Financial Futures

Washington Post columnist Martha M. Hamilton was online Tuesday, July 10 at Noon ET to answer questions about making smart financial decisions while preparing for retirement.

She was joined by Laura Barnett Lion, founder and president of Barnett Financial in Austin, Texas, who has served on the board of the National Association of Personal Finance Professional Advisors (NAPFA) and as president and chair of its southern region.

This week's column takes a look at things engaged or newlywed couples should foucs on now to financially prepare for retirement together.

A transcript follows..

To read past Financial Futures columns, click here.

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Martha M. Hamilton: Welcome to the chat. We're lucky today to have Laura Barnett Lion, founder and president of Barnett Financial in Austin, Texas with us. And now we'll take your questions.

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Cincinnati: Should I include my stock options in my plan to diversify my portfolio? I will not be executing the options for 5 to 10 years.

Laura Barnett Lion: Assuming that you are not "banking" on your stock options and that in fact it will be a while before you exercise, I would exclude them from your asset allocation. It's nice to have a well rounded portfolio that you are depending on being rock solid and then you can view your options as a windfall--and hopefully they will be!

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Atlanta, Ga.: I have already retired and moved from the D.C. area to Atlanta. I have left my 401K with my employer as I do not yet need the income. Is that smart or should I move it elsewhere?

Martha M. Hamilton: I think it's fine to leave it where it is if you're satisfied with the investments you have there and don't want to add to your retirement savings. You could roll it into an IRA which would give you more flexibility.

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Philadelphia, Pa.: About six years ago my husband and I attend a financial/retirement course at the local community college. The teacher was a financial consultant in our area. He looked at our retirement funds and made some suggestions as to the allocation of our 401(k) funds for each of us and also suggested moving IRA funds to a different mutual fund company, i.e. American Funds. Our retirement date is approaching within the next five years and we have amassed approximately $2,000,000. I am fearful that this is not enough of a retirement fund. We currently earn about $175,000 together. I have been toying with the idea of getting a second opinion from another financial advisor. Is this advisable? I don't want to end up eating cat food in my later years of retirement. Any advice would be greatly appreciated.

Laura Barnett Lion: Retirement planning (especially for the near term) is a dynamic, ever changing field. I think it is critical to find an adviser that is competent, that will act in your best interest and that you trust to help walk you through the myriad of decisions you will face.

I recommend spending some time interviewing several advisors to find the right one for you. It should be viewed as a long term relationship and communication will be key. A good place to start is www.napfa.org. There is a list of advisors that are fee-only and that act as fiduciaries (in your best interest).

I get asked the question "how much do I need" to retire on --alot. And it always depends on how much you need to be able to spend each month. So, while $2,000,000 is a lot of money- it is all relative to your needs.

You certainly want to make sure that your asset allocation shifts to a more conservative posture now that you will be drawing income from it. But remember, you will be an investor for 30-40 more years. That means that inflation is still a big threat. And that is a good reason to own a fair amount of stocks also.

To sum it up, a second opinion is a great idea. But also, find someone that can get to know you really well. Their financial advice will be valuable, but establishing a long term relationshiop will allow them to act as a good sounding board when you are faced with tough decisions is immensely valuable.

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Ithaca, N.Y.: The Washington Post does a great job by having a quarterly "Hot or Not" for mutual funds to (I guess) guide individuals on how best to invest their funds. Boy, China sure did well in Q2 - a lot of China funds on the Washington Post's list of "Best Funds", which was conveniently ranked by trailing three month returns. There was a also great article on how mega-cap US stocks are in for a surge.

Now that the Post has provided all this wonderful information ("best funds" as ranked on three month returns and some opinion pieces by analysts about how they think markets are going to go), what's the best way for a Post reader to position their portfolio for retirement? How should one take all this great information you guys print every three months and act on it to get to a safe, secure retirement?

From reading this quarter's report, it sounds like I should load up on emerging markets (especially those hot hot hot China funds that top the list of "best funds"), US large caps ("Signs Pointing to Large-Caps says the headline"), and avoid bonds because Bill Gross is bearish on bonds. That must be a great strategy, right? I read it in the Post!

washingtonpost.com: Post's 2Q Mutual Fund Report: Signs Pointing to Large-Caps

Best Finds| Worst Funds| Biggest Funds

Martha M. Hamilton: I wouldn't make investment decisions based on any single source of information, including The Washington Post, and I wouldn't change investments on a quarterly basis. Also, my experience is that, by the time popular publications are writing about an investment opportunity, it's usually a bit late in the game. In fairness, the Post isn't urging these investments on anyone, it's just reflecting what has happened recently and what professionals in the field are currently thinking.

Laura Barnett Lion: I agree with Martha. Getting your portfolio set with a long term investment strategy will serve you well. It may be less exciting, but otherwise you will be chasing yesterday's story and yesterday's returns.

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Chicag, Ill.: As a Federal employee in the CSRS system, we invest money in the Thrifty Savings Plan (TSP). And under the CSRS, retirees receive benefits mainly through a pension. What is your advice for Federal retirees concerning the rollover of the TSP funds into an IRA account.

Laura Barnett Lion: Having your funds in an IRA (instead of an employer plan )when you retire will give you more control over your money, more investment choices and it should make it easier for you to make withdrawals.

That being said, always check with your employer to make sure that you aren't giving up any benefits by moving the money out of the plan.

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Springfield, Va.: My wife and I will both have CSRS Federal Pensions with a COLA, TSP savings plans which are tax deferred, plus additional savings.

What is the best strategy for spending down a tax deferred account? Should you wait until the IRS forces you to start withdrawals and let the account continue to earn as long as possible? Or start withdrawals as soon as the penalty free age is met, moving the money out and paying the tax, even if you don't need the money to live.

Martha M. Hamilton: One thing you might consider is, if you qualify for one, to draw some money out and start a Roth IRA that can continue to grow after you reach 70 and 1/2 and are required to take withdrawals from you tax-deferred accounts. I'd be interested in Laura's opinion.

Laura Barnett Lion: Yes, Roth IRA's are wonderful tools and I also recommend making contributions (from NON-retirement funds) if you are under the IRS income limits. These accounts are not subject to IRS required minimum distributions and the balances can continue to grow tax free until withdrawal. Usually, it's the last dollar you want to spend because the tax free growth is so valuable.

I would recommend that you keep your tax deferred money in the retirement account for as long as possible. That way, all of your money is growing, instead of only the amount that is left after withdrawal and after taxes.

If you have enough built up in taxable accounts to allow you to wait until 70.5 to begin making required minimum distributions, then that is great.

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Martha M. Hamilton: Laura, I had an e-mail from a reader yesterday asking for advice for someone in their mid to late thirties or older s thinking about getting married to someone who is older (early to mid forties or fifties) who already has children and will have children once they get married. I believe she was looking for advice about financial issues she should consider, not advice on whether or not to marry. Any general thoughts?

Laura Barnett Lion: There are so many complexities involved in combining family finances that it is helpful to have a team of professionals advising. An attorney (for possible prenup issues), a financial planner to make sure that the investments have synergy and perhaps a tax advisor as well.

As far as the investments are concerned, it is important to make sure that there isn't too much overlap in types of securities. In other words, if the wife had all Exxon Mobil stock and the husband had all Chevron Texaco stock they would obviously need to diversify out of oil companies. I suggest they begin looking at their investment allocation together as a couple. That can be a very emotional thing to do and it can be very helpful to have an adviser there to reduce some of the emotion.

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New York, N.Y.: I have had 401(k)s and a money market account invested for 9 years with a broker who has basically put all the money into the same few funds, which have yielded average or less than average returns. I want to transfer my funds out of this person's brokerage and am not sure what to do with them. Would it wise to diversify the funds into something like Vanguard no-load funds while I figure out what's next? I am also concerned about being hit with high fees for taking my accounts out of the current brokerage, although most of the funds have been there for years. Any advice?

Laura Barnett Lion:9 years is a long time. I would follow up by asking if there are other issues involved in your decision or if you are considering moving your account just because of performance issues. If it is performance only, and the person has treated you well, you might consider making sure that he/she understands your risk tolerance and how you are measuring his/her success at investing.

Otherwise, if a move is in your future--find out if there are fees (transfer fees or back end loads) associated with transferring your investments from this advisor to another custodian like Vanguard. If you feel uncomfortable speaking about this over the phone with him/her you can write a letter or send an email requesting that information.

If you have any taxable investments with this broker be sure to find out your cost basis. In other words, if you have any (non-money market and non-retirement) funds invested there, ask what the cost basis is so you will know how much tax you will owe if you decide to sell the investments.

I'm a big fan of Vanguard. But, I don't think that using them as a short term holding vehicle until you've found an advisor is the best solution...unless it's just a money market account. You don't want to rack up transaction fees or taxes ( in your non retirement account) by buying and selling. I suggest either waiting to move your investments until you have found your new advisor, or transfer all to money market until you have found your new advisor.

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Martha M. Hamilton: Laura, I'm always emphasizing to readers that they should look for a fee-for-services adviser and stay away from those who work on commissions. But, as I understand it, there are three types of payment for fee-for-services--a percentage of assets, by the hour and annual retainer for an initial plan with annual updates. Do you have a view on the pros and cons of the three payment approaches? And what is a reasonable percentage of assets?

Laura Barnett Lion: There are three methods as you described.

I believe that the hourly fee is best for those that either want a second opinion and are going to do it themselves or those that can really stay on top of things and follow up with the advisor at least yearly.

With the annual retainer or the percentage of asset fee you have an advisor looking out for you, responsible for proactively contacting you if something needs to be done.

The fees are usually around 1% for 1 million and then decrease incrementally. Usually those fees indicate full wealth managment which includes financial planning and investment management.

Investors should always ask about fees up front. They should find out exactly how the advisor gets paid. www.napfa.org has a great questionnaire regarding tough questions to ask an advisor- its a good resource if you are shopping.

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Maryland: I prefer the thought of a tax-free retirement to a tax-deferred now and am wondering if I should regularly be converting funds from my 401K to a Roth. I meet the income requirements but don't make enough to fully fund both. I figure I should fund my employer 401K to get the match and then transfer a few thousand every year into a Roth. A plan or no?

Laura Barnett Lion: I like the idea of converting IRA's to Roths as you are able. It is painful paying the tax up front and looks like hell on your balance sheet. When you take the money to pay the taxes out of your taxable account, you can really see your total bottom line go down. But long term it is an excellent move.

Some of the newer 401ks are offering a Roth 401k which is ideal. Otherwise, your plan of funding your traditional 401k to get the match and then contributing to a Roth is a sound one.

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Takoma Park: Hi,

I have seen recently some big disagreements among the financial experts about the percentage of your portfolio to keep in international and emerging funds. We currently have 5 percent of our total portfolio (which is 50% stocks and 50% bonds) in an ememrging market stock index and 10 percent in international stock index. Does that seem reasonable to you for people of average risk tolerance? We intend to retire within two years and keep our 50/50 stock/bond asset allocation about the same as now.

Thanks!

Laura Barnett Lion: I don't see anything wrong with your allocation. Just remember that the emerging markets funds are very volatile. That's easy to do when it's upside volatility but make sure you can stomach the downside too...and that you are with a good money manager that knows the environment.

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Martha M. Hamilton: Here's another e-mailed question: I have a question about the article in this past Sunday's Washington, What to Do When Two Finances Become One. Ms. Lion talks about disability insurance. I am a federal government employee and wanted to know if I need additional disability insurance if I have it on my job?

Laura Barnett Lion: Good question.

Check to find out the details of your federal disability coverage. Find out what amount it covers and under which circumstances. Knowing what you have is important to determining what risks you still have left that are uninsured and that would be financially catastrophic.

You can ask a disability insurance specialist to recommend an individual policy that will coordinate with your existing coverage. Unfortunately, individual policies are often fairly expensive.

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Martha M. Hamilton: Many thanks as usual for joining us today, and special thanks to Laura Barnett Lion for her good advice. Remember, if you have suggestions for future columns, please e-mail me at hamiltonm@washpost.com.

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