Tuesday, March 11, 2008; 12:00 PM
Washington Post columnist Martha M. Hamilton will be online Tuesday, March 11 at noon ET to answer questions about making smart financial decisions while preparing for retirement.
She will be joined by Mac Hisey, Chief Investment Officer and Treasurer of AARP Financial Inc.
A transcript follows.
To read past Financial Futures columns,
Martha M. Hamilton: Hello, and welcome to our chat. I have Mac Hisey with me today. He is investment officer and treasurer of AARP Financial and brings a world of knowledge to the enterprise. So let's get started.
Kensington, Md.: I have a question about annuities and retirement savings. I am a Fed employee and will have a good amount in TSP when I retire about 4 years from now. Because we will not necessarily need to live on TSP, we plan to use it for travel. I understand that I could draw about 4% per year and preserve the principle. This would also be attractive in the event that we need the principle sometime down the road. How would that compare to purchasing an annuity to pay a set amount per month? Alternatively, we could just draw random amounts from the investment as we need them, i.e. a big trip soon after retirement, then smaller trips or no trips in other years. Thanks for any help on this.
Mac Hisey: Immediate income annuities can offer a predictable stream of income every month for life. However, when you purchase an annuity, you typically give up the principal in exchange for these income payments. So, they can be a good tool, particularly if you need a guaranteed stream of income. However, you may be trading off flexibility.
Los Angeles, Calif.: I am a 56 year old teacher and able to save about $2,000.00 a month. I bought a condominium last year with 20 percent down. Besides a little social security I have no other savings or investments. What should I do with the $2,000.00 I save every month.
Mac Hisey: First, if you are not already enrolled in a 403(b) plan, I suggest checking with your employer for available retirement saving options. Taking full advantage of workplace retirement programs such as this allows you to save for retirement on a pre-tax basis with tax deferred growth. You can also explore opening or contributing to an existing IRA account for additional tax deferred savings. Your employer or advisor can provide additional guidance on how to select the best investments for your circumstances.
Washington, D.C.: I'm only 23 years old, so obviously I have a long ways to go before I think about retiring. However, for the last couple of years, I've had a legitimate interest in investing but I have no idea where to begin. What do I do? Am I too young to start thinking about this?
Martha M. Hamilton: You are absolutely not too young to be thinking about saving and investing. If you have a workplace retirement savings plan, start with that, especially if the employer will match your savings. You may also want to look into a Roth IRA. You pay taxes on the money you contribute to a Roth, but then it grows (and in your case for a long time) tax free.
McLean, Va.: After reading the Cover Story in this Sunday's Magazine, I realize how important long-term car insurance is. My husband and I are in our early thirties. What should we do now to get started with LTC insurance?
washingtonpost.com: The Vow (By Liza Mundy, March 9, 2008)
Martha M. Hamilton: Long-term care insurance can be very useful to some people but not everyone. It's most useful to families that are middle income. Lower income families will do better with Medicaid and higher income families may be able to self insure by using their savings. I've written a column exploring this issue and listing some shopping tips.
Mac Hisey: Another good source of information is www.ahip.org and the U.S. Department of Health and Human Services.
Washington, D.C.: Mac, Will you discuss tax treatment of assets in retirement and how that influences how we save for retirement?
Mac Hisey: Tax treatment of retirement income is an important topic, although it's a bit complex. Most income from qualified retirement assets is treated as ordinary income. Social Security payments can be taxable if your income from other sources exceeds certain thresholds. Roth IRAs, however, typically offer tax free distributions if certain conditions are met (e.g., five year holding period). Please consult your tax advisor for how it applies to your situation.
Anonymous: Should a 72 year-old retired person who uses his earnings from mutual funds get out now having lost over $100,000--on paper--in the last 6 months?
Martha M. Hamilton: If you don't have to sell, don't do it. That's the step that transforms that paper loss into a real one. However, if you have been thinking about converting a regular IRA into a Roth, this might be a good time to do it, since you will pay lower taxes (because of the reduced value). That's my theory anyway.
Mac Hisey: Martha makes great points. I would just add that it might be a good time to review your long term asset allocation to make sure you are properly diversified and that the investments match your risk tolerance. The important thing is to avoid over reacting to short term market fluctuations.
Alexandria, Va.: In a declining market, how can I get good FDIC insured CD rates?
Mac Hisey: A good website for comparing CD rates is bankrate.com
New Brunswick, N.J.: I'm really curious about whether baby boomers are delaying retirement. The vast majority are only approaching retirement, of course, but I wonder how many can retire with $30,000 of retirement savings plus Age 62 level social security benefits. Is any data available yet?
How long do you think baby boomers will wait until retiring - age 70?
Martha M. Hamilton: We probably are not far enough into baby boom retirement territory for data on that particular group. Unfortunately people often find themselves retiring early because of job loss or disability. I remember looking at some data on early retirement that indicated that the most reliable predictor of early retirement (without misfortune) is having a traditional pension. I think your underlying thesis is correct, though. Many people approaching retirement will take a good look at their resources and decide to work on.
Valdosta, Ga.: I am a recent widow and have to do something with my deceased husband's 401k from his employer and I do not want to pay the 40% or so tax penalty by just withdrawing the funds but I don't know which way to turn with the funds (I work full time, making a good wage and am 57 years young). What should I do with this money to protect it?
Martha M. Hamilton: You should be able to roll it into your own IRA where it can continue to grow tax-free.
Mac Hisey: You should also check to see how it's invested to make sure the investments are well diversified. So, if the 401-k is invested too heavily in company stock, you may want to consider other investments.
Washington, D.C.: I'm single, no children, no nieces or nephews--not much family at all. How does someone without a spouse or "next generation" plan for old age--especially if I should become unable to care/think for myself?
Martha M. Hamilton: One thing you should do is to find someone you trust who will be willing to act in your interests if you can't and give that person, or persons, a power of attorney and a health care power of attorney.
Ft. Lauderdale, Fl.: Regular chatter on vacation...Mr. Hisey, how well do current measures of inflation capture the actual cost of living of different groups? One important objection to the current measures is the use of quality-adjusted indexes for things like computers. By these measures, computer prices drop about 50% every six years. But you can't replace your current computer with one that costs half as much, only with one twice as powerful; so unrealized savings on computers help to mask rises in gasoline and food. Also, there's no way to measure the quantity of health care being consumed, so its price continues to rise mainly because of increased consumption. Are government price indexes really the right measure for both pensions and other uses like business costs?
Mac Hisey: I think you make some very good points about relying too heavily on published statisitics. When evaluating cost of living increases, particularly in retirement, it's important to keep in mind that many costs, such as health care, can increase at greatly different rates than the published rates of inflation.
Martha M. Hamilton: Here's a column I wrote on inflation that mentions the CPI-E, a computation the Labor Department does on an experimental basis, accounting for different spending patterns of those who are older.
U Street: I'm about a month away from meeting my emergency goal (6 months living expenses). I plan on investing 10,000 of that in two 5,000 high yield CDs and keeping the rest in savings. I just started a Roth IRA and save 6 percent in a work retirement 401(k). With these first steps out of the way, I feel like the next big step to explore is investing. I did a little bit of reading and think I should focus on growth mutual funds and want to invest in socially responsible companies. But other than that, don't know what the next steps are regarding research and purchasing shares. Advice is greatly appreciated!
Mac Hisey: It sounds to me like you've taken some great steps. Setting aside an emergency fund is a great idea as is taking full advantage of tax deferred savings plans, such as 401-ks and IRAs. I assume you are maxing out the company match on your 401-k contributions. It's important to have an overall asset allocation plan, which covers all of your investments. From there, sources such as Morningstar can be very helpful in selecting individual mutual funds to meet your long term goals.
Washington, D.C.: Hello - I'm in my late 20s and I have both a Traditional and Roth IRA. Assuming that I'm under the adjusted gross income limit for the year, is there an advantage to contributing to one over the other for 2007? I'm sure this is a potentially complicated answer, but maybe there's a quick summary that would help clarify. Thanks!
Martha M. Hamilton: If you can only afford to contribute to one, I would recommend the Roth, since your tax rate is likely to be lower now than it would be in the future.
Boston, Mass.: I am 62 years old and plan to work for 2 more years. I have $900,000 in investments and a $550,000 house with the mortgage paid. Do you think this will be enough for retirement as long as I still safely manage my money?
Martha M. Hamilton: It depends on your investments, of course, but you sound like you're in good shape. If you can wait beyond turning 65, you can increase your Social Security income which will be there for you until you die. If you are worried about outliving your income you might explore an annuity that pays you month for life, a single premium fixed annuity.
Mac Hisey: One point to add is to make sure your $900,000 in investments is properly diversified. Also, considering that you may have many years in retirment, make sure your allocation to stocks, bonds and other investments meets your risk tolerance requirements as well as your long term growth requirements; i.e., if you're only invested in cash and bonds, you may not be able to keep up with inflation.
Dallas, Texas: My employer recently added a "Roth 401(k)" option to our existing 401(k) plan. What factors should one consider when deciding between a Roth and traditional 401(k)? Is there value in splitting retirement savings between the two types of plans?
Martha M. Hamilton: I think there's great value in diversifying your retirement savings in terms of tax treatment. One difference between a Roth 401(k) and the regular is that the regular plan requires you to take mandatory distributions once you turn 70.5, and the Roth doesn't. And one peril in the mandatory distributions is that they could potentially push you in to a higher tax bracket.
New York, N.Y.: My wife and I are in our late 40's, both wage earners, she's salaried, I'm self employed. We're watching our retirement and non-retirement savings, which are mostly in various, diversified mutual funds, tank--on a daily basis. Is it time for us to cut our losses and get into money markets or annuities?
Martha M. Hamilton: No. Resist the urge to sell low, strong though it seems to be. After the last three recessions, the recovery from the bottom of the bear market was on the order of 30 to nearly 60 percent. The only way to lock in your loss is to sell when the market is low. If you don't have to for financial reasons, don't do it.
Charlotte, N.C.: My husand and I, ages 48 and 52, have whole life insurance that costs us $245 a month. It's for an amount that would let one of us pay off our home if one of us dies, as it takes both incomes for the mortgage, taxes, etc. The insurance is set up in some way I don't quite understand that functions as an investment vehicle as well. We have no children and no debt besides the house. Is is smart to have this kind of insurance?
Mac Hisey: This could be the right policy--it's hard to tell without knowing all the facts. However, you should ask your agent exactly how the policy works, how the investments are actually invested and whether a term policy might provide you the protection at a more affordable rate. The savings could then be invested in a separate investment plan. Keep in mind that changing insurance policies at this age likely requires a health exam. I have always found that if I don't understand the policy or investments, it makes sense to keep asking the agent until you understand. They are there to help.
Martha M. Hamilton: They're also working on commission, however, so sometimes you really have to push. My advice is, if you don't understand an investment, don't buy it.
Falls Church, Va.: In Sunday's Financial Futures, you described a savers credit for contributing to an IRA. My grandson makes under 26,000 a year and contributes to a Roth IRA; he is not eligible for the credit because he is a student! Can you tell me why students aren't eligible? Thank you.
Martha M. Hamilton: It's true that fulltime students and people who are claimed as dependents on other folks' tax returns are not eligible. I don't know the legislative history, but I'm guessing students are excluded because they often fall into both categories.
Merrifield, Va.: I had $50,000 in a 401(k) with a company that laid me off 3 years ago. We did not part amicably. After laying me off, the company froze my 401(k) for some kind of 'conversion' of their retirement plan, so Vanguard was unable to roll the fund over into an IRA for me. My money got dumped out of a well-preforming portfolio into a money market account, at my former employer's direction. I've since contacted Vanguard numerous times asking about how I can either get that money rolled into an IRA or transferred into my current employer's plan (not my favorite choice; I'd rather stick with Vanguard), but Vanguard tells me that I have to contact my former employer and get them to move the money for me. When I request that from my former employer, the answer is 'no.' Do I have any options for getting Vanguard to put that money into an IRA and a real fund? Can both Vanguard and my employer legally prevent me from accessing my money this way?
Mac Hisey: This sounds like a tough and complex situation. Three years sounds like a long time for any type of conversion. I can't offer you any legal advice, but I suggest you contact the human resources department and request a complete explanation of what is happening, what type of retirement plan this is and when the conversion will be complete,and when you will obtain complete acces to your funds. Qualified employee retirement plans are subject to strict rules and regulations, particularly under ERISA. If you can't get anywhere with the human resources department, I would consider getting legal advice.
Arlington, VA: Hello, thanks for holding these chats and for (hopefully) answering my question!
I've been investing in a Roth IRA for a few years now and I'm worried that I might approach the income limit in 2008. I've read that the income limit for max contribution is $99,000, then I can make phased contributions with an income up to $114,000. Can you tell me how that phased contribution limit is calculated?
Mac Hisey: For 2008, the modified AGI limitations you reference increase to $101,000 with phase outs to $116,000. Please see IRS publication 590 for details on how to calculate the allowable contribution.
Arlington, Va.: I am 27, My husband is 30. We have about $100,000 in assets and $20,000 in a high interest savings account. I will contribute the maximum amount to my 401(k) for 2008 (15k+). My employer does not offer an employee match for a 401(k) plan. My husband will contribute about $5700/year to his 401(k) this year (including his employer match). Our combined salaries are too high for us to contribute to a Roth IRA. Should we invest in a traditional IRA? Something else?
Martha M. Hamilton: If you don't have an emergency fund that would cover three or four months worth of expenses if you needed it, you should start one. Otherwise, contributing to a regular IRA would be an option or investing in I-Bonds for inflation protection.
Mac Hisey: One additional suggestion is to see whether there's any way to increase your husband's contribution to his 401-k plan to take full advantage of the tax deferral as well as the company match.
Martha M. Hamilton: Thanks for joining us today and for all the excellent questions. And special thanks to Mac Hisey from AARP Financial for adding his expertise. The next chat is March 25. See you then.
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