Financial Futures

Martha M. Hamilton
Washington Post Columnist
Tuesday, October 9, 2007 12:00 PM

Washington Post columnist Martha M. Hamilton was online Tuesday, Oct. 9 at Noon ET to answer questions about making smart financial decisions while preparing for retirement.

She was joined by Jason S. Scott, director of retirement research for Financial Engines, a provider of independent investment advice and managed accounts to 401(k) plans.

The transcript follows.

To read past Financial Futures columns, click here.

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Martha M. Hamilton: Hello, and welcome. I'm delighted to have as my guest today Jason Scott, the very smart director of retirement research for the company Financial Engines. So let's hear your questions, and remember, you can always e-mail me suggestions for future columns at hamiltonm@washpost.com.

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Oviedo, Fla.: Much is made in the personal finance press about estimating your retirement income needs before setting a savings goal. Mid-career with two teens at home, I find this difficult if not impossible. Just plugging in a blue-sky guess makes the process seem fake. I know I want $60k annual after-tax dollars (in today's dollars) to start an age 64 retirement in 2022. I don't have a pension coming to me, I expect the equivalent of $1200 a month in SS at age 66 and I don't have retiree health benefits lined up. I have $120k saved in retirement funds and about $550k in taxable accounts. I don't plan to add to these sums between now and retirement. Am I OK?

Jason S. Scott: There are a lot of factors to consider when trying to decide if you are on track for retirement. Try to shoot for a portfolio value at retirement of between 20 and 25 times your target annual income. After Social Security you need about $46,000 and you have $670,000 in retirement assets. Right now you have about 15 times your desired annual income and you also have 15 years for your money to grow. Make sure you have a reasonably diversified portfolio and keep track of how you are progressing towards your retirement goals. If you start to lag behind your goals you may need to consider contributing to the portfolio again.

Martha M. Hamilton: I always err on the side of saving more. I would keep adding to those retirement accounts until you retire.

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Rockville, Md.: Please help! I have shares of stock in a company that recently--without any warning--started operating under a different name. I'm having trouble getting in touch with them. What happens to my stock in this situation--can I sell it as if the company didn't undergo a name change? The company, based in Canada, traded and still trades its stock over the counter...it was pretty worthless (penny stock, basically), but I won it in a contest and believe I'm stuck with it. It was originally in the millions of shares (!) and worth in $5000 range. Thanks in advance for any advice you can offer.

Martha M. Hamilton: I guess I would check with the SEC and with FINFRA (formerly the NASD and the regulator of brokers) to see what your options may be.

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Reston, Va.: I will turn 70 in three years and have a 401K, SEP, and also a TSP. I don't expect to draw on them until it becomes mandatory. Is there a way to combine any of the above funds?

Jason S. Scott: Employer based retirement plans can be rolled over into an IRA. You can combine them in an IRA although you loose the ability to invest in the funds available in the 401(k), SEP, and TSP. I know the TSP in particular has some very low cost investments and a particularly strong bond fund. Take that into consideration before deciding on a rollover strategy.

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Their poor choices: My mom and dad have made poor real estate decisions since they bought their first home. They just made another big mistake.

I looked at their portfolio about two years ago and they don't even have a third of what I think they will need. What can you do when your parents insist on making odd choices, living beyond their means and buying high and selling low?

Martha M. Hamilton: The first thing to realize is that you may not be able to save your parents from making the wrong decisions anymore than you can always do so with your kids. It's a tough realization. You don't say how old your parents are or if they're saving anything for retirement. If they're not, you can certainly encourage that. Presumably they will at least have Social Security, and if they own their home they may be able to benefit from a reverse mortgage in retirement.

Jason S. Scott: Another way to squeeze more income out of a retirement portfolio is to consider an annuity. Annuities are a complex topic, but an option to consider was discussed in a recent column by Martha Hamilton you can find at this link.

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Non-profit DC: Hi there, I'm a 32-year-old single woman with a new job!

With my last employer I was fully vested and my 401k was climbing steadily. At the new job, after one year I begin vesting for a pension. It takes five years to fully vest.

Is it worth it for me to start an independent 401k and, if it is worth it, how do I do that? Or, should I just be investing in general?

Martha M. Hamilton: You can't start an independent 401(k), but you may want to investigate an IRA, especially a Roth IRA if you are under the income limits. The advantage of the Roth is that you pay taxes on it now and draw it down tax-free in retirement. And at your age, that money would have room to grow nicely.

Jason S. Scott: Keep in mind that "vesting" at a company provided pension plan only refers to the employer contributions. Any of your own money that you contribute to the plan is automatically fully vested. If this is the case in your plan, it is a good idea to take full advantage of the company provided pension plan.

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DC: I am 31 and have been working for the government for four years. I contribute the max to my TSP and also have a separate Roth IRA. I feel "behind" because I didn't start working/contributing to retirement until after I finished law school. I would like to meet with a financial planner to go over my goals/needs, but the price seems very high to me. The fee only planners charge up to $250 an hour. Are there any other options out there for young professionals?

Jason S. Scott: Getting started at 31 is not "behind" at all. You are doing the right things by contributing the max to your TSP and also contributing to a Roth IRA. There are various websites you can go to and get help figuring out how much you will have at retirement given how much you are saving and how you are investing. Finanical Engines (www.financialengines.com) is one such option.

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Olney, Md.: NOTE - It's FINRA not FINFRA - www.finra.org

Martha M. Hamilton: Whoops. Thanks for the correction. At least with NASD I could remember what it stood for.

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Falls Church, Va.: Hi Martha and Jason,

As a registered representative and insurance agent, I am very upset about the misleading article written on Sunday generalizing about equity indexed annuities. First, I will agree with you there are terrible EIA products and insurance agents out there ready to prey on the elderly -- as there are are unethical people and products in all walks of life. However, my simple way of doing business for anything is if you don't understand a product then don't recommend it or, as a consumer, don't buy it! However, your focused attention spending "two weeks talking to people and reading about equity indexed annuities" is a tremendous disservice to those of us who have spent years researching these products and trying to locate EIA's that meet our clients specific needs. By lumping virtually all equity indexed annuities into the statement, "Most buyers have come to regret buying on the promise without understanding the potential pitfalls" you are grossly overstating the problem. Are you aware there are EIA's with 4-year surrender schedules and monthly averaging with an annual spread and NO CAPS? Also, considering you spent a great deal of time discussing it, let me be clear I've never offered a free lunch or dinner with a gimmicky seminar and never would. Bottom line -- please don't lump all EIAs or insurance reps together unless you're willing to say that all newspaper journalists and their articles can't be trusted because of the few who create fictitious resumes or news stories in the hope of gaining fame and money. Thanks for your time.

Martha M. Hamilton: I think there are many ethical insurance agents, but I also think consumers should be extra vigilant about what they're buying when the person selling it depends on a commission. And I'm sure there are some EIAs that are better than others. But when a PHD in finance can't get enough information about costs and other features to adequately compare products, that tells me a lot. Buyers of a complicated product may tend to rely heavily on the advice of someone else about which product is best. Sometimes that advice will be good and objective, but the record shows way too many cases in which it was not.

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Rollovers: For your Rockville chatter, I believe the TSP allows IRAs and 401(k)s to be rolled into the TSP (check their website for sure). There aren't as many investment choices in the TSP, but the expenses are dirt-cheap, so if the reader is looking to minimize fees, that might be a way to go...

Martha M. Hamilton: Thanks for the suggestion.

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Washington, D.C.: Are there variable annuities you can use to invest directly into stocks or bonds and get a guaranteed 5 percent income even if the market tanks? Or are all or nearly all variable annuities the indexed ones you wrote about?

Jason S. Scott: Annuities can help you protect yourself against outliving your portfolio. They are just about the only way to get this type of "longevity insurance." However, when considering an annuity as an investment, you should pay close attention to the fees and expenses involved. Sometimes getting a "guaranteed" return comes at a high price. I would question any investment which offers a higher guaranteed return than government bonds (the lowest risk investment option). Things that sound too good to be true usually are...

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Baltimore: I'm almost 40, and have just over $100,000 in my 401(K). My mutual funds have done remarkably well this year, but I'm convinced things are going to get worse with real estate, loans defaulting, etc. What kind of funds are a safe harbor for an investor who's convinced the market is currently being sustained by "irrational exuberance"?

Jason S. Scott: Money market, stable value and short/intermediate bond funds are the lowest risk investment options available in 401(k) plans. If you are convinced the markets are going to decline, these are the options least affected by an equity market decline. However, a word of caution. Market timing is extremely difficult. By trying to time the ups and downs of the market, you risk having your money invested too conservatively for the long term. A well diversified portfolio of cash, bonds and stocks is generally best for the long term.

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Please help....: My husband and I are talking about trying to buy a house but out here in the Alexandria, Va., market it's almost impossible. We have NO money saved up (we have at least 3 months living expense) for a down payment and cc debt that I'm working so hard to pay down. How are younger people supposed to get ahead in this area? I'm 27 and between cc debt, car payments, insurance, and rent I feel like I'll NEVER own a home. I've considered getting a part time job but would only be able to work from home - suggestions on what can be done? We don't go out to eat during the week but I don't understand where our money is going besides to paying interest on cc debt (total 10k for 2 people)

Martha M. Hamilton: You're doing the right thing in working to pay down your credit card debt. Pay off the highest interest rate cards and get rid of them. And don't despair. You're relatively young. I think people have felt too much pressure to make sure they got into the real estate market in the past few years. And now some are regretting that they did as they see prices dropping. Take a deep breath, and go over your expenditures to see if there is anything you can cut or get at a lower cost, such as car insurance. Then get out of credit card debt and start saving.

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Washington, D.C.: For someone who has another 20 years+ til retirement, it seems completely a waste of time to figure out how much money I'll need in retirement. There are just too many variables and assumptions involved. I think the best advice for most people is to just save as much as possible and invest the savings in diversified investments and let the time value of money do its job. Any comments?

Martha M. Hamilton: I think that's generally good advice, but I can understand that people like to know whether they're on track or not. It's not a bad idea to think about what your expenses may be in 20 years and whether you will have enough to cover them. It's going to be a rough yardstick at best.

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Tysons Corner: Just curious if there is anything else I could be doing - am I on the right track?

I'm 39 and single. I currently have about $75K in retirement accounts - with a $10K bonus into my 401(k) coming in January. I currently put in 9 percent of my salary into my 401(k) with my company matching 7 percent. I have about $15K in other accounts (Money Market, Mutual Funds). I have a little bit of credit card debt that I am trying to pay off. I own my house.

Am I on track to retire before I'm 90?

Martha M. Hamilton: It sounds like you're doing well, but if you're nervous, you can always kick up the savings.

Jason S. Scott: Without knowing your salary, it is hard to say whether $75,000 - $85,000 is on track at age 39. However, saving a total of 16% of salary (9% from you and 7% from your employer) is good. While it is always a good idea to try and max out your contribution, 16% is a good start.

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Riverdale, Md.: It seems to me that the wild card in retirement planing is medical and prescription cost.

A few years ago my mother was hospitalized after a stroke and spent time in the hospital followed by rehabilitation in a nursing home. After that she had out-patient speech therapy until Medicare would no longer pay. This is the kind of thing that could happen to anyone. My mother was relatively young-- 70.

I vividly remember helping her with the bills. She had to pay quite a bit, and the paperwork was confusing for me and I had all of my faculties intact. So, how do you plan for medical expenses?

Martha M. Hamilton: You're absolutely right. Medical costs can be extremely high in retirement, even with Medicare which only covers about 51 percent of costs. And fewer employers provide retiree health care coverage. The only answer I can see is to save more and shop carefully for your Medicare and supplmental coverage. Here's a column I did on the subject recently. Look at the boxes on the right for shopping tips.

Also, it's important that someone you trust has power of attorney and health care power of attorney in case you have a stroke or some other medical condition that would make it hard for you to understand your medical and financial options.

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Maryland: Initial plans for retirement forecast looked good until health insurance skyrocketed. Retirement is a decade away, but I am looking at retiring and starting a second job based on its health insurance retirement benefits. Do you think most the feds will be one of few options for retiree health insurance?

Martha M. Hamilton: You're right about the health care costs. I have friends who took the buyout from the Post but then took new jobs to provide health insurance coverage. Some private sector employees still offer retiree coverage, but retiring federal employees (under the old federal plan) have the best deal.

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another view: Or just keep working - as long as you can. Maybe work a lower stress job, fewer hours, whatever, but don't stop. Keep generating income, save as much as you can. Cause if you get to the last few years of your life, and have no money - at THAT point, you're not going to be able to go back to work at that point, most probably.

Martha M. Hamilton: I think that's a choice a lot of people who are retiring from their longtime jobs will make. However, even people in their 40s and 50s sometimes report difficulty finding another job. If you can keep working, it pays benefits in many ways, but some people can't either because of physical limitations or because they can't find a job.

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Silver Spring, Md.: I could use some advice. My wife and I are in our late 30s and have two kids aged 2 and 4. Our only debt is our $280K mortgage on a home worth about $500K. We have about $250K in 401Ks and my government TSP combined. My wife is home with the kids so money's tight now. I want to get the most out of what money we have. Should I put some money in safe investments until the whole subprime thing is over? Is a financial adviser necessary for someone like me, who is middle class and doesn't have tons saved already?

Jason S. Scott: It is tempting to get a little spooked by all the sub-prime concerns. However, trying to time the market is almost impossible. Figuring out the right time to move your money to "conservative" and back again to "aggressive" is difficult for even the most expert investors. Usually you end up with a portfolio that is either too conservative or too aggressive. For a long-term investor, a balanced portfolio of stocks, bonds and cash generally does a good job of balancing short-term risks and long-term return.

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Annapolis: I was sold a variable annuity by a financial planner who I came to realize was more interested in getting large commissions than helping me devise a good retirement plan.

After several years, I no longer owe surrender charges and want to take the money out to put into an IRA instead -- I'm not 59.5 years old yet so I know there's a 10 percent tax penalty. Is that penalty on the entire amount in the annuity, or only on the profit the investments have made?

Jason S. Scott: For variable annuities, you generally make after-tax contributions and the earnings are tax deferred. As such, only the earnings should be subject to the 10 percent early withdrawal penalty.

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Martha M. Hamilton: That's all we have time for today. Thanks for all the good questions (and followup suggestions to other readers) and special thanks to Jason Scott for lending his expertise.

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