Financial Futures

Martha M. Hamilton
Washington Post Columnist
Tuesday, February 12, 2008 12:00 PM

Washington Post columnist Martha M. Hamilton was online Tuesday, Feb. 12 at noon ET to answer questions about making smart financial decisions while preparing for retirement.

She was joined by Sri Reddy, head of retirement income strategies at ING U.S. Wealth Management.

The transcript follows. To read past Financial Futures columns, click here.

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Martha M. Hamilton: Hello, and welcome to our online chat. Today we're fortunate to have Sri Reddy, head of retirement income strategies for ING U.S. Wealth Management.Sri is also a registered representative of ING Financial Advisers, LLC. Let us hear from you with your questions about financial planning for retirement!

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Philadelphia, Pa.: My husband and I have decided to follow your advice and seek the guidance of a financial advisor. We are approximately four to five years from retirement. We are at the point where we are signing papers with a firm and for now they will manage our IRAs and 401(k)s, in the neighborhood of $1.3M. A few years ago we decided that my husband would switch his defined benefit pension plan into a cash balance plan ($750,000 now). He has said a few times that when it comes time to claim this money he thinks we should place it with a different money manager in the name of diversification. I believe that it would be disadvantageous to have different people managing our funds since this could cause us difficulty. I think that one firm should have the "big picture". Do you have any advice on this? He also keeps bringing up annuities but I think that this defeats the purpose of having taken the cash balance option. What are your thoughts on this? Any other thoughts as to how our money should be managed? Many thanks. Sorry for the length of the question.

Martha M. Hamilton: I'm with you on this issue. Diversification is important in terms of your holdings, but if you are going to select a professional to advise you on handling your money, you want to find the right person and stick with him or her. I'm assuming that you have found a fee-for-services adviser. On the annuity question, you're right that it's a version of what your husband opted out of, but it might still be useful to have an annuity as part of your retirement finances. You and your husband should raise this question with your adviser.

Sri Reddy: The annuities that are available today to individual investors are significantly different than those versions that may be an option through defined benefit plans - you may want to explore the current features of annuities to see if they can help create guaranteed income for a portion of your retirement nest egg.

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Richmond, Va.: I'm a public school teacher. I heard mumblings about some sort of new regulations that will affect my retirement benefits, but I am unclear as to exactly how, or what's going on. Another teacher I work with said his adviser mentioned something to him about it. Can you shed some light on this? I have not really looked at my plan in a long time so I am not sure what he means.

Sri Reddy: What you are hearing about refers to new IRS regulations governing 403(b) tax deferred annuity programs that the IRS issued last summer. Starting in 2009, the IRS will require your school district to specifically name the providers with which you can invest your employee contributions and to authorize your loan, hardship and other disbursements from the 403(b) program, in order to make sure that the request complies with the new IRS rules.

Before these new regulations were released, there was no required process in place for your school district to identify providers in your 403(b) program. Your school district is now required to play a increased role in the 403 (b) plans in which its employees invest in order for these benefits to continue to have favorable tax advantages.

While the new regulatory environment always brings challenges, we believe this also is an opportunity for participants to seek investment providers who understand the needs of and are committed to serving educators.

If you have not looked at your plan recently, you might want to take the time to do that, just to get a better understanding of your investment options and how you're allocated.

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Delaware: If I get a tax rebate, should I spend it or invest it?

Sri Reddy: Hands down you should invest it if you can afford to - the only exception to this would be if you have high interest debt - consider paying this first to avoid paying a higher rate of interest than you may be able to earn on a tax adjusted basis.

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Rehobeth Beach, Del.: Where's the best place to get income from stocks? I am looking for some income in this market, but I'm not much of a bond guy.

Sri Reddy: Without getting into specific investments, equity investors might want to consider stocks that pay a dividend. Opportunities exist in the equities of many different industries including energy and consumer products sectors.

They also might want to consider closed ended income funds or even preferred stock funds. You may find some that are trading at a discount relative to NAV.

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401(K) Tip: I just realized that my employer was taking MY 401(K) company match and putting it directly into company stock. I did not want this. I initially thought MY company match would go into my asset selection.

Fortunately, I called and got it moved the same day. Just a word of caution because by having my company match put into company stock my asset allocation became out of whack and I was losing a lot of money.

Martha M. Hamilton: You were smart to pay attention and readjust your asset allocation. At least once a year you should look at your account to see if the balance among your investments has shifted. For instance, after a good run in the stock market, you might have more of your investments than you intended in stocks and less than you intended in bonds.

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New York City: Where are some good places to park cash now?

Sri Reddy: In addition to the usual suspects of short term bond funds and money market accounts, this is good time to evaluate various alternative options including short term corporate notes, bank CD's (don't forget to shop online banks) and if your time Horizon permits, even U.S. Treasury I-Bonds, which will help keep your money in pace with inflation plus a fixed rate of return.

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Rockville, Md.: My wife and I are both retiring in the next few years. Combined have about $700K to live on, and our mortgage is nearly paid off. That sounds like plenty to me, but my wife is not so sure. She worries about the economy going into a recession (watches too much news) and whether the money we have built up today will look like a whole lot less by the time we to get retirement, due to the stock market. Should I be worried?

Martha M. Hamilton: By the time you retire, the recession or slowdown probably will have come and gone. You might reassure your wife that in the last three recessions, there have been substantial rebounds from the bottom of the bear market, on the order of 30 to 50 percent. I assume that you and your wife are continuing to invest in your retirement accounts, so they will continue to grow for awhile more. This past Sunday's column was on the subject of how to protect yourself from future bear markets and some steps to take a few years before you retire.

Protecting Your Nest Egg From a Bear, Post ( Feb. 10, 2008)

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Arlington, Va.: With real estate prices tanking and interest rates lowering along with them, I have been thinking about what I should do about my mortgage. I have a 5.75% rate on a 30-year fixed loan. Should I pay it down some more and refinance, or just keep the money invested? If rates keep going lower, I would just have to refinance again anyway. I have no real debt other than my home.

Sri Reddy: The question you have to ask yourself is: Is the rate of return you can potentially earn on your investments greater than the interest you are paying on your mortgage? If the answer is yes, then you might want to consider keeping the assets invested instead of paying your mortgage. If not, and you are still considering paying down your mortgage, you have one more question you need to ask yourself: Is there a chance I might actually need the money for an emergency or some other expense in the future? If the answer is yes, you may not want to pay down the mortgage, and keep some money in some sort of a rainy day fund. Also, be sure to factor in the tax application of mortgage interest after retirement, which may be different than pre-retirement.

Martha M. Hamilton: Here's a column I did that talks about how to decide whether to pay down a mortgage:

Homeowners' Get-Out-of-Debt Instinct

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Rockville, Md.: An early submission: If I recall, you have written about your own experience in deciding what to do with a lump sum retirement payment, and I may be facing a similar situation. It looks like these are the choices: 1) Roll it into a standard IRA tax-free; 2)Roll it into a Roth IRA on an after-tax basis; 3) Roll it into a fixed-monthly-payment annuity; or 4) Take the cash and use what's left after taxes to pay off debts and invest for myself. I realize that there is no one right answer for everybody. Could you suggest a practical decision-making process and the factors to consider?

Martha M. Hamilton: When I took my lump sum, I put most of it into a fixed monthly payment annuity. But I was already highly annuitized (receiving monthly payments from a tradition pension), so it might not have been the best decision for me. For someone who doesn't have that guaranteed lifetime income, however, it would be another story. One thing to consider is that, if you are a woman, you'll do better taking an annuity from the distribution if it's part of an IRS qualified pension plan, because they are gender neutral. If you're a man, you'd do better to wait and buy it outside the plan because they pay based on expeced longevity, so men get higher payments.

Sri Reddy: Just a couple of things to note - rolling into a traditional IRA isn't tax-free, but tax-deferred, which means you may have to pay tax in the future when you withdraw the monies. Also, as you think about your retirement payment, you my want to group you expenses into buckets of necessary and discretionary - this will give you a better idea of how much guaranteed income you may need.

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Northeast Washington, D.C.: My husband and I are in our late 30s and I've been trying to determine if we should purchase some longterm care insurance now while we're young and relatively healthy. Is this a good strategy?

Sri Reddy: With long term care insurance, the earlier you purchase it, the more affordable it is - if you can afford it, it is something you should consider buying. Kudos to you for starting the planning process now!

Martha M. Hamilton: However, not everyone needs it. For instance, lower income families will probably be better off turning to Medicaid and higher income families may be better off essentially self insuring. Here's a column I did on the subject: Should You Secure Your Health Care?

AND some shopping tips: Looking Into The Long Term

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Gaithersburg, Md.: I still one have one year left on my ARM's five-year intro rate. It's so good I'd rather not lose it.

Is there anything I can do to pre-lock a new mortgage starting a year from now, or at least take out some kind of hedge that would move in the same direction as mortgage rates between now and then?

Sri Reddy: Consider reaching out to your current lender and negotiating either an extension of your rate (if it is in line with market rates) or locking in a new fixed or adjustable rate term now. Many lenders may be willing to work will good customers rather than having to compete to win them back at the end of the term.

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Judy, Conn.: I'm confused. RE: Philadelphia's diversfication question. I thought diversification meant having investments spread among different asset classes, not spread among different managers?

Martha M. Hamilton: You are exactly right. I thought I had said that in my answer.

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ING accounts: My husband and I have been considering opening an ING savings acct based on all the raves we've heard about them from our friends. I'm reluctant to put my money in a non-brick and mortar bank tho. Convince me.

Martha M. Hamilton: I put some savings in an online money market account, and I'm very happy with it. In addition to ING, Emigrant and Citibank and possibly some others offer this option. Check ad see who has the best rates. They are FDIC insured, just as in bricks and mortar banks.

Sri Reddy: Although ING's online bank, ING Direct, doesn't have brick and mortar locations, it is important to know that ING itself is one of the world's largest and oldest financial services firms offering banking, insurance, and asset management services. In fact, based on deposits, ING Direct is one of the largest banks in the United States. The lack of a brick and mortar infrastructure in this case allows us to pay the attractive rates on savings accounts and CD's, which has made us a popular option and alternative to tradional banks.

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North Bethesda, Md.: I'm thinking of increasing my 401(k) contribution - even with volatile markets - I figure, I'm young enough (33) to ride out anything that may be going on for a few years. My question is this - is there a good formula out there so I can figure out how much $$ pre-taxes I should have my employer take out - while not seeing a dramatic decrease in my after-tax take-home pay?

Sri Reddy: Generally speaking you need to multiply your contribution amount times 1- federal tax rate - state tax rate. If you are in a 25% marginal Federal tax bracket and a 5% marginal state bracket, for every dollar you contribute you can estimate a reduction of 70 cents in take home pay. One strategy though is to make sure you are taking advantage of your employer's contribution match to the full extent.

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Withdrawing from IRA: I know this is a bad plan, but right now I have more than $50K in there and I need to take some money out and pay some debt. How much is this going to hurt me at tax time next year?

Martha M. Hamilton: Here are a couple of things to think abaout. Is taking the money going to push you into a higher tax bracket? Also, if you are seeking to pay off high interest debt, a home equity line of credit might allow you to reduce your debt service costs and increase your tax deduction. Those rates are headed down right now.

Sri Reddy: Consult with your tax advisor, but if you are below the age of 59 1/2, you may also pay a tax penalty of 10% over the tax on the amount taken out.

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Washington D.C.: I have a question about a savings. I have $4,000 in a taxable money market account. Would I be better off putting it into a tax-exempt money market? I put about a $100/month into this account and it's for emergencies only.

Sri Reddy: The answer to this depends on your tax situation and difference in yield between the taxable account and the tax-exempt. For many investors, at a marginal total tax rate of 25 or 30%, the taxable money market may still offer a better after tax yield. Be sure to consult with your tax advisor and review the available investment options.

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Bethesda, Md.: I just started a new job and they automatically put me in a target date fund for my 401(k), but I just switched it out to a stable value fund last week. I check my balances every day - both the 401(k) at my old job, and the one at my new job- and the market drops are scaring me a little. I don't like seeing a huge chunk of my money disappear in a day. Then again, when the market goes back up I see my balances come back up, and I feel a little better. Still, I am not so sure I want to subject my new 401(k) contributions to the market when that's largely where my old 401(k) is invested. Did I do the right thing? I'm 40.

Sri Reddy: Ultimately, you need to choose your investments and asset allocation in line with your risk threshold - be comfortable with what you are investing in. This being said, historically, equity markets have outperformed other investment options over a long investment horizon. Your investment horizon is not only the 25 years to retirement (assuming a retirement age of 65), but also the 25 years you can expect to be in retirement.

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Arlington, Va.: My adviser talks a lot about creating a bond ladder. It sounds too complicated and like too much work for me to keep track of. Can't I just buy a bond mutual fund and call it a day?

Martha M. Hamilton: A bond ladder or a CD ladder is a series of investment that mature at different dates. That gives you a flow of money coming available once the first maturity date is past. One difference between Treasury bonds and a bond mutual fund is that the mutual fund is not guaranteed.

Sri Reddy: With a bond or CD ladder, you have control over the investment decisions, including mix of terms as well as income creation suited to your personal needs. You can very the duration and reinvestment risk exposure based on your individual comfort level. There are many tools through banks and brokerage firms that have simplified the process of building ladders.

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Washington, D.C.: Do you think Financial Engines is a good tool to use to keep track of your retirement portfolio? I have free access through Vanguard and am thinking of using it to help me keep it diversified.

Martha M. Hamilton: It's very well regarded.

Sri Reddy: Using any tool that will help you stay on track of your retirement goals is a positive thing.

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Plainville, Conn.: Hi Martha. My understanding is that the immediate income annuity, unlike variable annuity has no fees. You give a sum to the ins. co based on your age and the amount you give. You get a monthly payment, in a sense creating your own pension. The older you are because of mortality the better the payout. Am I on the correct thought process on this? Buying one might make sense to me.

Sri Reddy: Generally speaking, there are two types of immediate annuities - fixed payout annuities and variable payout annuities. With variable payout annuities, you still have control over the investment options and may have multiple variable investments to choose from. Although you may have longevity protection, your income may vary, up or down, from period to period. For fixed payout annuities, an insurance company will quote you your payout rate based on gender, age and term of payout - this rate does change with market interest rates and will change from time to time, but once you purchase a contract is guaranteed to you for the term of the contract. For both types of annuities, be sure to read the prospectus and/or the product contract to understand features, fees and benefits of the product.

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Washington, D.C.: Do you think it's a better idea to max out my contribution to my employer's IRA or to put some of that money in my own Roth IRA. I think my taxes are going to be much lower this year compared with other years if that makes a difference.

Martha M. Hamilton: You want to make sure you take full advantage of any employer match. Beyond that, if you are in a low tax year, contributing to a Roth might make some sense so that you have more tax diversity in retirement. For those who aren't familiar with them, on Roth's you pay taxes on the money you contribute but then draw on your funds tax-free in retirement.

Sri Reddy: Also consider if you expect that your current tax rate, albeit lower than prior years, is lower than what you expect your retirement tax rate to be. If you can afford it, consider contributing the max allowed to both vehicles.

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Martha M. Hamilton: As usual, we've run out of time before we ran out of questions. If we didn't get to you today, I hope you'll try again in two weeks. If you live in the Washington area, remember to take the opportunity to vote today. Many thanks to Sri Reddy from ING for helping today.

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