Financial Futures

Martha M. Hamilton
Washington Post Columnist
Tuesday, October 30, 2007 12:00 PM

Washington Post columnist Martha M. Hamilton was online Tuesday, Oct. 30 at Noon ET to answer questions about making smart financial decisions while preparing for retirement.

She was joined by Ellen Rinaldi, a principal at Vanguard who leads the Investment Counseling and Research group, which provides portfolio recommendations as well as commentary and investment counseling for Vanguard clients.

To read past Financial Futures columns, click here.

A transcript follows.

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Martha M. Hamilton: Good afternoon, and welcome to our online chat. We're delighted today to have Ellen Rinaldi as our guest. Ellen leads leads Vanguard's Investment Counseling and Research Group. She also has Tod Feder who is a senior financial planner with her. So we have lots of expertise today. Let's get started!

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Allentown, N.J.: Hi, I left a company a few years ago and took my 401k funds and rolled them into an IRA. I plan to start working full time again and would like to roll the IRA funds back into a 401k with the new company. Is this allowable?

Ellen Rinaldi: Yes, this is allowable as long as your new employer provides for it.

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Cambridge, Mass.: I am 35, in accounting (not an accountant, though)with a college degree, but just started getting back on my feet financially after years of finding a more decent pay and job field. I haven't that much in retirement, but I do have plans to save more. My question is, with about 45k in college debt, one at just above $4900.00 at 7.0 percent and one at 39+k at 4.4 percent how do I recover now while putting away enough for a decent retirement? I hope this is a valid question. Thank you, Cheryl

Martha M. Hamilton: My inexpert instinct is that I would pay off the higher interest college debt first, and then divide my efforts between repaying the rest of the debt and saving for retirement. But, since we have some experts with us, let's see what they have to say.

Ellen Rinaldi: We definitely concur! If you are in an employer plan (401(k)) try to take advantage of at least the employer match to help boost your retirement savings.

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Stamford, Conn.: How do you balance the need for income with the desire for capital appreciation? Should a retiree buy a closed end fund that pays a good dividend (e.g. EEF, ZTR, etc) but fluctuates in value?

Ellen Rinaldi: We'd say first, look asset allocation, are you aggressive? moderate? Does the particular investment fit within that allocation? Another consideration is how you want to spend from your portfolio - many times people try to boost income with dividends but are shortchanging themselves on growth in the portfolio for the long-term - here balance between the two is key.

Martha M. Hamilton: Here's a column I wrote about how focusing on income might shortchange your prospects for growth.

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Portage, Mich.: I'd like to hear some discussion on the appropriate asset allocation for retirees to maximize income over 25 to 30 years. I'm comfortable with a 60 percent stock and 40 percent bond split using mutual funds, but am wondering about the specific kinds of funds to use. Thanks for your response.

Ellen Rinaldi: This is a great question! When you look at Vanguard's Target Retirement funds the retirement asset allocation mix after age 60 is about 50/50 so you are not that far off an allocation for the general public and this reflects your risk tolerance. Wr'd say look for 12% in internathional, 34-35% large cap, 14% mid/small cap and bond exposure in intermediate term maturity.

Martha M. Hamilton: You're right. As long as retirements can be nowadays, you don't want to sweep everything into very low return investments on the day you retire.

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Washington, D.C.: I just graduated from college a few months ago and am working full time. I'm not making very much money, but I am managing to save a little ($100-$200) each month. Where should I put these savings? They aren't earning -any- interest sitting in my checking account; it seems like there must be a smarter way to manage (and grow?) my savings, even if they aren't a big lump sum, but are instead accumulating slowly and incrementally.

Ellen Rinaldi: Congratulations you are saving!!! First, if there is an employer plan like a 401(k) available start saving there first, the employer match, if any is very valuable and you gain taxdeferred savings. Next look to IRA's either Roth or traditional.

Martha M. Hamilton: A Roth is a good choice for someone at the beginning of her worklife. Chances are you'll be paying higher taxes as your career progresses. That argues for paying taxes now (as you do in a Roth) and allowing the earnings to accumulate tax-free for a very long time.

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Reno, Nev.: I've read many articles in financial publications on saving for retirement. Now that I'm retired I find very little info in any publication on how to live off of you nest egg so you don't run out of money before you run out.

Ellen Rinaldi: There are real challenges in spending in retirement but there are a few standard rules. generally you should be withdrawing no more than 4%/year adjusted for inflation.

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Little River, S.C.: Name two or three of your most respected advisers who have also published books or blogs to help your audience members who are new to investing. Thanks

Martha M. Hamilton: There are a lot of really bad books out there. I think Ed Slott's Your Complete REtirement Planning Road Map and his Parlay Your IRA Into a Family Fortune are pretty good. Zvi Bodie, who is very thoughtful,wrote Worry-Free Investing which argues for investing in inflation-protected bonds. Ellen, any favorites of yours?

Ellen Rinaldi: One of my favorites is Bert Malkiel's Random Walk.

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DC: I am 31, a government worker, and am currently putting the max into my TSP and the max into my Roth IRA (in Vanguard). What are good funds to invest additional savings?

Ellen Rinaldi: You now are in the realm of tax efficient investing - great for you! Here look for tax advantaged funds like index funds which give you growth with a minimum of capital gains.

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Oviedo, Fla.: My portfolio is split between mutual fund accounts at T Rowe Price, Vanguard and CDs at BOA. Explain to me why it would benefit me to consolidate these into one account, pls. Should I have a bakeoff and pick a winner or just let the three accounts ride?

Ellen Rinaldi: Consolidation simplifies your life. If you do combines asset threshholds may qualify you for additional benefits such as reduced fees, financial planning and discounted costs. Check those out - it may be worth it!

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Atlanta, Ga.: Hi there, I'm 26 years old and have about $15k in a 403b (TIAA-CREFF) from a previous job. I hadn't been as diligent as I should have in doing the research on allocations, but I've tried to spread it out among large, mid, international equities, and real estate, fixed income, money market. Anyhow, I recently changed jobs and my current employer offers a 401k (Prudential). I haven't been able to contribute to a 401k yet because i have to rack up 1000 hours of service first, but I'm eligbile to receive a 5-7 percent employer contribution after 1000 hours on the job.

Question is -- should I leave the 403b as is and not touch it? should I continue contributing to it on my own? What should I do once I have a 401k portfolio with Prudential? Should i combine the two? Should I roll over to an IRA?

Any advice/comments/suggestions would be greatly appreciated. Thanks!

Ellen Rinaldi: One thing you can't do is continue contributions to the 403(b). You can however roll that over to an IRA to give you more flexibility or to your new employer plan if it allows it. One of the advantages of the rollover is consolidation. Always pay attention to the cost of your investments. It makes a real difference over the long-term in your total asset accumulation.

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Washington, D,C.: You'd think one way to beat inflation is to buy stocks in some proven but not yet widely known technology or concept that will be big in the future. But I haven't found yet where to get information on what these might be. Have you?

Ellen Rinaldi: Classic reason why we suggest mutual funds. A key in investing is diversification to spread your risk. Trying to find that one winner stock may work, but may easily not as well.

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Little River, S.C.: Books or blogs to follow that you recommend for the beginner.

Martha M. Hamilton: I'd recommend that beginners go to Finra. Finra is the organization that used to be known as NASD. It has a Bond Learning Center and a 401(k) Learning Center and good basic info about mutual funds.

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Virginia Beach, Va.: How do I go about determining whether the spousal IRA (Traditional) I set up for my wife is eligible for conversion to a Roth IRA, and if so, how do I go about it?

Ellen Rinaldi: Roth conversion depends on income. If income jointly is below $156,000 she can convert. Remember there is a tax cost to this and you may want to check what this does to your overall current tax picture before doing it.

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Hartford, Conn.: I am currently employed in 2 different companies and am enrolled in their respective employee matched IRA. I also fund annually to a ROTH IRA account. However, all these accounts are held in different investing companies. If I do move onto another job in the future, are there any advantages to rolling all my IRA funds to one company or should I leave them with their respective companies to increase diversification?

Ellen Rinaldi: First, be very careful that are not exceeding allowable total investment in IRAs for the year. After that, diversification is generally accomplished at the investment level - not at the offering company level. Consolidation also sounds like it would simplify things for you!

Martha M. Hamilton: And possibly reduce your costs as well.

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Hartford, Conn.: What's your take on REIT index funds? Good time to buy low or will it decrease further in value?

Ellen Rinaldi: REITs are what we consider special sector funds. We reccommend no more than 10% of your total stock allocation in sector funds (or individual stocks including your company's stock, if any). Timing a purchase does not always work out the way you might want it to. Who knows when a particular segment will continue to increase or decline? We recommend setting a policy and an asset allocation and sticking to it rebalancing annually.

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Atlanta: With regards to your Sunday column and longevity - we just don't know how long we are going to be here, but we can certainly plan for it.

We can work as long as we're able (even part time, even seasonally, or temporarily, etc) - just to make a little bit of money. To supplement savings.

Also, personally (almost 40), I'll only 'retire' when I can live on the interest of my savings (in the way I want - cause let's face it, if I'm 'retired' I will have tons of time on my hands - so I'd want to travel). I don't plan on living on more than the interest, and really, the plan is to live on less than the interest. If you have $500,000 in savings, on average, you should make about $25k - $50k per year - not including any pensions and/or social security - so in good years, you'd take a little more, bad years, a little less (so save when years are good...).

washingtonpost.com: Longevity's Evil Twin: Inflation

Martha M. Hamilton: You're right about working longer. I think it makes sense for reasons both financial and personal, although some people don't have the choice.

Ellen Rinaldi: We concur. We find that many shareholder prefer to work well into what was traditionally considered retirment - often part-time, often as volunteers but also full-time if their health and interests align with opportunity.

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Thousand Oaks, Calif.: I have the majority of my retirement savings at Vanguard in Index Funds and will begin drawing on them during retirement next year. I'm comfortable with my investments but uncomfortable about the tax consequences and other unknowns of withdrawals. Where should I go for help?

Ellen Rinaldi: There is a lot of information available first on the web at Vanguard.com, including an explanation of an order of withdrawal. Also, advice is available at Vanguard through CFP's , give us a call or check the web.Anytime you are concerned about taxes it ia always good to check with your local tax advisor first.

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Virginia: Hi, I just got an ad from Schwab about a high interest (4 percent) checking account. How can this be? Even my credit union only offers 1.5 percent. Is Schwab's offer some kind of scam to get you to deposit money, then they drop the rate to the usual low?

Ellen Rinaldi: High interest rate checking accounts do exist. We reccomend you call Schwab to find out more about the offer.

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Fairfax, Va.: Can you tell me the differences between a 457(b) and a 403(b)? I come to the public sector from the world of 401k, so don't understand if one is more advantageous then another. I am 35 and have a healthy 401k balance for my age.

Ellen Rinaldi: The availability of these plans depends upon the organization you work for, but all of these plans have pretty much the same features now. That was not true 5 years ago.

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Rockville, Md.: I read that people do not like annuities and see an ad about a 500 pound gorilla who tries to discuss annuities with a person who will not respond and wonder about the reasons. What is so wrong with annuities? Not popular?

Martha M. Hamilton: I think annuities that guarantee lifetime income are useful for some retirees. But many investors don't like turning over a lot of money at once. One alternative is a new product called a longevity annuity which is lower cost because the payments don't begin until, say, 15 years after you pay the premium, instead of immediately. It's lower cost because some people won't collect on it. When it comes to equity indexed annuities, however, I think they're too hard to understand and that it's too hard to compare one to another, so I'd stay away from them, although I understand there are those who love them.

Ellen Rinaldi: We concur! There are several kinds of annuities out there and it gets cnfusing. If the objective is to make sure you have enough money to cover fixed living expenses, you could consider an immediate annuity. Vanguard reccommends using no more than 25-50% of your assets to accomplish this. There are lower cost annuities available to help with this. Removing this worry of meeting expenses is a relief to some. Not everyone is prepared to irrevocably turn over their assets however.

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Sterling, Va.: Hello,

I'm in my late 20s and I just bought a house, so the down payment took a significant chunk from my liquid assets (cash, savings, stocks, etc.). However, I didn't touch my 401K (about 22k) and am currently contributing 5 percent to it (with 5 percent employer match). What's the best way to continue to try to save money? I don't save as much anymore with the mortgage, and I'd like to have some cash on hand. Do you recommend CD's, high yield savings (i.e. ING), Roth IRA, or just plain stashing money under the mattress? - Thanks

Martha M. Hamilton: One thing you may want to consider is saving money in an emergency fund that is enough to cover at least three months' worth of expenses (some advisers recommend six months), so that you don't have to borrow if you're suddenly in a bind. You'd probably want that where it was reasonably easy to reach, such as in a higher yielding online money market account. If you can qualify for a Roth IRA, that's probably a great place to put money, too, so that you have some tax diversification. Ellen, what would you suggest?

Ellen Rinaldi: You've covered the bases. This is great advice.

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San Antonio: Hello, I am a veteran who is working towards a degree in Information Systems using my tuition assistance. My question is I have 5+ classes to take for my electives and I wanted to lean towards the financial realm (for personal financial management, investing etc.), what types of classes should I look for? Would an Economics class help or should I stay with the Financial side of things?

Ellen Rinaldi: Look for some finance courses along with basic economics.

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Hartford, Conn.: For a IRA account, is it better to fund an index fund or an actively managed fund?

Ellen Rinaldi: Great question. If the choice is only between index and active, and you already have room in your IRA for any taxable bonds you have as part your investment portfolio, then we suggest placing active in the IRA. Index will generate the least amount of tax. We are assuming you have a balance of assets elsewhere.

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Vermont: Ha, I'm making 6 percent on my checking account at a credit union. The deals are out there, just make sure you read the fine print!

Martha M. Hamilton: That's great. Alas, I haven't seen a deal like that at my credit union.

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Annandale: My financial adviser (at my credit union) doesn't think much of my strategy of using drips to purchase McDonalds and Dominion Resources stock (not a large amount $100 each a month) but I think this is a good way to diversify.

Previously I had invested each month in mutual funds and have a decent sum there in addition to my 401k.

But would it be better to not purchase individual stock (I've been doing this for about 5 years)

Ellen Rinaldi: We recommend that you hold no more than 10% of your total stock allocation in individual stocks. What stocks you pick are entirely up to you!

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Washington, Pa.: You say be careful not to withdraw more than 4 percent of retirement assets a year -- as do others. In general, where is this formula expected to lead to in terms of diminishing or depleting assets and remaining assets at the end of projected life expectancy?

Ellen Rinaldi: The formula of 4% withdrawal rate adjusted for inflation and a well diversified portfolio limits the risk of running out of money to the age of about 95. That does assume asset depletion at that point. The ending balance is dependent upon the market.

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Alexandria, Va.: Approaching 62, I've read/heard varying opinions as to whether one should start claiming social security benefits earlier or later. It seems to me that I could start receiving the funds and then invest them in better-earning vehicles than what the government is paying on the dollars were I to leave them in. (I have other income from investments so wouldn't need the SS funds right away.) What is your opinion?

Martha M. Hamilton: I lean toward waiting till later to take Social Security. In my case, it's the only inflation adjusted retirement income I'll have, so I want that cost-of-living adjustment on the biggest base possible.

Ellen Rinaldi: Social security and when to take it is a personal decision. The numbers are dependent upon the rest of your investment portfolio. The market is variable and volatile, Social Security provides and indexed pension benefit.

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MD: After the mutual fund scandal, a very successful money manager I knew suggested I split my retirement between two completely separate companies to minimize my risks. i.e. If one company goes down in flames Enron-like (or something less dramatic), only 1/2 my money goes with it. I have split my money between Fidelity and TIAA-CREF and feel comfortable with the advice and will keep it that way, but what do you think?

Martha M. Hamilton: Some of the mutual funds lost investors, as they should have, since they abused their trust. But I don't recall any of them going out of business. It's been a few years, though, so I may be wrong. I think if you're comfortable with what you're doing, stay with it.

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U Street: I am 27 years old. I have traditional IRA that was a rollover from a previous employer's 401k with about $3,500. Is it worth the time/effort to convert this to a Roth IRA and let it appreciate tax free? I'm not concerned about taking the tax hit now. Or should I just roll this into my 401k plan with my current employer that I am funding up to my employer's match?

Ellen Rinaldi: If taxes aren't a concern, consider converting this now while you can. There is no other investment vehicle we have available to us that allows you to accumulate income and dividends from investment tax free. It also will help give you tax diversification on the investments over time.

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Washington, D.C.: I have $25k in cash that I want to move to a retirement mutual fund. Considering the state of the US economy and world economy, which Vanguard funds offer the best return for retirement in 10 years? International, global, sector, or other? Thanks!

Ellen Rinaldi: Look at Vanguard's Target Retirement 2015 or 2020. There is a broad array of funds within those funds with an appropraite asset allocation 10 years away from retirement.

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Accokeek, Md.: I have a non-deductible IRA ($3K/yr)that I plan to convert to a ROTH in 2010.....is it true that I will only pay tax on the earnings accrued and not my contributions? thanks

Ellen Rinaldi: The contributions you made were after tax. Even the IRS generally doesn't tax you twice. So the tax you will owe is on the earnings.

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Naples, Fla.: Comment.

I'm retired and am mightily impressed with the number and quality of questions you're getting from young people who have begun their saving and planning. Kudos to them!

Martha M. Hamilton: I'm with you. One good thing is that many young people realize how much of their retirement depends on their own savings, so they're starting early. Some of us who are closer to retirement didn't have access to retirement savings accounts such as 401(k)s until later in our careers.

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Annandale, Va.: What is the best way for a person at retirement age to convert a portion of his or her assets into a lifetime income stream (without paying the excessive fees and commissions most annuities require)?

Ellen Rinaldi: Look for what is called a direct write immediate annuity. They are offered by Vanguard as well as several other mutual fund providers. There is less cost and additional transparency. You should dedicate no more than 25% to 50% of your assets to such a purchase. You need assets around for other reasons, emergencies, etc.

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Arlington, Va.: I know Suze Orman thinks everyone should have a revocable living trust. My husband and I have two children and I know we need a will, but if we don't have a lot of assets or a complicated estate, why do we need a revocable living trust?

Ellen Rinaldi: The purpose of such a trust is to make sure that whatever assets you have are protected for the benefit of your children. It also gives you the opportunity to express your wishes in how that money should be used for their welfare.

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Harrisburg, Pa.: Where can I invest to get about 6.00 percent or more per year minimum cash return fixed income to spend for current living expenses?

Ellen Rinaldi: You have a number of choices but few are guaranteed. You could buy an immediate annuity. You could invest in CD's but their rates can change quickly for the next purchase. Be careful in investing for income today and jeopardizing income for the future by not keeping you principal invested to keep up with inflation.

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Martha M. Hamilton: As always, thanks for so many interesting thoughtful questions, and thanks so much to Ellen Rinaldi for joining us and providing the benefit of her expertise. Remember, if you have ideas for future columns, email me at hamiltonm@washpost.com. And join me again in two weeks.

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