Washington Post columnist Martha M. Hamilton was online Tuesday, Jan. 15 at Noon ET to answer questions about making smart financial decisions while preparing for retirement.

She was joined by Anythony Webb, research economist at the Center for Retirement Research at Boston College.

To read past Financial Futures columns, click here.

The transcript follows.

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Martha M. Hamilton: Hello, and welcome. Sorry for the late start. Here we go.

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Crofton, Ky.: I am 64 and I am still working, how long can I delay drawing my social security. I now draw a pension of $3800 a month, which meets my needs.

Anthony Webb: You can postpone claiming until age 70. An individual currently aged 62 who postponed claiming until age 70 would increase his retired worker benefit by 76 percent.

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Reston, Va.: I haven't read anything specifically about the anticipated cost of living, which has grown exponentially over the last decades. What part do you think this will play in our financial planning?

Anthony Webb: You are right to be concerned. Even at a low 2.5% a year inflation rate a married couple aged 60 can expect to live to see prices double. One very effective way of protecting oneself against inflation is to postpone claiming Social Security. The benefits are indexed to inflation and individuals that postpone claiming, for example, from age 62-66 increase their inflation -adjusted monthly benefits by one-third.

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Alexandria, Va.: Housing/mortgage question: My husband and I, late 50's, retired (me with a gov't pension), own two homes. Our main house has a small remaining mortgage at 5.25 percent. We're not paying extra on that one now; we've already paid it down enough that most of our payment is going to principal. Our second home (a vacation home), has a sizable mortgage, an ARM currently also at 5.25 percent, but due to re-adjust in 2 years. We're paying that off as if it were a 15 year mortgage, with large extra payments each month.

Does that seem like a wise place to put our money? At least it's a guaranteed return of 5.25 percent, which seems like a better result than either the stock market or guaranteed bonds would give us right now. Are we doing the right thing there? (If it makes a difference - we don't have any kids, so no one is counting on us for a large inheritance. But no one will be around to help us out financially, either, in our elderly years.)

Anthony Webb: There are really two separate issues here. The first is whether you should switch from your adjustable rate mortgage into a fixed rate mortgage. Even though the currrent rate on 15 or 30-year fixed mortgages may be higher than 5.25 percent, you have the peace of mind of knowing that the payments will not increase. Whether it is worth refinancing will depend on the terms on which you can obtain a new loan, the reset provisions of your existing loan and how much you value that peace of mind.

The second issue is whether you should concentrate on repaying your mortgage debt or accumulating financial assets. There is no right answer to this question. If you choose not to pay down your mortgage, you are in effect borrowing at a tax-deductible [assuming you are itemizing] 5.25 percent in the hope of earning a higher return in the financial markets. You will probably achieve that higher return, particularly if you are investing through IRAs and 401(k)s, but the strategy is not risk free.

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Fairfax, Va.: It sounds cold, but the government should not get involved in the sub-prime debacle. Folks might lose their homes, but why should the government get involved? Folks made poor financial decisions, and the chips should fall where they may. Yes, there will be foreclosures, and values will drop for all of us. What's wrong with that? Maybe houses will become affordable. What's the down-side to government NOT getting involved that I'm not seeing?

Martha M. Hamilton: There certainly were people who made bad financial decisions, but there were also people who were systematically misled into bad decisions. If some borrowers can be helped to get into more reasonable financing arrangements that will prevent foreclosure, I don't see a down side to that.

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Washington, D.C.: I've got my Roth IRA in a target retirement mutual fund and have been holding off on sending in contributions because of worry over the market. So I sent in a conservative amount on Monday. And today the market is heading south. Should I continue to hold my money (I put it into a money market account instead) right up to April 15? Or?

Anthony Webb: Anybody who tells you he knows which way the market is heading is a liar. I will give you the answer to this question after April 15! If you are comfortable with the risk of loss, I would put the money in now. If you are not, then maybe you should consider more conservative investments.

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Woodbridge, Va.: How do I start setting up a portfolio? My husband and I have an IRA, we have a retirement savings through our jobs, but I'm not feeling comfortable with that. A financial specialist at our bank said he could help, but I'm not sure how to begin. Do we do stocks? Mutual funds? How do you diversify? etc. I'm feeling very naive and a bit embarrassed about my lack of knowledge. We do save for our son's college (he has $2400 in his acct - 6 mth old), but I know it's not enough. Also, I'm 34 so that really adds to the embarrassment.

How should we begin?

Anthony Webb: Don't be embarrassed! Many experts recommend that younger households should invest more heavily in stocks, reblancing in favor in bonds as they age. And everyone should, of course, hold a diversified portfolio. If you want to leave all of this to the experts, there is a lot to be said for investing in a life-cycle fund in which portfolio allocation between bonds and stocks is gradually adjusted in accordance with the above principles. Most major financial services companies offer such funds.

Martha M. Hamilton: Also, before you pay someone to help you, make sure that you know how they are going to be compensated for their help. If it is through commissions, you probably want to look for help elsewhere. Both the SEC and an organization called FINRA have good investor education materials on their websites. www.sec.gov, and www.finra.org.

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Alexandria, Va.: So, with the stock market and the housing markets both in a downward trend, where's the best place to put your money these days? Personally, I've got enough in CDs and money market funds to get me through the next 2 1/2 years, but after that I need to start cashing in some of my mutual funds. Should I just hang on for the ride and watch that part of my portfolio decline right now, and hope that it will be up again when I need it?

Martha M. Hamilton: Just as the good times never last in the markets, neither do the bad times. If you don't have to cash out now, I'd advise staying in. But I'll defer to Anthony.

Anthony Webb: I certainly wouldn't sell now if what you are trying to do is to time the market. Nobody knows which way it heading. If you really can't stomach the risk of loss then maybe you have to think more generally about rebalancing your entire portfolio in favor of less risky assets.

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Wash, DC: When do I start buying shares in Citigroup for my retirement portfolio?

Martha M. Hamilton: You may already own it if you own shares in a major mutual fund. It's always interesting to look at the top holdings of the mutual funds in which you're invested.

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Arlington, Va.: Another mortgage question. I'm 5 years into a 30 year fixed at 5.78. The loan amount is roughly 40 percent of the value of the house. I noticed that 15 year fixed are under 5 percent now. I could afford the payment - should I refinance to a 15 year fixed? Or something else you recommend? I plan on staying forever.

Anthony Webb:15 year mortgages almost invariably carry a lower interest rate than 30 year mortgages. You need to consider the costs of refinancing and also what else you could do with the additional payments--if you are not already maxing out your IRA and 401(k) contributions you could maybe increase your contributions to those accounts. Or you could simply make increased payments on your existing mortgage. I can't give you a definitive answer--it all depends on the refinancing costs and your tolerance for risk.

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Fort Worth, Tex.: What percentage of my mutual funds can I safely withdraw at retirement and not deplete it?

Anthony Webb: The number widely quoted by financial planners is 4 percent. You can greatly decrease the risk of depleting your wealth by adjusting your withdrawal rate in line with market fluctuations , cutting back if the market tanks.

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Arlington, Va.: The markets are so crazy these days, seems like every time I check my balance on my IRA I've lost money. I'm in this for the long haul--at least 20 more years. I've reallocated recently and am happy with my current diversification, I also contribute the same amount to the same funds every paycheck regardless of market conditions. So I just sit tight and try to wait this current madness out right?

Martha M. Hamilton: I'll tell you the same thing I tell my daughter: you haven't lost money unless you sell now. It's just paper. Resist the temptation to take those frequent looks at your balances for the time being.

Anthony Webb: Don't try to time the market. What people often do is to pile into equities at market peaks and then switch into money market accounts when the market has declined. If you are happy with your current investment allocation, leave well alone, and stop looking at your fund prices.

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New Investor Here, DC: Martha, My New Year's resolution was to finally start contributing to my employer's 401K plan. I've worked at my company for 3 years and I'm 25. My question is, I have no idea what kind of plan I should pick. I make 53K and have no dependents. I am looking at a "all in one" retirement fund of stocks and bonds for a target retirement date of 2045, high risk now, gets conservative as I get close to my retirement date. I feel like this makes sense, but should I really be investing in only "all in one" plan or is that too risky?

I have over 10 options to choose from that include a money market fund, international equity fund, US equity completion fund, S&P 500 select fund S&P Index fund,Bond funds, an Active allocation fun, and my company's stock fund. I look at these and I'm completely lost. Are there any non biased websites where I can read about my different investment option in plain English? Thanks.

Martha M. Hamilton: Target date funds are relatively new but research so far has shown that they generally are a better mix of investments than individuals put together left to their own devices. And why wouldn't they be, since they're designed by people who work in the field fulltime? But it's important to remember that target date funds don't guarantee that you'll have enough income in retirement. You've done well to make that New Year's resolution and get started early so your money has a long time to work for you.

Anthony Webb: One important thing to remember is that a target date fund is a substitute for ALL the other investment options. If you combine an investment in a target date fund with investments in other funds, for example, the international equity fund, you won't have a balanced portfolio and will defeat the objective of investing in the target date fund.

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Charlottesville, Va.: I liked your idea about Roth IRAs for our children. Is there a minimum age at which they can have one? Thanks.

Martha M. Hamilton: I don't think there is a minimum age, but your child has to have earned income to qualify to open a Roth and can't contribute more than he or she earns.

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Monmouth, Ore.: I am about five years from retirement. I will get some pension but most of my eggs are in various baskets: regular IRA, Roth IRA, deferred comp, and various taxable Vanguard funds. I am aware of general asset allocation and am probably in the accepted ballpark. My question is, following that asset allocation, should I do it for each "basket" or overall. For example, should my bond funds be in taxable, tax deferred, or tax exempt? Does it make any difference as long as I have a mix of foreign and domestic equities, bond funds, and cash? Thanks.

Anthony Webb: What you are talking about is "asset location," the idea that you should have highly taxed investments, such as bonds and REITS in your tax-deferred acount and more lightly taxed investments in your taxable account. This is certainly something that you should pay some attention to, although not at the cost of paying substantial amounts of capital gains tax on asset sales needed to achieve the desired rebalancing.

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Arlington, Va.: What did Congress do (if anything) to limit the number of people who will have to pay the Alternative Minimum Tax (AMT) this year?

Martha M. Hamilton: Here's what my colleague Jeff Birnbaum wrote on Dec. 20:

Congress gave final approval yesterday to a bill that would protect about 20 million households from a tax increase caused by the alternative minimum tax, but the legislation passed so late in the year that 15 million Americans will probably have to wait longer than usual to get their refunds in 2008.

The House voted 352 to 64 to prevent middle- and upper-middle-income taxpayers from being hit by the AMT, which was designed in 1969 to target only the very rich. President Bush was expected to quickly sign the measure.

The Internal Revenue Service had urged lawmakers to act sooner, warning that the longer they waited to repair, or "patch," the AMT, the more disruption taxpayers would encounter when they filed their 2007 tax returns. The rules governing the AMT affect not only people who are forced to pay the levy but also almost all taxpayers who itemize deductions.

The IRS has said it needs seven weeks from the patch's enactment to adjust its computers to the change. Given the lag time, as many as 15.5 million tax refunds totaling $39 billion will be delayed next year, the IRS's oversight board has estimated. In other words, 11 percent of 140 million filers will probably have to wait a little longer to get their money back from the IRS.

"The filing season usually starts the second week in January," said William R. Fleming of PricewaterhouseCoopers, an accounting firm. But the delay in passing the patch, he said, "could cause a delay in early filing by as long as a month and a delay in getting refunds by the same period of time."

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Alexandria, Va.: So, if I had 10 - 12 times my salary, so that would be 1.4 million I could retire? I am 43 right now, how would that work? Would I live off of a return on that money, say 10 percent? Wouldn't taxes eat a lot of that away, it would be short term gains, right? I am not sure how I could work that 10 - 12 times equation to enable me to get out of the rat race.

Martha M. Hamilton: I think they were suggesting that 10 to 12 times final earnings was the right target for those retiring at normal retirement age. I don't think the same number would work if you tack another 20 years onto retirement. If the money is in tax-deferred accounts, you'd actually be paying ordinary income tax on your withdrawals, and, at your age, a penalty, too.

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Accokeek, Md.: For the Ft Worth Tex withdrawal rate question... go here.

Martha M. Hamilton: Thanks for passing that along.

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Roth IRA: Is there a particular company that you'd recommend to your daughter for staring her Roth IRA? I'm looking to start and contribute to one this year. thanks!

Martha M. Hamilton: I suggested that she take a look at Vanguard because of their generally low fees and because I understand that they have a socially conscious mutual fund which is important to her. Probably the best advice is to shop around. FINRA, formerly the NASD, has a mutual fund analyzer that can be helpful:

http://www.finra.org/InvestorInformation/InvestmentChoices/MutualFunds/index.htm

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Pittsburgh, Pa.: Hi, My wife and I live in Pittsburgh and are looking to buy a house. We have outstanding college loans to pay and have a 2-month-old baby girl. We were pre-qualified for $100,000 loan for a house. We currently pay $900.00/month for our Apartment rent. Do you think we should first pay off our debt before buying a house? Also, I understand the standard advice is that one's monthly mortgage payment should be 60 percent of their monthly salary. Is this 60 percent of your net pay or gross monthly pay? Also should we consider the monthly mortgage payment before accounting for the tax refund on the interest or after? Thanks

Anthony Webb:60 percent of either net or gross pay sounds rather high. What you need to do is to make a budget and find out how affordable your mortgage would be. Don't forget about property taxes, insurance, maintenance, and all the other fun stuff that comes with homeownership! Include your college loans in your budget--that will help you decide whether you need to repay them before embarking on homeownership.

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Winchester, Va.: Hi Martha. My father "retired" a year ago upon turning 62 and began drawing social security benefits. He did so due to health issues and wanting to spend more time with his family. It ended up being not enough for him to live off of (along with a small pension), so he took on a part time job. Then he earned more than what social security allowed for him (although it was still barely enough to live on), so now he is contemplating coming out of retirement. It will be a real hardship to have to pay back the social security retirement he has already received in the past year. Does he have any other options?

Martha M. Hamilton: I'm not aware of any other options. The good news is, at least he doesn't have to pay interest on the money he earned. However, he should check with the local Social Security office to see if there are options I'm not aware of.

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Martha M. Hamilton: Thanks for joining us today with your very good questions. Join me again in two weeks for the next chat, and keep saving for retireent. Many thanks to Anthony Webb from the Center for Retirement Research for contributing his expertise.

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