Financial Futures

Martha M. Hamilton
Washington Post Columnist
Tuesday, June 12, 2007 11:00 AM

Washington Post columnist Martha M. Hamilton was online Tuesday, June 12 at 11 a.m. ET to answer questions about what smart financial decisions you can make now to prepare for your retirement.

She was joined by Bill Fleming, managing director in the private company services group at PriceWaterhouseCoopers. In this week's column, Fleming helps to answer questions about minimum withdrawals from retirement savings accounts.

A transcript follows.

To read past Financial Futures columns, click here.

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Martha M. Hamilton: Hello all, and welcome to our chat. We are fortunate to have as our guest today Bill Fleming , managing director in the private company services group of PricewaterhouseCoopers. Among other things he's an expert on Required Minimum Distributions, a subject that causes probably more consternation and confusion among folks thinking about retirement than almost anything else. Before we get started, let me make a special request: If you're afraid you can't afford to retire because of debt, and if you're willing to talk about it on the record, send me an e-mail (hamiltonm@washpost.com), and I'll pose your problem to a financial expert to try to find a way forward. Now, since we have many, many questions, let's get to it!

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D.C.: Before you can worry about minimum withdrawals you have to have something to withdraw!

What are we older people in our 50's to do.

We are just now able to start to really save.

Bill Fleming: Start small... even smaller amounts add up over time. Make sure to take advantage of employer match in 401k plan first.

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Washington D.C.: I am 23 years old and just finished my first year at my job that I took right out of college. I also just recently opened up my first Roth IRA with $150.00 and a scheduled payment of antoher 150.00 a month starting next month. I did this because my company does not match any money that I would put into a 401k. Although they disperse profit sharing into our 401k's.

My question is, how should I be investing my Roth IRA? I know that I have the option to invest it Mutual Funds, Stocks, Bonds, etc. But what is my best option? I am nt planning on tapping into this money at all before I retire. Also since I barely have any money in there now, how long should I wait to start investing that money? thanks for your Help.

-Tom

Martha M. Hamilton: You might want to start out with a broad-based equity fund like an S&P 500 Index. That gives you exposure to lots of different stocks, even with only a small amount to invest. However, many mutual funds have minimum investment levels of $1,000 or more, so you may have to save up for awhile. You might want to explore some of the online money market accounts which offer fairly decent interest rates.

Bill Fleming: Sometimes the minimums are lower for retirement accounts

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Grand Rapids, Mich: I am 20 years old and would like to start saving for retirement. How much do I need to put away so that I can retire comfortably? I want to start now so that I can avoid paying a higher proportion of my salary for retirement later.

And where do you recommend that I put my funds?

washingtonpost.com: Saving for Retirement -- and Everything Before Then and Where to Begin (April 29)

Martha M. Hamilton: The good news is, the earlier you start, the less you have to put aside because your money has so much time to grow. And you've got a lot of time in front of you. If you're working, and your employer will match a certain percentage, save up to that amount, so you're not giving up the employer provided dollars. If you're not eligible for a 401(k) type of plan, you might want to consider a Roth IRA. Your taxes at your age are probably lower than they will be in the future. With a Roth, you pay taxes when you put the money in, but not when you take it out.

Bill Fleming: Usual priority is 401k for employer match, then regular 401k, then Roth... unless your ROth is limited by earnings

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Arlington, Va.: I am 47 years old and would like to meet with a financial planner, but I do not know what to look for to just get the best advice. I do not want someone who just wants to sell me something. I really want someone to review my portfolio and let me know how to better enhance my portfolio.

Martha M. Hamilton: You're right to not want to deal with someone who is making money through commissions. When it comes to fee for services planners, there are those who charge a percentage of your assets, those who charge by the hour and those who charge an annual fee. I think the best way to find a good planner is to ask friends, relatives and colleagues if they use someone they would recommend. But then, ask questions about what it is that they like. If they say, she's great, she took over my investments, and you want someone who would be more of a teacher, you're probably not going to be happy with that planner.

There are a few web-sites where you can find the names of planners in your area. Try www.napfa.org or fpanet.org. And there is good advice about questions to ask financial planners at http://www.sec.gov/investor/brokers.htm.

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Gulfport, Miss.: I reached my 70th birthday early this month, so as I understand it, in order to avoid penalties, I have to take a distribution from my IRA and from my 403B annuities soon. How soon?

Bill Fleming: Your first year distribution can be this year or you can take it any time before April 1 of next year. But then you need to take two next year. You'll have to take distribution from IRA and 403b separately... and from each 403b account separately. You might want to combine some accounts to make it easy.

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Rolla, Mo.: I have always wondered about asset allocation between couples. If you look at standard models, it may say put 80% in stocks, 20% in bonds, with the stock portion made up of 40% large cap, etc. However, we were doing this but we had so many funds between the two of us to keep this allocation in each of our retirement accounts, we decided to divvy it up viewing our retirement account as a whole, depending upon what offerings were best in each plan. So, I am heavily large cap because my large cap fund choices were better than my spouse's, but her international fund choices were better than mine, and so on. Do you encounter this often, and is it a sound strategy?

Bill Fleming: Asset allocation is tricky when multiple plans are involved. What you are doing is absolutely correct. Concentrate on the "best" offerings in each plan and fill in the other categories as you can. It is a balancing act. I'm doing the same thing with my employer 401k plan and my wife's SEP...

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Dianne in Silver Spring: Hi Martha, I hope you can please help with my question.

This month my divorce will be final. Married for 26 years, having raised two kids, I am 54 years old and forced to re-enter the workforce full time at a time in my life I thought I would be close to retirement. Don't get me wrong, I'm not against work. But I have almost nothing personally saved from our marriage.

With my divorce settlements I will have some cash (five figures) to put away, But what to do? And how? My ex-husband handled all the financials. I need a good but safe plan.

I can't believe I am the only middle-aged divorcee in such a situation. I have written to the columnists at Kiplinger's and Money magazines seeking some advice, but no one answers back. It seems as though unless you are a young, long-term investor or someone with six or seven figures to invest, no one is interested.

That said, maybe it would be a good story on how to start this late in the retirement savings game. I feel like my age and gender group is in a black hole on this matter.

Thank you!

washingtonpost.com: Parting Gift From a Dead Ex (Oct. 8, 2006)

Martha M. Hamilton: I sympathize with your situation. The reality of divorce is one reason it's important for stay-at-home parents to put money into their own IRAs while they're not eligible to take advantage of workplace savings plans. But that's not going to help you now. When you're looking for a job, be sure to ask about the retirement savings plan and other retiree benefits. An employer who matches a good percentage of what you contribute, could help you a lot. You should also consider opening a Roth IRA. Send me an e-mail if you're willing to talk about this further on the record. Maybe we can find you some good answers.

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Arlington, Va.: Martha - I found your recent column on required minimum distributions from an IRA extrememly useful. My question - Can I combine the value of my government TSP (a 401K style plan) and my traditional IRA in determining the RMD or must I treat each one separately? Thanks

washingtonpost.com: Substantial Penalty For Messed-Up Withdrawal (June 10)

Bill Fleming: The minimum distribution has to be taken from each plan separately (a pro-rata share of the total).

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Washington, D.C.: I am 27 years old and have approximately $75,000 in student debt, $15,000 from private student loans with interest rates at 8.5-9.5 percent. I am also renting. I have not chosen to contribute to my work's 403b plan on the theory that every extra dollar would be better spent on paying down the high interest loans and saving for a mortgage down payment. I have managed to cut my high interest loans in half in two years because of this, though I always keep a few thousand around for emergencies. Is this the prudent course?

Bill Fleming: The endless dilemma... saving for retirement or paying down debt... Based on the interest rates the debt reduction plan is reasonable. Make sure you are not passing up any employer match in 403b (probably not). If you could squeak even 1$ into the 403b it would be a start.

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Ithaca, N.Y.: I just got a 5 percent raise, and am wondering if I should just put it all towards retirement (before taxes) or keep it in a high interest savings account. I currently set aside 33 percent of my salary for retirement.

Bill Fleming: Depending on your age and what you have already saved... 33% is quite a savings rate (I am green with envy). If you are over about 55 and have little aready saved... then it isn't so good.

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Philadelphia, Pa.: Hi, posting my question early because I won't be able to make the actual discussion. I'm a recent college graduate and I want to begin investing some of my money. I don't have much saved up and the job that I'll be starting in the fall won't pay that much. What would be the best options for me at the moment? Right now, I'd be able to start with $500 as investment money. Thanks

Martha M. Hamilton: I usually advise opening a Roth IRA when you're young and relatively new in the workplace. With Roths you pay taxes now, not when you withdraw the money--the reverse of the traditional IRA. And chances are you'll be paying lower taxes now than in the future.

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Ashton, Md.: Financial experts are always telling us to max out our retirement savings at work. Are they talking about saving enough to get all of our company's matching contribution or saving the maximum allowable by law?

Martha M. Hamilton: I think they mean the maximum allowable by law, but if you can't do that, by all means don't give up the match.

Bill Fleming: I agree. I think they mean maximium pre-tax allowable in the employer sponsored plans.

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Boston, Mass.: I'm 50, and I earn $50K, but have only $53K in total assets - bank and retirement investments. Highly risk-averse, my investments are bonds more than stocks. I have fully funded my Roth for 2007, and save 18% of my income at 5% interest. I certainly cannot afford to purchase housing, and I suspect I cannot afford to retire. Do you disagree? Any suggestions?

Bill Fleming: By my calculations... in order to have $30,000 a year to live on for about 30 years.. say from age 65 to age 95... you would need about $450,000 in assets. The short answer is that retirement is probably going to be later in life... mean part-time work... or a move to a lower cost part of the country

Martha M. Hamilton: You might want to take a little more risk for a higher return, especially since you may need to be in the workforce for longer.

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Brentwood DC: Can you explain more on how to handle IRA balances left to heirs? I got the main point from Sunday's column not to take it as a lump distribution, but how should the "phasing" that the column mentioned be structured?

Bill Fleming: IRAs left to heirs can be drawn down over the heir's life expectancy... as long as that draw-down starts in the year following the year of death. If you miss that deadline then you have to pull all of it out by the end of the fifth year following the year of death.

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Laguna Hills, Calif.: Mr. Fleming, you wrote "unless your Roth is limited by earnings." There are Roth IRA's not limited by earnings?

Thank you.

Bill Fleming: All Roths are limited by earnings... if you earn too much you cannot contribute. I don't know your earnings... so it was just a heads up.

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Survivor benefits:: This may be out of your area but I have a question about Social Security benefits for widow/widowers. The surviving spouse continues to work and was told because she earns over 24K a year she can't collect any SS as a surviving spouse. Did she get good advice?

Bill Fleming: It depends on her age. My understanding is that once you are age 65 the earnings limits do not apply.

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Beaverton, Ore.: I have read so many different stats regarding a prudent withdrawal from retirement accounts. Next year I will be retiring and am so CONFUSED..should we withdraw 4 percent? 6 percent? Of course I would like to withdraw 8% but realize that is not realistic. In our early years of retirement we will be traveling and being much more active than in our later years. My husband is ten years older (69) and has been retired for 5 years We currently live on his SS and my income. SOOO what is the magic number? What if we are facing a market down turn and our portfolio does not grow for several years yet we are taking withdrawls? HELP

washingtonpost.com: Substantial Penalty For Messed-Up Withdrawal (June 10)

Bill Fleming: You have got to be flexible and run some different alternative. The 4% rule of thumb comes from endowments and charities... and that is a long-term view.. you can spend 4% of the value and it will still grow over time...BUT if the market turns down you'll have to have a course correction and watch it for a year or two. The problem with retirement is that you need to establish a pattern ... maybe just go on trips every other year...

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Indian River Shores, Fla.: I am a retired Federal employee with a TSP account and just a few years away from 70 1/2. I am considering either transferring the TSP to a traditional IRA- - which seems to have confusing withdrawal rules - - as opposed to a MEtLife annuity which appears easy. The annuity can include an inflation fighter, a monthly check for my and thenmy spouse's life and easier to draw down.

Do you favor one over the other?

Martha M. Hamilton: Annuities are good in some stuations, but not in all. I wrote a column about how, in my case, it probably wasn't the best buy. Also, you have to be careful shopping for annuities. It's hard to comparison shop, and if you're buying from an agent on commission, that might not be the best way to get objective advice. here are some shopping tips: http://www.washingtonpost.com/wp-dyn/content/article/2006/12/09/AR2006120900010.html

Bill Fleming: Annuities give you safe secure income each year ... easy to manage... but they involve commissions and fees... depending on your situation it may be worth the "cost" to have peace of mind... but Martha is right... shopping for the "best" annuity is tricky.

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Lost 401K?: I'm very embarassed about this - but when I got laid off from a job a few years ago, I didn't think to keep track of my 401K. Now that I'm more responsible, I don't know how to find it. I can't get in touch with the company.

Any ideas? It's not a lot of money, but it's still mine and I'd like to make sure it works for me for the next 30 yrs or so.

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

Bill Fleming: You might try contacting the custodian... they may have contact information. You should NOT give up.

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Laurel, Md.: I've already contributed the max to my Roth for 2007, and due to some other stock market profits, I may go over the income limit for the contribution I've already made.

Short of taking an actual pay cut, what can I do to reduce my adjusted gross?

Bill Fleming: You could deliberately lose money in the market... I understand that there are hedging transactions that could create losses this year and gains next year... but the economic cost may be significant... not to mention the tricky tax rules that apply to such investments

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Paying off your mortgage: Thanks for taking my long question. I'm a 47 year old single female. I bought my little bungalow in Takoma Park, MD in 1998 for $89,000. It is now worth close to $400,000. I'm an administrative worker making in the mid-50s. I can't see myself getting any huge salary increases over the years, just bare bones 3 to 3.5 percent increases. I've been adding more to my principal for the past year and a half and hope to pay off my 30 year mortgage (that I had refinanced in 2002) in 9 years (according to my calculations). Lots of people think this is not the right way to go. They think I should be putting that money into my 403(b) account (which has about $75,000 in it so far, that I am contributing to monthly and my employer puts in 5% of my yearly salary each year). Oh, and I also have no other debts. My way of thinking is that when I pay off my house when I'm in my mid to late 50s, I can then cut back my hours a bit where I am working now (I've worked here for 17 years!) or get a job that I would LOVE to do (working with animals) that would pay $15,000-20,000 less than what I'm making now. I know things are not the same as they were for our parents. But one of the things that I think made it easier for them is that they indeed had their homes paid for by the time they retired. What are your thoughts?

washingtonpost.com: Homeowners' Get-Out-of-Debt Instinct (May 13)

Martha M. Hamilton: We're attaching a column I wrote on this subject. I would say that you probably need to continue contributing to your retirement accounts after you ratchet down in the workplace to make sure you have enough to last your retirement.

Bill Fleming: I'm a big believer in paying down debt.. even deductible home mortgage interest.. Having no debt makes a smaller fixed cost in retirement..

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Boston, Mass.: Please tell students who are soon to begin college, how to avoid the crushing debt burden that so many willingly but foolishly take on. If you are a student of middle class or lower means, can you get a good education without going into debt?

Martha M. Hamilton: You can get a good education. I worked and took night courses and correspondence courses to get my degree. Took a little longer, but it was highly satisfying to have paid for it myself. One good way to lower costs is to consider taking courses at a community college. That's a cost-effective way to polish off basic first and second year courses. And the teachers at some community colleges are terrific.

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St. Paul, Minn.: When is the best time of life to set up a revocable or irrevocable trust that would provide a livable stream of income from the interest throughout our retirement years and until our passings? My husband and I are childless, expect to remain so, and are likely to leave our estate to charities, and to several nephews and nieces. Our net worth is nearly $1 million at present (mix of national and international stocks, bonds, real estate and cash) and we are in our 40s (early and late). We expect to work for as long as possible, ideally until we are incapacitated, but of course this may be impractical. Thank you.

Bill Fleming: You are never too young to have a revocable trust. It is just a way to ease the transition of assets at death. Irrevocable trusts are permanent ways to make gifts to family and are best for those with high net worth (over about $4,000,000 or so).

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Washington, D.C.: My husband and I are maxing out his 401(k) but that is it. I'm a stay at home mom now but hope to go back to work part-time when the kids are in school. We are in our early 30's. Is hoping that our income will increase substantially with age get us in trouble in the long run? I feel like because we can't afford to put away much more it is almost pointless.

Thanks for your thoughts!

Martha M. Hamilton: You should also be contributing to an IRA for yourself while you're out of the workplace. And it's definitely not pointless to be putting away what you can. You are relatively young, and every dollar you put away has time to grow.

Bill Fleming: Even small savings add up over time.. I saved the most before marriage and children... and that money is impressive now... I like deductible IRAs and Roth IRAs if you are eligible... but non-deductible IRAs don't excite me. Rather than nondeductible IRA, I like some low cost mutual fund (index 500) and plunk something in each month.. even a little as $100... to get the ball rolling.. most funds can automatically draw on your checking account each month (I have mine come on the 16th of each month.. right after the second paycheck)

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Indian River Shores, Fla.: Martha and Bill - - -

(This is a follow-up to a previous question today and you might not want to adress it if you have an abundance of other questions.)

Thanks for responding to my question about what's best to do with a TSP - - transfer to a traditional IRA or get a MetLife annuity. Regarding expenses/commissions, currently TSP's contract for annuities is only with MetLife so there are no options.

On the other hand, don't firms and financual institutions everywhere also charge for maintaining IRAs and providing distribution?

Bill Fleming: IRA custodian charges can be a low as $10 per year... and over a certain dollar amount there is no charge.

Check out Vanguard, T.Rowe Price and Fidelity online.. lots of good information there..

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Daly City, Calif.: If I have enough income from non-retirement sources, shouldn't I take my RMD on the last possible day of the tax year?

Martha M. Hamilton: You don't want to get caught in last minute processing problems and set yourself up for a penalty.

Bill Fleming: DANGER... the best financial answer is to take it out on the last day at the last minute... BUT in the real world stuff happens..... like processing delays and errors

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Alexandria, Va.: I will get a salary bump next year and want to figure out where to put it. Right now my employer pays 10 percent of my salary into a defined-contribution plan. I'm also contributing regularly to my kids' 529 plans. Should I (a) make voluntary contributions to my retirement plan, since 10% isn't very much, (b) open an IRA, Roth or otherwise (I don't have one now), or (c) rev up the contributions to the 529 plans, since I'll have 5-10 working years after they graduate to make more retirement contributions?

Bill Fleming: You should save for retirment first (you can finance college).. do volundary contributions to plan (hides it from colleges) then Roth IRA (if eligible) then something else.. maybe low cost mutual funds...

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Capitol Hill, D.C. : Ms. Hamilton--

Thanks for these chats, which are the only place I know to get accurate answers to essential questions.

Did I understand Sunday's column correctly? You implied that one did NOT have to begin taking minimum withdrawals from retirement accounts (e.g., 401ks, IRAs, TSP) if one were still working at age 70.5. Did I understand this point correctly? (A federal retiree, I turn 64 this summer but work at least half time at a job that I love and that I do very well. I could easily foresee myself working at least another ten years, maybe more if my brain holds out. If my plan works, I won't need any retirement funds to live on as long as I keep working. And, yes, I continue to shelter monies in my employer's 401k.)

Thanks in advance for answering this question.

Martha M. Hamilton: If you are still working at age 70.5, you don't have to take withdrawals from your employer's 401k. It doesn't apply to the other plans.

Bill Fleming: You must also be careful about whether you are officially "working" or are "retired". Tricky for part time workers... see what your official status is with your current job

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Shelburne, Vt.: I am a very small investor with little money. I am interested in ETF's or Exchange Traded Funds. Can these be used by the small investor? Do they require greater attention or can you use them like mutual funds, i.e. dollar cost averaging the investment?

Thanks

Bill Fleming: ETFs are much like mutual funds... but you pay to buy and sell. For small amounts (and even big amounts) consider low cost index mutual funds.. very similar.. Vanguard is known as the low cost provider in the index market.

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Dunn Loring, Va.: When planning for retirement, what is the recommended range for the percentage of current expenditures (current dollars) to plan on for the first five years of retirement versus years after that? I've read estimates ranging from 70 percent to 110 percent depending on one's health, lifestyle (travel) etc. Thank you.

Bill Fleming: The studies suggest 65% to 80% depending on travel plans ... and age (younger should be higher percentage)

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Martha M. Hamilton: We had so many good questions today. The downside, though, is that we weren't able to get to them all. If we missed yours, please try again on another chat. Many thanks to Bill Fleming for adding his considerable expertise to this enterprise.

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