Financial Futures

Washington Post columnist Martha Hamilton was online Tuesday, Feb. 20 at Noon ET to discuss how to make smart decisions while preparing for retirement.

She was joined by John Ameriks, a senior investment analyst for Vanguard Investment Counseling and Research Group and Stephen Utkus, director of Vanguard's Center for Retirement Research.

A transcript follows.

To read past Financial Futures columns, click here.

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Martha M. Hamilton: Martha M. Hamilton: Good day to everyone, and thanks for joining us. We're extremely fortunate to have as our guests today Stephen Utkus, director of the Vanguard Center for Retirement Research, and John Ameriks, senior investment analyst for Vanguard's Investment Counseling & Research Group. They are two of the authors of an extraordinarily interesting report on what they call "downshifting," a transition from work to retirement that typically follows six different paths, including shifting to a part-time job or to a less demanding fulltime job. The point is that for many folks, retirement isn't a sudden switch from work to no-work. I was interested in their finding that few people plan for this interim phase in their lives, so let me start by asking the authors two questions:

How should people think about making the transition? And, do you think employers will do more in the future to provide for such transitions?

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Herndon, Va.: Could you please recommend some best for the money health coverage when a person takes an early retirement between age 55 and 61?

Stephen Utkus: This is a little tough, since health coverage is regulated at the state level, and what's available will depend on your local market and how competitive it is.

You should obviously check with your local "Blue" plan as a baseline. And see if the commercial carrier offered by your former employer also offers plans for individuals.

Another option, if you are affiliated with a non-profit group or association, is to see what programs they are offering in your state.

The fact is, health care during these transitional years can be very expensive, and sometimes unavailable because of medical underwriting rules of many carriers.

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Washington, D.C.: What is the best long-term care policy available on the market, and is it smart to buy it before I retire?

Thanks,

Mark

Martha M. Hamilton: I think it would depend on your health and your expected longevity. Here's a column I wrote on the subject that may be helpful.

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Indianapolis, Ind.: I am 54 and in the very unpleasant position of being a contractor with no benefits, 401(k), or healthcare. I have been fortunate to get a modest inheritance but am still owing on my 1992 B.S. degree in medical illustration. I got to work in the field briefly, loved it but it is mostly freelance now.

How do I get it to grow as much as absolutely possible? I would love to have my own home and could use it to get into a little place but with such a disposable job am reluctant to try until I can land a better job, but have not been able to get that done yet.

John Ameriks: You've certainly got your work cut out for you. I'd start with setting up Roth IRA as soon as you possibly can -- before April 15 of this year -- so you can put away two contributions (one for 2006, and one for 2007). Then sign up for an automatic savings plan on that IRA to make sure you do your regular saving every year. In terms of investments, I'd start with a basic low-cost life-cycle / target date fund -- as your savings grow you might build a more complicated portfolio, but you need to start right away with the basics. In your situation, you really can't afford to get too creative with the portfolio, start simply until you've made some good progress on saving, and have the leeway to take potentially more risk...

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Mary Esther, Fla.: Preparing for retirement, what percent of total assets is advisable to invest in international equities? What percent during retirement?

Also,is it advisable to invest a percent of funds allocated to bonds, to international bonds?

Thank you and be well

washingtonpost.com: The Global Bet: Investors Who Look Abroad Should Use Caution (Post, Feb. 4)

Stephen Utkus: There's lots of interest in international stock investing these days--partly because of the merits, but partly because of the strong returns of non-US mutual funds.

A good rule of thumb is to allocate around 20% of your total stock investments to non-US stocks. So total up everything you own in equities -- 401(k), IRA, funds or stocks -- and take 20%. That's the dollar figure to target for international investing.

Now, in all fairness, we should mention that some investors argue for an even higher allocation, as high as 40%, and others for a lower one, less than 10%. But as a starting point, 20% seems like a good target to consider.

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Yorklyn, DE: I and my colleague run a small, free Web site, www.knowyourpension.org, that is designed to help workers and retirees track and understand how their pension plan is doing. We designed our own system that breaks down pension plan information from their annual Form 5500 filings to help our readers avoid unpleasant surprises with their own pension. Would you agree that many people who count on their pensions have a hard time keeping current about important developments with their plans? What should they do about it?

Chris Keenan

Director

Know Your Pension

washingtonpost.com: Tracking Down Your Long-Lost Pension Payments (Post, Feb. 18)

Martha M. Hamilton: People do have trouble keeping track of their pension plans. But they also have trouble focusing on them and making sure that they understand them until they're on the verge of retiring. Thanks for letting us know about your service.

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Lithia, Fla.: Hello. We have at least 20 years until retirement, and we have a high annual income (over $300,000). What can you suggest for us, other than IRAs, which we already max out every year, to minimize the tax hit on our investments? Thank you for your insight.

John Ameriks: While some would jump immediately to low cost after-tax deferred annuities, I'd say you might also simply look at low-cost tax-managed mutual funds (if you are making a series of savings deposits) or broad-based index ETF (if you have a large lump sum to invest). The 15% rate on qualified dividends and the ability to defer long term cap gains can be a real advantage, plus you'll have flexibility to offset gains and losses going forward.

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Chicago, Ill.: What is the maximum I can put into my 401(k) for 2007? I am 64 and opened my Vanguard account last year. I am totally invested in the Money Market account for safety as I intend to retire in 2009.

Stephen Utkus: The total you can invest for 2007 is $20,500--$15,500 in regular contributions, and another $5,000 because you are 50 or older.

But say -- it's not usually the best strategy to invest all of your retirement savings in "safe" cash at retirement. Retirement can last many decades, and so it makes sense to hold a diversified portfolio. For a conservative investor, that may mean keeping only, say, 20% in stocks, and then most of the rest in higher-yielding bonds, bank CDs and other conservative investments.

Because of inflation, you'll want to think more carefully about keeping all of your money in cash.

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Baltimore, Md.: If a majority of one's assets are in highly appreciated equities, what would be the most efficient way to access those funds during retirement?

Stephen Utkus: Partly this depends where the money is and your tax rate in retirement.

If the appreciated equities are in a taxable account, then the good news is that the long-term capital gains tax rate is at 15%, and so the tax burden of gradually selling off the assets and using them for living expenses will be small.

If they are in a tax-deferred account, then withdrawals will be taxed at your top marginal tax rate. The standard approach there is to first sell those assets with the small tax consequence (usually taxable assets taxed at capital gains) and leave the tax-deferred withdrawals (usually taxed at higher rates) until later.

By the way, if you can identify specific stock or mutual fund shares for tax purposes, you can also do a lot to minimize the capital gains tax due (if held in a taxable account). Which will require help from your tax prepare or accountant....

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Buffalo, N.Y.: Already in retirement but not yet drawing on my IRA (with Vanguard incidentally) Have 3 years before reaching 70 1/2 and have pensions that fulfill our (wife) needs. Question is when I do start drawing on the IRA can I roll the distributions into a Roth?

TY

jim

John Ameriks: If you don't need the assets from the IRA, you might consider looking to convert them to a Roth as soon as possible, in order to avoid the Required Minimum Distributions (which must start by April of the year after the year you turn 70 1/2). You can't really "roll" IRA distributions into a Roth once they start, though you can still convert Traditional IRA to Roth...and you can't make new Roth or Regular contribs without employment earnings though...so best path may be to investigate a conversion now...

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Hampton, Va.: I am 29 years old and currently have two Roth IRAs - Van Index 500 and the MidCap Index Fund. I also just opened a Vanguard REIT mutual fund and would have to pay the penalty if I switched it to another. However, I am wondering if I should switch one of my Roths into an international fund. I also have a retirement plan through work that is divided 33-33-33 between large-cap, small, and international. Please let me know what you think.

John Ameriks: In general having some international exposure is great...but if you are doing it because you think last year is likely to repeat itself...it's possible...but I'd say be cautious. In general "switching" between investments isn't likely to add much value. You already have some international in your accounts at work -- I'd say you have a good core set of funds -- so the fun stuff (choosing the funds) is done, and now the hard work (making sure you save religiously in those funds) needs be done. I'd say given the list you mention, you can stop worrying about your portfolio and start worrying about your savings rate!

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Princeton, N.J.: I have $80,000 in a money market which I want to use for sending my son to Ivy league. He is 10 years old and has seven years before he goes to college. Can you please suggest the best way to invest his money.

I was thinking of Wellington Balanced Mutual fund. Any suggestions?

Stephen Utkus: This really comes down to risk tolerance and other resources.

Yes, you could possibly get a higher return with a balanced mutual fund. But you might also experience a loss. No one can say, just before the first tuition payments are due, whether stocks will suffer a severe bear market.

Some investors will be happy taking this potential risk; others won't. You have to ask yourself how you might feel in seven years if your account has grown a lot -- and then loses 1/3 of its value in a bear market.

One way to mitigate some of this risk is to hold less in equities--more of an income fund than a balanced fund.

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Wilmington, Del.: Following the above discussion to a "downshifting approach" to retirement, working part time, fewer hours etc. Are there any alternative options to consider for family health coverage if you are too young too qualify for Medicare. Are there any cooperative purchase plans available outside of the COBRA plans that may be made available by employers?

Stephen Utkus: The basic areas to look at are the local blue plans, the commercial plans offered by employers in your area, and then plans from nonprofits (e.g., business or voluntary associations you belong to, but also groups like AARP).

The types of policies vary by state and by region, so it's hard to say there's one good or obvious answer.

I'm not aware of any employer cooperating program -- not to say that there might not be one under development or available in certain areas.

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Washington, D.C.: I often see retirement planners saying you need to plan on annual expenses during retirement of 80-90 percent of pre retirement. If supporting a family of 5 now and then only supporting 2 after retirement shouldn't his percentage be much lower?

Stephen Utkus: This question of setting a retirement target is as much philosophical as it is practical.

Yes, you are right. Many individuals can probably get by with less than the standard 70-80% rule. But on the other hand, many individuals are also saying that they hope to enjoy a very active standard of living in the early years of retirement, with lots of discretionary money for travel, leisure, entertainment. Our standard rule of thumb at Vanguard (for more affluent households) is up to 85%.

One note about the issue of children. One of the things that happens to us as individuals is that, as we get older, our standard of living creeps up to match our income. So yes, by age 60 the children are gone -- but we're spending our higher income on other things we like and enjoy. So that's why practitioners have developed these rules of thumb -- rules that apply well after the children have left home.

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Anonymous: I am a federal employee and want to know what I should do with my TSP before or after I retire?

I thought I read where I can take my TSP and transfer the money somewhere and this will make it tax free. If not, what are your suggestions?

Ed

Stephen Utkus: I'm not exactly familiar with the TSP rules, but in general you typically have the option of keeping your money in the plan, and taking periodic or as-needed withdrawals from your TSP account.

The other option, which you're probably referring to, is to roll it over to an Individual Retirement Account (IRA) offered by pretty much any bank, broker or mutual fund company in the nation. That will make sense if you want more investment flexibility, or perhaps you need financial advice from an adviser.

By the way, TSP is known for its exceptionally low investment costs and well-diversified funds (costs even lower than Vanguard's!) So check with your local HR office to see if it is an option to keep the money in the plan.

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D.C. area: For a long time I read that the Boomers -- I am one--were not saving enough for retirement. Now comes an article that says we may be saving too much.

What is an average, financially unsophisticated person to do?

My husband runs a small mail order business from our home. He loves it and will likely continue it as long as he can. I will be eligible to start to draw pension of about $2200 a month in eighteen months. The pension includes health insurance. I also have money in TIAA/CREf and would prefer to leave it there until I am 60.

Retiree health care and pensions are disappearing so I don't even know if we should count on them. Can you offer some sanity?

We have a couple of small IRA's and a small stock portfolio.

John Ameriks: That article has gotten quite a lot of attention, and deservedly so.

The issue of savings adequacy is a complicated one, and to provide an answer, you have to have a baseline: how much is enough? Obviously there is no "one true answer" to this question.

The economists cited in the article used a particular model along with a variety of assumptions to come up with an estimate. Steve and I have done some similar, though less fancy, modeling at Vanguard. While our results are not as overwhelmingly positive as the results, our conclusion mirrors theirs there are a large number of people who are saving at a reasonable rate retirement, while others are not.

To answer your query about what to do: Save regularly, make sure to get any company match money you have access to. Take advantage of tax shelters via IRAs where you can. Understand that correcting an "undersaving" mistake is more difficult than an "oversaving" mistake.

And don't put too much faith in any particular calculator. These tools are built on assumptions that often can't possibly mirror the uncertainties we all face. They can be great tools to illustrate basic tradeoffs and solve simple "compounding" type problems, but they can't be crystal balls.

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Richland, Wash.: Do you have a recommendation on the best year for starting the receipt Social Security benefits after retirement(if the income is not needed immediately).

Martha M. Hamilton: I examined that question in a recent column.  The answer depends on your anticipated longevity, among other things. I expect to outlive my 93-year-old mother, so I'm hoping to put off drawing Social Security as long as I can. Then, when I get the annual cost-of-living adjustment, it will be on a bigger base.

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Oakton, Va.: There has been some research out recently that suggests that brokerage firms and money management firms are advising their clients to save more than they need, Vanguard included.

While I understand the argument "better safe than sorry", (as well as the fact that your business is driven on a percent of monies under management), isn't it better to be correct and accurate? Just how much money do we need to save, and saying "the more the better" is something my mama can tell me, I expect something a little more researched from a professional.

Thanks!

Martha M. Hamilton: The argument was made by Laurence J. Kotlikoff, a economist at Boston University, that some retirement calculators err on the high side. He has an alternative calculator. I don't know who's right, but my own instinct is to err on the side of caution. It's really unknowable what the right figure is for any individual because so much can occur that is unanticipated.

Stephen Utkus: I'd add to Martha's comments only to say that, in a recent survey of the issue in a publication from the Wharton School (the business school in Philadelphia), one academic concluded -- in the end, the prudent approach is to keep saving.

Yes, while there are probably 30% of Americans who are well prepared for retired, our estimates -- and the estimates from independent academic economists -- suggest that another 70% of Americans should be saving more for retirement.

This seems especially prudent given the looming uncertainties with medical costs in retirement.

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Washington, D.C.: if you're 50, and have a lot of credit card debt, is it smart to suspend payments to a 401k until your debts are paid off? i have $100,000 in a 401k. my company contributes 12 percent of my salary, even with no match from me. I can't afford to pay the credit card companies and contribute to the 401(k).

Stephen Utkus: This is a tough choice. The good news, though, is that you have $100,000 saved, probably due in large part to your employer's contribution but perhaps your own saving.

Given that your company is putting aside 12% of salary already into the plan, I'd probably agree with you that your top priority is to pay down the credit card debts with your own contributions.

But only if it means a permanent reduction in the debt. One worry I would have is that you are only making small payments on the credit card debt, and total balances will still grow due to interest charges.

One option here is to get some advice (if you feel you need it) from a credit counseling service.

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Minneapolis, Minn.: After years of struggling to keep working, my 61-yr old husband is filing for Social Security disability. We have together appprox. $300k in IRAs, that's it. I'm 58 and work a little but we will need to start tapping our IRAs. Is a 50-50 stock/bond allocation okay, or too risky for our situation?

John Ameriks: I really need to know more about how much risk you can handle to answer the question. If you find you are having trouble sleeping, or that you are constantly thinking about your portfolio, you need to dial back a bit on stocks.

But recognize that there are more risks than just that the stock market will bounce around from year to year. Some exposure to stock market risk enables you to expect that your portfolio will continue to grow over time at a rate well above that of inflation -- as you shift to more conservative investments, you'll lower that expected growth rate. Don't forget also that your social security will provide a baseline of income for you both for the rest of your lives -- thinking about social security as part of your portfolio may give you more perspective on how much risk you truly are exposed to...

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Cary, N.C.: Currently I contribute 12 percent towards my 401k, of which 1-3 percent is employer matched. Should I lower that amount and start a Roth up to the max per year, or continue what I'm doing and put any leftover towards a Roth? I am 27 if that makes any difference. Thanks for your time.

Stephen Utkus: Terrific! Saving 12% in your 401(k) at age 27 is splendid. Keep this up for the years to come -- and you will be well on the path to retirement security -- or even early retirement!

As for the Roth, we encourage 401(k) participants to take a "tax diversification" approach. If you knew that your tax bracket in retirement was going to be lower, you'd always stick with pre-tax savings. If you knew it was going to be higher, you'd pay taxes now and make Roth contributions.

But no one knows future tax rates with certainty. So I'd suggest some diversification -- such as half Roth and half pre-tax. Since your employer money is also pre-tax, you might up your Roth to an even higher amount.

This is of course a generic recommendation, and there may be some tax reasons why it might not make sense (e.g., if you have a lower income and receive certain deductions and credits). So talk to your tax prepare about the impact.

But as a general rule, we're in favor of Roth contributions for high savers.

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Pittsfield, Mass.: I just retired and rolled over my retirement savings to Merrill Lynch. They have invested my approximately 400,000 into bonds and stocks and mutual funds with much of the money going into C shares with annual charges of about 1.5%. Is this an appropriate avenue for me to follow?

Stephen Utkus: My recommendation (for all investors) is to understand clearly the fees you are paying, and make sure you feel you are getting value for the money.

Many individuals go with higher-cost advisory services because they need someone to help them with their portfolio. So the fees may (or may not) make sense in light of the advice and service you are getting.

As a general rule, investors should know the dollar fees they are paying. In your case, it sounds like it is 1.5% of $400,000 -- or $6,000 a year. Use that figure to judge the value of the services you are getting, and in shopping around with other advisers.

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Warrenville, Ill.: Ms. Hamilton--

Thanks for your column and these chats. I retired almost two years ago from a federal job. For years I had worked simultaneously a part-time job, doing something that I love and am good at. This part-time job--now ramped up to thirty-two hours a week--pays enough to let me make the move.

Being super cautious, I hired a fee-only financial planner to review my accounts. I knew the numbers but I didn't know what they meant. And I still don't. The planner earned every penny I paid her.

My finances seem stable, mainly because I have always lived frugally and still do.

I am therefore trying to live on my modest Civil Service Retirement System annuity (which grosses about fifty percent of my previous federal salary). My goal is to invest my current part-time salary in retirement accounts (with minimal employer match). One option is to select a Roth account that targets a retirement date. Because I hope never to draw on these funds, can I select a fund that targets my retirement at 2040, even though at sixty-four I fully realize that the money may outlive me? Or that a fund with that long a time will be deeply affected by changes in the economy?

(By the way, the move to pseudo-retirement has been more stressful than I had expected, despite extensive planning. I follow your column faithfully, because I've discovered that I can never learn enough about retirement and how to fund it.)

Martha M. Hamilton: Thanks for the kind words about the column. I'm glad you're finding them useful. I'll let the experts answer your more specific questions.

John Ameriks: In my view, living below your means is *the* key to success in retirement -- and it sounds like this has worked well for you.

With regard to your ongoing saving, you are right to use continue to use company plan. In terms of asset allocation, the strategy you outline is sensible, though given that your investment has an "infinite" horizon, I think a balanced fund with a fixed risk exposure might make more sense. Given you are simply saving to grow the money over time, a significant allocation to stocks is probably a sensible strategy...in particular because you have the federal pension to rely on for everyday expenses.

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New Jersey: I currently have a Roth IRA invested in the Target 2025 Fund. I want to make a 2006 contribution before April 15th, but I'm thinking of putting it in another fund to further diversify. Any thoughts?

John Ameriks: Good to see you are focused on making an IRA contribution. You might also consider making your 2007 contribution early (if you can), to get the maximum advantage of compounding inside the IRA.

On choosing another fund -- these target funds are generally already very broadly diversified, so you aren't going to add "diversification" by choosing a new fund. What you will do is concentrate your portfolio's exposure in a particular area. There is nothing necessarily wrong with this, but you should have good reasons for doing so. Assuming the target fund has market proportional exposure to all segments of the market, why does it make sense for you to overweight a particular sector, while someone else out there, by definition, is underweight that same sector?

If you feel like you can handle more risk than you are exposed to in the target fund, adding additional moneys to a broad stock fund, in addition to the TRF makes sense. But note you are not adding diversification -- you are moving along the risk-return frontier -- adding additional risk, in hopes of achieving higher returns. (You could also choose less risk by adding a broad bond fund).

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Silver Spring, Md.: Are there any specific sectors that you see as being particularly high growth sectors over the next 10-15 years? For example, everyone's been high on China, natural resources, technology.

Stephen Utkus: As with all such investment observations, they contain a bit of truth. China, India and other countries are rapidly growing and are in the news spotlight.

But that is different from saying that investments in such countries can be timed exactly right to benefit from the upswing. More often than not, by the time such themes become common wisdom, stocks in the particular sector, region or country have been bid up way over their long-term value.

Another way to think about this is -- yes, the stock market in India (or wherever) may be hot. But current investors have bid the local market up to that level based on the fact that they are assuming long-term economic growth of 7+% a year. The only way to make money is to assume that India does even better!

Our recommendation: keep a broadly diversified portfolio, including US and foreign stocks, developed and emerging markets. Your goal is to "win" the investment game not by timing investments in and out of hot and cold sectors, but by buying the US (and increasingly the global) capital markets and holding them for the long term.

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Syracuse, N.Y.: Outside of my 401(k) I am pretty much a Vanguard Diehard. The core holding in my Roth is VG Wellington and the core holding in my Rollover IRA is Target 2020. Do you think it is appropriate to have both or should I keep my core holding to one fund.

Thanks for your time!

Stephen Utkus: One thing I do like about your choices is that they are all very simple -- not a lot of duplicative funds or holdings. The other element that is appealing is that each of the funds is broadly diversified.

Sometimes we look at a fund like Wellington Fund and think of it as a single investment. But when you look under the hood, you can see that it holds a broadly diversified portfolio of US stocks and bonds -- much like the portfolio you would get if you had $2 million and walked over to your local trust bank for a custom portfolio.

That said, the investment experts would probably say that Wellington Fund is a bit value oriented, and lacks some international and small cap exposure. So you could potentially add those elements to the Roth over time.

Of course, the Target 2020 is also providing you with some of that exposure already, as it is diversified across countries, asset classes, styles and capitalization levels.

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Arlington, Va. A previous questioner referred to a "TSP" - What is TSP?

Martha M. Hamilton: Thrift Savings Plan. It's a federal retirement savings plan. Thanks for reminding us to define terms when we do these chats.

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Silverdale, Wash.: The 80 percent rule of thumb for post-retirement income is obsolete unless you intend to limit your vacation/entertainment expenses to the same as the pre-retirement level plus the amount you were saving and not living on.

Is the new rule of thumb more like 125 percent?

Martha M. Hamilton: Sounds like you're planning to live it up in retirement. I'm getting a pension from the Post now, and I'm not having deduction any longer for a health care spending account, disability insurance or Social Security from the pension, so the difference between gross and net has narrowed in a way I hadn't really thought forward to. That was a pleasant upside. I expect you'd be fine with 90 percent.

Stephen Utkus: Just to add--the folks who have analyzed the 70-80% rule (Georgia State & Aon Consulting) noted that the lower level comes from lower savings rates, lower taxes, and lower commuting costs. So unless you are figuring for a dramatic increase in travel costs, my guess is that Martha's 90% isn't unreasonable.

As I may have mentioned earlier, this question is as much philosophical as it is financial. Does travel mean the QE2 or a car tour of the lower 50 states? And as you know, with travel costs as variable as they are, sometimes it is cheaper to go eco-touring in Costa Rica then to spend a week in New York at the theater!

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Vienna, Va.: I hear of the coming phase when baby boomers will be retiring en mass. I am not a baby boomer. If I invest my 401K in stocks today, will I be negatively impacted by the large number of boomers retiring and perhaps liquidating their stocks? On the positive side, how can I make this situation advantageous to myself?

washingtonpost.com: Could the Market Fall Down and Go Boom? (Post, Feb. 4)

John Ameriks: The two big issues with the "Asset Meltdown" story, from my point are:

(1) Asset markets are increasingly global. Whether there will be a "meltdown" is going to be highly dependent on the behavior of a younger generation of Chinese, Indian, Brazilian and other emerging-market savers. There may be plenty of demand for holding productive investments from these folks -- so I'm skeptical of a broad sell off as baby boomers retire.

(2) Even if it happens, this is an "asset meltdown", not a stock meltdown -- if the story is that that there won't be enough savers, why is it that stocks will bear the brunt of that shift? The values of almost all assets would also be impacted. So it's not clear to me that even if you believe the story, it has portfolio allocation consequences -- either negative or positive...

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Minneapolis, Minn.: I am in my early 60's. Do you think people like me can at all depend on the estimated income that Social Security says we will get at age 66 (full retirement)?

Martha M. Hamilton: I expect that any major changes to Social Security will be made prospectively. I doubt the rules will change much for people who are currently in their 60s.

Stephen Utkus: I agree wholeheartedly. The most recent proposal from President Bush left those age 55 and older unaffected. Other proposals from both sides of the aisle do the same.

To be honest, at the rate Social Security reform is moving along, it may be that half of the baby boom will be exempt from any changes in benefits! But as you may recall, boomers are the reason we have the problem in the first place!

But in your case, it seems pretty safe to assume that benefit levels will be unchanged from what you see on the statement.

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Washington, D.C.: I am just curious, can I have a Roth IRA and a traditional IRA? I contribute the max to my TSP and Roth IRA, but don't have any other official 'retirement' accounts. Am I eligible to also contribute to a traditional IRA? If so, what are the contribution limits?

Stephen Utkus: You can have both a Roth and a traditional IRA, but there is only one limit in a given year. So, for example, you can't make a $4,000 traditional and a $4,000 Roth contribution. Just some combination adding up to $4,000.

Whether you are eligible for Roth or traditional is tricky. There are different rules & limits depending on income. Check out many of the available websites, including vanguard.com, with the details.

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Sioux Falls, S.D.: I have two Vanguard Roth IRAs - one aggressive domestic and the other general domestic. I have at least 30 years before retirement. Should I keep investing in these funds or invest in new funds in the future? How should I manage which funds I put $$ into and how much to have in each one? Thank you!!

John Ameriks: You might consider looking at a balanced fund that includes some (at least 20%) international exposure. An easy thing to do is use target date funds to get, and maintain, such a well-balanced portfolio. If those funds aren't risky enough for you, you can continue to hold the aggressive funds in addition to the "baseline" investments you make in such an option.

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Baltimore, Md.: Bush's proposals to reform Social Security with options for workers to invest small amounts in the stock market has been derided by some groups as a risk of "benefit cuts" up to 40%. Inherently, that complaint seems to be saying that people might invest poorly in the stock market and actually do much worse than the Treasury securities we're all currently forced to invest in. In your experience do small 401(k) stock investments tend to underperform Treasury benchmarks?

Stephen Utkus: Generally we don't find that small 401(k) accounts underperform Treasury securities. But yes, there is a small group of 401(k) investors, large and small, who stick with 100% cash investments, focusing on short-term stability of capital, and not looking at their need for long-term growth.

In terms of addressing this problem, there is a move within 401(k) plans as a result of the 2006 Pension Protection Act to encourage more participants to be in professional managed "default funds." Largely this is driven by the research that some participants make poor choices or feel uncomfortable making investment decisions.

My guess is that the same would be true for any reformed Social Security. Most people will be (and should be) in default funds managed by someone else.

This is not to say that there aren't other hotly debated policy issues in the Social Security debate. But the investment issue would probably be handled in this way if Congress chose to adopt personal accounts.

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John Ameriks: On the issue of transition into retirement, I do think more and more people will do this, with the help of employers, by working fewer hours, or fewer days of the week at their jobs. And I think employers are going to really lead the way here -- it's already happening!

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Stephen Utkus: The good news -- for boomers, plus gen xers and yers -- is that increasingly the transition from work to retirement will be gradual. It isn't about stopping work one day and starting full-time play the next.

What this means is that individuals will have to be creative in thinking about these transitions. It means building skills in your middle career that you might use in a new job in the future. Building a network with different types of organizations that do work you find interesting. Working with your current employer to look at flexible "downshifting" opportunities.

This is the new retirement.

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Martha M. Hamilton: It's been a great chat with lots of good questions. I'm grateful to all of you who sent queries and to Steve Utkus and John Ameriks for allowing us all to benefit from their expertise. If you have any suggestions for future columns, please feel free to e-mail me at hamiltonm@washpost.com. And join the chat again on March 6.

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