Financial Futures

Martha M. Hamilton
Washington Post Columnist
Tuesday, February 26, 2008; 12:00 PM

Washington Post columnist Martha M. Hamilton was online Tuesday, Feb. 26 at noon ET to answer questions about the recent Supreme Court decision affecting 401(k)s as well as making smart financial decisions while preparing for retirement.

She was joined by Daniel D. Joss, of the financial planning and investment management firm, Fox, Joss and Yankee.'

A transcript follows.


Martha M. Hamilton: Hello, and welcome to our online chat. And welcome to Daniel D. Joss of Fox, Joss &Yankee, who is adding his expertise on financial planning.


Nashville, Tenn.: I think the program that allows you to withdraw from your 401(k) via an ATM machine is just awful and should be banned by law.

Daniel D. Joss: Nashville, I tend to agree; 401(k) accounts are designed to support retirement. However, there are emergencies that require the use of funds and the easier it is to access those funds during times of emergency, the better.


Washington, D.C.: Do you know if it's right that you take a penalty if you withdraw money from a 401(k) before 59 1/2? How much is it and would that apply to the federal TSPs?

Martha M. Hamilton: The penalty for early withdrawals from 401(k) plas is 10 percent of the amount distributed, as it is for the TSP, although both have some provisions for hardship withdrawals.

Daniel D. Joss:401(k) balances should be viewed for use during retirement. There are usually other sources of money available for emergencies that do not have adverse tax consequences. Begin to set aside cash early and often for emergencies and opportunities.


Down South: I really take issue with you constantly pointing out to people that companies don't provide pensions anymore. We are all well aware of that - the world is different. Frankly it's not up to any company to provide a 'secure' retirement to anyone (let alone the whole idea of 'retirement' being a very new concept). It is up to a company to provide pay for a specified job. That is all.

Companies used to provide more, that's great - but they don't now. Why shouldn't it be up to individuals to be responsible for themselves? To be responsible for their own retirement, if they so choose, to be responsible for themselves financially, etc.? I don't understand.

Martha M. Hamilton: Companies that provided traditional pensions took that cost into consideration when setting pay and other benefits. It was never a gift: it was part of total compensation. Traditional pensions didn't require individuals to be as well-versed in investment choices as defined contribution pensions do, and they also prevented retirees from lasting longer than their retirement incomes. I don't see any harm in pointing out those differences.

Daniel D. Joss: Early retirement, or any retirement for that matter, has become almost a right these past 50 years. The percentage of workers over 65 declined from over 60% in 1920 to under 18% in 2000. If you plan well, start investing early and have good fortune, you may be able to stop working and live well financially independent. It is also a blessing if you have good health in your old age and have the ability to work.


401(k): I've always believed it's best to put aside more of my money in 401(k)s because I can put more money in those accounts (up to $15K annually), as opposed to IRAs (up to $5k annually). However, I often read/hear advisers telling people to invest enough in 401(k) to get the match, then max out your IRA. My income is high enough that I don't get a tax deduction for my IRA contributions, which are taxable upon withdrawal, but I can reduce my taxable income NOW by contributing the max to my 401(k).

Assuming any of that made sense (smile), am I thinking of this in the wrong way?

Daniel D. Joss: Many choose not to max both the 401k and the IRA. If you can do both, then do both. However, you almost always have more investment options in an IRA than your 401k and therefore advisors recommend contributing to a 401k for the match, then max the IRA, then max the 401k. I recommend you also save/invest money outside of retirement plans for those necessary expenses pre-retirement. We do not know what tax rates will be during retirement.


Washington, D.C.: How will the struggling stock market affect my 401(k)?

Daniel D. Joss: The struggling stock market will provide an opportunity to purchase additional shares at a lower price. If you have a long time horizon, values will recover. Stock market returns have historically outperformed bond market returns and inflation.

Martha M. Hamilton: I've been surprised by the number of people who told me they had pulled out of the market. One good reason to stay in is that in previous recessions there have been rebounds from the bottom of the bear market on the order of 30 to 50 percent.


Virginia: I recently started a 401(k) investment account. I'm currently 47 and have 5% of my salary taken out bi-weekly. Is there anyway I can accelerate the process to increase my chances of getting more bang for my buck? I would like to increase my investment percentage, but the economy is not working with me. My plan is to work until I'm 60.

Daniel D. Joss:13 years is a long time. Develop a well diversified portfolio and continue to add to your 401k each year. While values are low, you purchase more shares. While values are high, less. You will see both good and bad markets over these pre-retirement years. You will see even more good and bad times during retirement. A well diversified portfolio has both stocks and bonds. The bond markets have been doing well recently and therefore, so has that part of your portfolio.


Bowie, Md.:"...advisors recommend contributing to a 401(k) for the match, then max the IRA..."

If this is one's strategy, is it better to use a Roth IRA, since $5k after taxes is a larger contribution than $5k before taxes?

Daniel D. Joss: You are correct. However, not all investors are allowed to contribute to Roth IRAs. Better yet, use the Roth 401k if your employer offers the option. There are no income restrictions to Roth 401ks. If you employer doesn't offer the Roth 401k, ask her to make it available.


Washington, D.C.: Is it true that if you start contributing to your 401(k) in your mid-20s, that by the time you are in your late-40s/early-50s you could be a millionaire?

Recently read this in a book, and was wondering if there's any truth to it.

Martha M. Hamilton: It would depend on how much you contributed and how your investments did. I wouldn't count on being a millionaire in your late 40s, but there is every other reason to start contributing to your 401(k) as soon as you can. If there's an employee match, and you don't contribute, you're leaving money on the ground. And the earlier you start to save, the longer your money has to earn for you.

Daniel D. Joss: I recommend saving 10% of your income from your first pay check and then increase that percentage with each raise. If you are diligent in saving/investing, you will have many options in your later years. You may be saving well over 20% of your final paycheck.


Baltimore, Md.: I think the "401(k)" poster might be mis-hearing the advice. I've never heard anyone recommend to do the match in the 401(k), then switch to a traditional IRA -- you're right that the only possible reason for doing so is if your 401(k) choices are horrible. But I always, always hear you should do the 401(k) match, then switch to a Roth IRA, then go back to the 401(k) if you have more left to save after maxing out the Roth. Because that way, you only pay the 15% long-term capital gains rate on the earnings from the Roth, instead of full personal income tax rates on the 401(k).

Daniel D. Joss: There are income restrictions on Roth IRA contributors.


Baltimore, Md.: Re Down South taking issue about employer paid pensions: I many cases, traditional pensions were negotiated as part of a union pay package. Men in steel making for example (and they were all men 50 years ago) did dirty, hard, often dangerous work that left them physically worn out at age 65, if not before then. Traditional pensions, generally timed to length of service, recognized that fact.

Martha M. Hamilton: That's true, and when the union negotiators sat down to bargain those pensions, you can be sure the management negotiators said, "It's all part of the package. If you get more in benefits, you'll get less in pay."


To sell or not to sell: Do you have any insight as to what a person should do when they are ready to sell their house in a very slow housing market?

My husband recently retired and we are looking to relocate; however, the houses in my neighborhood that are up for sale have been for months with no movement. Do we just wait and see if/when the housing market begins moving again? 2009, 2010, 2011?

Daniel D. Joss: The advice of a good realtor is worth the cost. The houses haven't moved because the asking price is more than a buyer is willing to pay. Are the houses moving where you want to relocate to? If so, the sell/buy transaction is a wash.

Martha M. Hamilton: You might also consider renting your current home until the markets improve.


Laurel, Md.: Back in the days of the defined-benefit, vested pension, it was an occasional practice to fire employees just before they became eligible. Are there any measures of how changes in pension plan types (e.g. from defined-benefit to defined-contribution) have change pension-driven HR practices?

Martha M. Hamilton: That did happen, although many of the defined benefit pensions existed in workplaces with union representation which was a shield against arbitrary firing. One thing I have heard from pension professionals is that many companies have discovered that people are working longer than anticipated by HR. They lost the predictable turnover that was a result of people stepping down when they maxed out on their pensions.


Roth IRA v. Traditional IRA: Why would I choose one over the other?

Daniel D. Joss: An investor pays income tax first on contributions to a Roth IRA and then pays no income tax on distributions. Traditional IRA contributions are made before tax and then income taxes are collected on distributions. So, if you think you will be paying a higher tax rate later in life, then you would be inclined to contribute to a Roth. If you believe you will be in a lower rate later in life, you should be inclined to contribute to a traditional IRA. If you earn more than $101,000 single or $169,000 MJF AGI you earn too much to contribute to a Roth IRA. Again, no such income restriction is currently placed on the Roth 401k contributor.

Martha M. Hamilton: I think it's a good idea to diversify your retirement income in terms of its taxability, if there is such a word.


The credit crunch...: Has crunched me. I need to withdraw from my 401(k) as my emergency fund is depleted and the bills continue to arrive. What are the tax implications of doing this?

Martha M. Hamilton: You could pay a 10 percent penalty plus taxes on the amount withdrawn. You might consider taking a loan from the plan instead, especially if some of those bills are high interest credit card debt. The interest you pay yourself is likely to be lower.

Daniel D. Joss: Correct Martha. Be reminded, a 401k should support retirement when you may well be physically unable to earn income. Try another way to get through the crunch.


403(b): What's the difference between that and a 401(k) account? Any limits as to contributions etc.?

Martha M. Hamilton:403(b) plans are defined contribution plans in the non-profit sector. The limit on contributions is $15,500.


As a I approach 40....: and we're about to start a family, I've suddenly realized that my retirement savings are quite paltry (though I saved what I could given my income) and now I'm about to have the added and undefined costs of childrearing which will divert more money away from saving for retirement. What advice do you have for trying to figure out how to balance all these competing things?

Martha M. Hamilton: I wrote a column on that very subject:

At least when it comes to paying for college, don't skimp on retirement savings to do it. There are other sources of funding for school but not so many for your retirement income.

Daniel D. Joss: The blessing of a family is worth a few more years of work. We must all prioritize our goals and spend/invest/give money to what is important to us.


Alexandria, Va.: As an employer, with a 401(k) plan, what are the best steps we can do to ensure we fully comply with regulations that govern the plan?

What are acceptable meetings scheduled for 401(k) plan committees; monthly, quarterly, semi-annually, or annually?

Thank you.

Daniel D. Joss: You should meet at least annually with your 401k administrator and semi-annually with your employees. The administrator should review the performance and changes of fund managers and make recommendations about new options for the plan and underlying investments. Offer the Roth 401k to your employees and make them "opt out" of contributions. Encourage them to increase their contributions regularly.


Virginia: I participate in my employer's 401(k) and I find that my office administrator is doing a terrible job administering the paperwork. I have had to point out several basic, but serious mistakes and omissions. Some serious enough for jail time. I feel like a nit-pick, but I want to be sure that my money is being properly handled. Any advice how to handle?

Martha M. Hamilton: I would make sure your employer knows of the problems. In the wake of the recent Supreme Court decision, they are likely to want to make sure things are being done right.

Daniel D. Joss: Keep up the good work. I was in the Army for many years and corrected many pay problems. Keep accurate records and audit your paychecks and 401k accounts periodically. It is your money and only you think it is important.


Washington, D.C: Gosh, this is probably a dumb question. But, does that max limit for a 401(k) include the company match? Or can I contribute the 15 grand, plus my company's match?

Daniel D. Joss: The company match is a bonus on top of your contributions. $15,500 is your 2008 contribution limit and an additional $1,000 if you reach age 50 this year.


Washington, D.C.: Re people pulling out of the market: I have not done that with my 401(k), but I certainly rebalanced and redirected subsequent contributions more heavily into bond and money market funds. I froze in 2000 when the tech bust happened and watched my retirement funds plummet--it took years go get back to square one. Only 40% of my 401(k) is currently in stocks (I'm 60 years old, FYI). Some people would say that's much too low. I would say, I'd rather sleep at night.

Martha M. Hamilton: Amen. So much depends on your tolerance for risk. That said, I'd rather see investors pull out of the stock market and rebalance when prices are up.

Daniel D. Joss: Sometimes sleeping well at night overrides conventional wisdom. A well diversified portfolio including US and international stocks, US and international bonds, US and international Reits, and commodities is the best defense against times like these. Establish a risk adjusted portfolio that makes you comfortable and stick with it.


Investing regularly: I have a Traditional IRA with Fidelity. I put $100/mth into the account, however, you can't invest in many of their mutual funds until you have like $500 or something. I don't understand how I'm supposed to get dollar cost averaging under this structure. Or maybe I should move to another investment company.

Daniel D. Joss: Establish an emergency fund of cash sufficient to meet whatever you define as an emergency. This cuuld be $2,000 or $102,000. Then begin to invest.


Tax rate in retirement....: Can you give me an example of how your tax rate could be higher in retirement other than changes in the law?

Martha M. Hamilton: Changes in the law are a definite possibility given the size of the deficit and the need for spending on infrastructure and other areas. You might also find yourself going back to work in retirement.


Washington, D.C.:"We do not know what tax rates will be during retirement."

Of course, if one's tax rate in retirement turns out to be higher than in one's working life, then the decision to max the retirement fund will have been an error.

Daniel D. Joss: I always invest after-tax dollars outside of retirement accounts for just that purpose. Laws on retirement accounts can also be changed.


Columbia, Md.: Hello! I just figured out I am going to owe a couple of thousand on my taxes. It was money I was planning on funding my 2007 Roth contribution with. Do I forgo this year's Roth contribution or liquidate some taxable investments, paying the taxes on sale of these assets next year or (I know this is not the best option) take out a loan on my home equity line to fund the Roth? If it matters, I am 51, single, and fully funding my 401k.

Daniel D. Joss: Pay the tax. Fund your Roth as early as possible in 2008, fund your 2009 Roth in January 2009 and get ahead.


Washington, D.C.: My 401(k) is losing money! I know that that's normal this year, and I'm young (22) and have time to make it up. However, I do have student loan debt, and it's so hard to watch my 401(k) lose money while I'm paying interest on those loans. Do you have any suggestions as to how to balance my retirement saving and loan payments?


Daniel D. Joss: Do a little of each. Work to repay your debt within the next several years and continue to add to your retirement savings. The habit you start now (saving for retirement) is very important to establish. Good luck.


Martha M. Hamilton: Thanks to all for so many good questions today. Time didn't allow us to get to them all, so if your's wasn't answered, try us again in two weeks. Many thanks to Daniel Joss for helping us out today.


Editor's Note: moderators retain editorial control over Discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. is not responsible for any content posted by third parties.

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