I think, in your situation, I would try to find a good fee for services financial planner and pay the planner myself to sit down with both of you to talk about your dad's finances.

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Quito, Ecuador: Planning for retirement is more complex than financial issues alone. My experience is most approaching retirement have little idea what they will do during their last 20 years creating a large pool of talent and energy available to address social needs. Can you recommend a good site to channel this resource?

Martha M. Hamilton: That's a great question. There is a tremendous resource that is going to be available for social needs. I'd start by thinking about what area you want to work in, whether it's education, environmental work or as a victim's advocate, a docent in a local museum or helping to build affordable housing. Then, try volunteering with different organizations until you find the right fit. I was looking for an outlet for voluteering several years ago and tried three or four different organizations before I found what was right for me: serving on the community board of a D.C. public high school that serves mostly immingrant kids. There are also an increasing number of online sites for folks who want to work in retirement. Some of them are retirementjobs.com and retiredbrains.com.Nothing wrong with contributing to the world AND getting paid for it. I know federal workers who were able to realize lifetime dreams of teaching after they retired.

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Leesburg, Va.: Bring on the Roth 401(k)! I set one up for my own business, just for me and my partner. But I know that for most people who have to rely on their employer, this option will likely not arrive soon enough. It is a no-brainer, I say. And no income limits!

Martha M. Hamilton: The Roth has its fans!

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North Bethesda, Md.: I recently changed jobs and my new employer won't let me rollover my old 401 (k). Can I just leave the money where it is - or is it better to roll it into a new account. Since I'll be contributing to a new 401 (k) I don't see the need in the immediate future to have the ability to contribute to the old one. Please help, I'm very confused.

Martha Priddy Patterson: Some employers' 401(k)plans will accept rollovers, but the law does not require that they do so. Most don't because they fear liability from the former employer's plan.But also understand you cannot contribute to a former employer's 401(k)plan, you can only contribute to your current employer's plan. If you like the former employer's investment options, leave the money there. Personally, I favor establishing a "rollover IRA" to hold money from former employers. That way you don't have to worry about keeping up with several 401(k) plans if you change employers over time. You also have more freedom on how to invest the money.

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Silver Spring, Md.: Hello. My question is how can regular working people save enough for retirement given the current and future political, socio-economic, and environmental issues facing the world? For example, given that the US economy is so much in debt and is so impacted by what goes on in foreign economies (China), how can I make sound long-term investment decisions that will provide a high enough ROI to combat things like higher taxes and inflation? Also, the fact that more people are on their own when it comes to saving and investing for their own retirement is very scarry given that most people don't know how to invest wisely.

Martha Priddy Patterson: You are correct on all issues, but some savings will always be better than no saving. Diversification of investments is the only answer for preserving and growing savings. This is the hard part -- you have to pay attention to your investments. This doesn't mean on a daily basis, but at least quarterly. And this is now somewhat easier with some investment products that are geared to one's age and expected retirement date.

Martha M. Hamilton: You're right that those are large imponderables. But don't let that stop you.

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Alexandria, Va.: I plan to set up a 401(k) plan for myself and my spouse. We own our own business. Thoughts on where to go? At least one mutual fund company we found has a decent plan.

Martha Priddy Patterson: Because you have such a small number of people, you will need to be alert to administrative fees. Going with a mutual fund company that offers a good selection of funds and investment products is not a bad idea. But be sure you consider both the administrative fees charged to managing your plan (filing forms with the IRS each year, etc.) and the underlying fees of each fund. Once you have accumulated a significant amount in the plan, you may want to shift to some one to actively manage the account, but that probably will not be economically effective until the plan has about $1/2 million.

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Alexandria, Va.: I'm 26. I make 40K/year...what is the best way to save/make money. (i'm not the best saver). What do you think of Stocks and what is the best way to learn more about it?

Martha M. Hamilton: The best way to save money is to set up an automatic deduction, so it goes into savings without going through your hands. If your employer has an employee savings plan, sign up for it. And if your employer will match your savings, make sure you contribute enough to get the full match. Otherwise, it's like leaving money lying on the ground. If you want to invest in stocks, investing in an index fund, one that mimics a broad index of stocks like the S&P 500, is a lower cost way to buy into the stock market without having to be a stock picker. Read the business page of your newspaper (I have to put in a plug for newspapers) and look at sites that have information about saving and investment, such as choosetosave.org.

The important thing is to start now. The sooner you start, the more your money can grow.

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Herndon, Va.: Our host makes the following statement in her introduction: "If you're thinking about selling financial assets now, ahead of the coming wave of baby boom retirements... please e-mail me at hamiltonm-washpost.com."

I think it's absurd to believe that any intelligent investor who wants to make his or her assets last for 30 or 40 years is going to substantially reduce stock holdings at the time of retirement. However, I worry that someone claiming to be a financial reporter writing on this topic as if the idea has merit will make less-educated investors do things that are not in their self interest. Can you please comment on this topic.

Martha M. Hamilton: I am not recommending this course of action. But there have been stories lately about whether the wave of retirements will have an impact on the market for financial assets. Many experts don't think they will. But I would like to hear from individual investors about what they are thinking.

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Northeast Washington, D.C.: Currently, I have about $40K in a traditional IRA, I put 10 percent in my employer's 401(k) (they also offer a pension, but I'm not yet vested in it), I have some emergency savings (about $10K) in an investment account and I have no debt other than my mortgage. I'm 36. Not sure what else I should or could be doing....any advice?

Martha Priddy Patterson: Congratulations. You are certainly on the right track! If your employer plan permits it, I'd recommend you increase the amount you are putting in your 401(k). Trying moving it to 12 percent and see if you miss it. I'll bet you won't. And of course, keep funding the IRA. Depending on your income you may qualify for a Roth IRA (you put in after-tax money, but when you retire your withdrawals will be tax-free). You are young enough to really benefit from the Roth IRA (assuming the law doesn't change, but the risk of the law changing is a hazard for every decision).

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Herndon, Va.: I am presently 80 years old and have long term health insurance from met life which costs me $234 dollars a month--it pays $100 a day for long term health and lasts for four years. My question is --am i paying too much or are there other plans that are much more economical to which i could subscribe. Thank you.

Martha M. Hamilton: The older you are when you buy into a plan, the higher the premiums and the harder it is to qualify. Without really knowing what's out there on the market, I'm guessing you're probably better sticking with what you have.

Martha Priddy Patterson: I agree with Ms. Hamilton. I and a colleague spent a month analyzing the various long-term care policies for a client and in the end we both concluded they were very difficult to compare. However, there is a wealth of information on the internet and browsing a few sites for features and costs could repay the effort. And clearly you are an internet savvy individual... But just remember the "wing walker's advice" -- never let go of one thing until you have a firm hold on something else. So do not give up you existing policy, until you are certain you qualify for a new policy and you know the complete costs and exclusions. Take your time and look at the poolicy very carefully.

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Roth IRA: Oh yeah, yippee. Like most of society can afford to eat the tax hit up front.

But let's all give a cheer for the Govt. creating yet another way for those who have (a lot) to get even more.

Oh, and before the typical DC upscale "middle class" starts whining, the median standard income for a family of four in the US is ~$55K. In the DC metro area its ~$75K. So no, your $90-150K income doth not make you middle class, no matter how you feel you can't keep up with the Joneses.

Martha M. Hamilton: You make a good point. Those of us who worry about whether our retirement savings are enough don't have it that bad. About a quarter of retirees have nothing but Social Security to depend on. That's important to remember.

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Rockville, Md.: "talk about your dad's finances."

Suppose they are happy. Am I the only one who does not like this tone?

I just retired and don't have children to tell me that I made a mistake. I don't think I did. My retirement covers government health insurance and my monthly payments are more than my take home pay was. All is adjusted for inflation.

Martha M. Hamilton: It sounds like you're in good shape in your retirement. Congrats! I took the question about the e-mailer's father's finances as an expression of concern about his future. And, generally, I think it's a good idea for parents and children to talk about their finances. My mother has done so with her kids, and I plan to do so with my daughter. It makes life easier, particularly if a parent becomes disabled and the child has to sort things out.

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Orlando, Fla.: I see a lot of estimates about how much you can/should pull out annually in retirement (from cash nest egg.) They seem to be around 4-5 percent, at most. I understand the rationale of not wanting to spend thru all your cash and be, say, 87, and in a bind. But does this go on forever? Do you never tap into the principal?

Martha Priddy Patterson: It really depends on your health --and whether you want to leave a legacy. And the absolute amount of money you have. If you are starting with a million, retiring at age 60 and your parents are still alive and out dancing almost every night (don't laugh, I'm 57 and mine are....), you really will need to limit the amount to 4-5 percent until you are well into your 80s because you will probably live until you are 95. Remember, too, that old thief -- inflation. We haven't really seen much of that since the late 1970s and early 1980s, but remember during that time we had an average of 7% inflation for a few years and that really eats up the principal. If you are starting with $5 million and want to leave your children the legacy of independence -- that is no inherited money -- it can be much more than 5 percent.

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Charlottesville, Va.: This is more of a policy question: Why can't laws be written to allow each of us as individuals to arrange our own retirement plans, and not rely on whatever quality of plans our employers offer us? Relying on somebody else to take care of you is a big problem here, I think. I am self-employed, so I can set up my own plan. And the sky is the limit as far as choices. Not the case at all if I were employed by someone else. And IRA is not the answer, with its ridiculous income limits.

Martha M. Hamilton: Most plans have been expanding the options available to workers who want to save through the employer's plan. The average now is 19 different choices. And saving through your employer often also offers the benefit of a matching contribution. Also, automatic withdrawal helps. I don't see benefitting from an employer-sponsored retirement plan as "relying on someone else to take care of you." Retirement plans are part of a basket of compensation made up of pay and benefits that is a fair trade for the work you do for your employer.

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Buffalo, N.Y.: I am thinking about taking SS income as soon as I can, and while I am still working. That way, I can use SS money for income and max out both my 401 plan and the 457 plan that my university has. Is this sound planning?

Thank you

Martha Priddy Patterson: It is only if you are currently at the maximum Social Security retirement age -- at least age 65. Otherwise not, because you will be reducing your Social Security benefit for the rest of your life.

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Northeast Washington, D.C.: If I have retirement savings and my soon-to-be husband has retirement savings...how does that work, exactly, after we get married? Does something change beyond beneficiaries? I've never had to share money or finances with someone so this is all sort of puzzling to me.

Martha M. Hamilton: I've only done this the other way around: dissolving a marriage. I don't think it has any impact on retirement savings. If either of you is entitled to a defined benefit pension, it might be lower if you elect to have it continue to cover your spouse when you die.

Martha Priddy Patterson: If you have a defined benefit pension plan, your husband will become entitled to a survivor benefit upon your death. In most plans this means your life time benefit will be lower. Since most women outlive their husbands, this is a bad deal. You should consider having him waive his rights to a survivor benefit, so you can get the higher amount while you are alive and you will have more money to spend together at retirement. Of course, if you die first, he will get nothing from the plan.

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Martha M. Hamilton: As always, more good questions than we have time to answer. Thanks to everyone who took the time to post. Let me hear what issues you believe I should write about in the Financial Futures column. And join me again in two weeks. Thanks to Martha Priddy Patterson for contributing her incredible knowledge of these issues. Cheers!

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