Financial Futures

Washington Post columnist Martha M. Hamilton was online Tuesday, April 8 at 12 p.m. ET to answer questions about making smart financial decisions while preparing for retirement.

She was joined by J. Mark Iwry, principal of the Retirement Security Project and a nonresident senior fellow at the Brookings Institution.

To read past Financial Futures columns, click here.

The transcript follows.

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Martha M. Hamilton: Good day, and thanks for joining us today. We're lucky to have Mark Iwry with us, one of the smartest people I know when it comes to thinking about financial planning and retirement. We're here to answer your questions, but remember, an answer to a question on an online chate isn't a substitue for getting professional legal, tax or investment advice.

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Richmond, Va.: Thanks for taking our questions. Now that I am in my 40s, I read you religiously!!! I want to start stuffing money into a ROTH. From what I hear, the tax benefits of ROTH are not legally extended indefinitely. True? Is it possible the government may decide to tax that which they said they would not? Here is what I fear: What if I put lots of money into a ROTH and when I retire the government says "Well....we've decided to tax it because we need the money. Sorry!"

J. Mark Iwry: Good question. It is highly unlikely that Congress would dare to cut the tax benefits of the Roth with respect to contributions already in the Roths (as opposed to future contributions made after the change). But in my view you're not being paranoid here: it's not impossible, especially as it could be done in subtle, indirect ways to raise revenue. Some people therefore hedge their bets and divide their savings between Roth and traditional.

Martha M. Hamilton: I think any changes that would be made would be likely to be prospective, but it never hurts to think about what could change.

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Silver Spring, Md.: I'm wondering what with the current housing crisis, whether any thought has been given to enhancing the appeal and level of employee participation in 401(k) retirement and similar plans by adding a provision allowing employees to apply part or all of their 401(k) balance to a down payment on a first home. It seems that part of the current housing crisis has been the very low or no down payments under these subprime loan programs. The provision might even be added to Roth IRAs.

J. Mark Iwry: Current law already allows you to make a hardship withdrawal from a 401k for down payment on a first home. But IRAs have not restrictions on withdrawals. Both have a 10% penalty for early withdrawals but IRAs have an exception for down payment on first home up to $10,000.

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D.C.: Still confused: My company seems to only offer expensive investments in our 401(k) plan. I don't want to park my money in a money market, but I also don't think the return on some of these funds are worth it with the high fees. My wife has a few index funds in her plan that seem to have fairly good returns (well, before this year) with MUCH lower fees. I think my company should offer at least one of these funds. Shouldn't companies that offer 401(k)s give us at least one good option for a lower cost fund? And, who's making all this cash on these fees?

J. Mark Iwry: You're so right. You shouldn't need to resort to money market in order to avoid high fees. Index funds or ETFs usually deliver low fees. Can you bring this concern to the attention of the HR people who run your plan?

The providers of the funds are making the profits on the fees -- it's generally not your employer. But the plan sponsor, usually a committee of execs, is responsible for monitoring the fees so that they are not unreasonable. That's why a communication from you asking about the comparison, especially in writing to them, is likely to get prompt attention. Congress, notably George Miller, is all over this now.

Martha M. Hamilton: Absolutely right. Also, if you have a union in your workplace, I would ask the union to raise the question of expenses.

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J. Mark Iwry: Please be aware that none of the communications from me in today's forum constitute or should be viewed or relied upon as legal advice, tax advice, or investment advice. To get legal, tax or investment advice, consult a qualified professional. The communications from me are simply my personal thoughts and do not represent the views of the Washington Post or of any organization with which I am affiliated.

The IRS requires a disclosure when tax advice is given, and even though these communications are not tax advice, if they were tax advice, the IRS-required disclosure (per IRS Circular 230) is that, to ensure compliance with requirements imposed by the IRS, we inform you that any US tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Thanks for bearing with these important caveats.

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San Antonio, Tex.: From the sale of a house, what would you do with $200,000 cash? Are tax free municipal bonds safe?

J. Mark Iwry: Go to a fee-only by the hour financial adviser and spend a few hundred bucks for advice. Safety of munis is reflected in their rating, eg AAA, AA, etc. Also, do you want munis in texas to get the state tax advantage?

Depends on your other investments, if any. Could diversify between bonds and some stocks.

Beware if you need to sell the bonds before maturity, they might decline in market value.

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Washington, D.C. pennypinchers: We are going to have a lower taxable income this year because we are taking a total of six months off between the two of us for maternity and paternity leave. Once we've contributed enough to our work 401-K's to get our employer's matching contribution, would it be a good idea to put the rest (or at least some) of our retirement contributions into a Roth IRA, for example a target index retirement fund? If it makes a difference, we are in our late 30s and are currently each putting 16% of our paychecks into retirement contributions.

J. Mark Iwry: Congratulations on the kid(s)!

You are poster children for saving.

As you obviously know, the most important thing is to keep up your great 16% or so rate to save as much as you can beyond the match in either the 401k or IRA (assuming your income is below the Roth IRA threshold).

Comparing k to IRA, investment fees are often (but not always) lower in k plans because of employer's bargaining power or economies of scale to get institutional rates on mutual funds, etc. You could compare cost of similar funds.

Most k's have the investment options most people want, but if not for you, try IRA. I also like target index because diversified and low cost, but am not giving investment advice.

There is something to be said for dividing your savings into traditional deductible (like most k's and many IRAs) and Roth k's or Roth IRAs in order to hedge your bets re direction of future tax rates. If your k has a Roth option, that is another way to do this.

k plans insulate assets from potential liability (lawsuits, etc.) better than iras, tho most of us don't have to worry about that.

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Upper Marlboro, Md.: I am approaching 60 and am about 5 years from retirement. I have a sizable investment in my Retirement Account. I have not purchased Long Term Care insurance. My financial adviser says I need LTC insurance to protect me and my investment. What do you advise for anyone nearing retirement? What is best time to buy such insurance? Is it really needed or can you self insure? Thanks

J. Mark Iwry: If you have enough assets, you can self insure, but ask your financial adviser how much she/he thinks is enough. Check with others too, maybe internet has some advice on how much is enough to self insure.

Does your financial adviser make any money if you buy LTC from or through him/her?

If you can trust your financial adviser, ask them for LTC insurance cost comparisons. There may be a good web site comparing policies. Focus on cost and forfeiture provisions that would apply if you stop paying premiums.

Martha M. Hamilton: Long term care insurance seems to make the most sense for those in the middle of the income spectrum. The more affluent can self insure, the less affluent usually end up with Medicaid. Here's a column I wrote on the subject and some tips on shopping for LTC.

http://www.washingtonpost.com/wp-dyn/content/article/2006/10/14/AR2006101400107.html

http://www.washingtonpost.com/wp-dyn/content/article/2006/10/14/AR2006101400076.html

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Bethesda, Md.: When deciding to invest in a retirement account should a 401(k) plan always receive greater consideration than an IRA or Roth-IRA. If not when would the opposite be true?

Also, can retirement accounts be applied to the purchase of a house? If so, which account would best suitable for that purpose?

Thank you

Martha M. Hamilton: If your 401(k) plan includes an employer match, your first step should be making sure to take full benefit of the match. Beyond that I think it's a good idea to have some tax diversification in your retirement savings, so, if your employer doesn't offer a Roth 401(k), as some are beginning to do, you might consider additional savings in a Roth IRA.

J. Mark Iwry: Also, k plans might have lower (institutional) investment fees than IRA and might have a reasaonble default investment for those who have trouble deciding.

K plans can also give better protection against creditors, though not usually an issue for most people.

J. Mark Iwry: And I agree with Martha's basic points.

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Bethesda, Md.: Thank you for highlighting the problems faced by our aging population. Like many physicians, I have stopped accepting new Medicare patients. It's simple economics. You cannot increase the number of Medicare patients knowing that your reimbursements will be less than the cost of seeing that patient.

With looming physician shortages, uncontrolled malpractice premiums and falling reimbursement, I wouldn't be so sure you will find a physician who will accept a new patient.

Rather than calling the Medical Society and your friends, why not advise your readers to call their senators and representatives for reimbursement relief?

Audrey, Montgomery County Medical Society

Martha M. Hamilton: Thanks for adding your comments.

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Washington, D.C.: Is it OK to invest all of your retirement savings in one mutual fund company such as Fidelity or Vanguard, or is it a better idea to have retirement savings invested with different companies?

J. Mark Iwry: As you know, mutual funds don't have the FDIC insurance, but they do have both SIPC insurance and usually their own insurance on top of that. You can check that out on their web sites. I've been told by financial advisers that this makes it reasonably safe. Personally, I'd divide it, but most people would probably say that's overly cautious.

Note they give you incentive to put lots or all eggs in their one basket via discounts on fees once you have above a certain amount, so take that into account.

Martha M. Hamilton: I've got mine in two fund companies, one that I started an IRA in many, many years ago, and the other the company that ran the Post plan. But since most of mine is in the Post plan, I get the discounts. Still, I've kept the other money distinct. Perhaps, overly cautious. Probably overly cautious. But it makes me feel better.

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Pikesville, Md.: What are your thoughts about Target Mutual Funds? I've looked at some annuity products. Are they a better choice than a charitable trust when considering highly appreciated stocks?

J. Mark Iwry: Targets are often reasonable allocations of assets to various classes, but check out the fees carefully. All targets are not good -- some may be too expensive and others could have poor funds embedded in them.

Targets comprised of diversified index funds are usually much cheaper.

annuities can be good, but cost there is even more of a key issue: scrutinize carefully and get advice from someone who is not getting a commission from your purchase of the annuity

Martha M. Hamilton: And remember, target funds have no guarantees that they will provide you with what you need at retirement, although studies have shown they perform better than the allocations chosen by individual investors.

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Montgomery County, Md.: My mother, who is in her mid-eighties, will leave a substantial estate in a trust (around $1 million, all financial assets) to which I'm the only heir. How do I take these funds into account in my own retirement planning? I'm in my early fifties. Given the longevity in my family, my mother could easily live another 10 years. Thank you.

J. Mark Iwry: Go to a qualified fee only hourly paid financial adviser (who makes no commissions from products) to get advice.

Martha M. Hamilton: Here are a couple of columns I've written on finding the right financial planner.

http://www.washingtonpost.com/wp-dyn/content/article/2006/11/04/AR2006110400037.html

http://www.washingtonpost.com/wp-dyn/content/article/2006/11/04/AR2006110400010.html

http://www.washingtonpost.com/wp-dyn/content/article/2006/11/11/AR2006111100076.html

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Laurel: Sorry I couldn't follow up on this in time two weeks ago, but I asked Ric Edelman about investing in commodities and he said they shouldn't be more than about 5 percent of one's portfolio.

My commodity holding is the "DBC - PowerShares DB Commodity Index Tracking Fund," which, while not a broad index, does cover the energy, food and materials sectors. Plus, I would say that the price of energy is one of the most important variables in my personal finances.

Doesn't this deserve respectable (more like 20-25 percent) portfolio allocation?

washingtonpost.com: Financial Futures Discussion, March 24

J. Mark Iwry: Though I'm not a financial adviser, I personally would never consider departing much from Ric's advice on this point.

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Boston, Mass.: Since you have someone form Brooklings today, I'd like to ask two statistical questions: One: how many Americans hit ages 65-67 with adequate retirement savings? Two: my greatest fear is not the market, the funds, or the fees, but longevity. Do we have any statistical information on what happens to people's nest eggs if they spend 30+ years in retirement?

J. Mark Iwry:1. Too few. Remember, most financial planners would say that if you want your assets to last your whole life, it's prudent to limit annual withdrawals to about 3 1/2% or 4% of the assets. Do the math -- those with adequate ret savings are mostly the quite affluent.

2. Unfortunately, we need to take all the risks seriously, including the market tanking, your being unable to continue working as long as you expected to be able to, your or a spouse's illness or disability imposing huge health care or long term care costs, inflation, and outliving your assets. Modeling shows the nest eggs are shockingly vulnerable to a few bad years in the market when you in withdrawal mode - hence the 3 1/2 or 4 percent advice. An alternative: buy a life annuity with part of your savings but beware high expenses. Get fee only financial adviser to help with that.

J. Mark Iwry: Go Sox.

Martha M. Hamilton: One of the scariest threats in retirement is inflation. Even when it's mild it can carve a deep hole in your savings. Assuming just 3 percent a year inflation, $40,000 today would be worth $14,200 in today's dollars in 35 years, which is about how much longer I will live if I only live to my mother's current age.

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Washington, D.C.: Martha and Mark, I just started a new job and I'm looking through all the options for investing in the company's 401(k). I think I'm a fairly intelligent person, but all these options are starting to confuse me. I'm trying to find the fees...shouldn't there be a place that tells me what I would pay for Fund "A" or Fund "B"? Why do these companies make it so hard?

Martha M. Hamilton: Many workers have been baffled over what they are paying. I believe there are efforts underway now in Congress to make the costs more transparent.

J. Mark Iwry: That's right. It's darn confusing. But ask HR whether the plan sponsor has organized the "expense ratio" info in a readily understandable way (perhaps in the plan brochure or summary plan description). Employers are increasingly aware that they have responsibility to ensure that the fees are not unreasonable.

Bottom line, it's true that what you can expect as a net return (net of expenses) is what matters most, rather than the fees by themselves, but this also depends on the type of investment -- e.g., ones that don't promise a fixed return.

J. Mark Iwry: The prospectus for a mutual fund or other security must disclose the expenses, so you can look for expense ratio there, but that may be cumbersome so I've suggested trying the employer HR or plan admin office first.

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RE: Laurel: Commodities are one of the most volatile asset classes available. Because of this, 20 - 25 percent is wayyyyy to much to have invested. However, a 5 percent allocation is a good hedge because they have a low correlation to the general stock market. Also, if much of your personal finance is dependent on energy prices why would you want to add more exposure to that?

- Investment Consultant in Mclean

Martha M. Hamilton: Thanks for your comments.

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Anonymous: Martha -- Our doctors office has told us that if we want to use Medicare we have to pay a $250 annual fee. Is that legal? Richard

Martha M. Hamilton: That's very interesting. I don't know whether it is legal, but I would guess it may be. I know lots of doctors are adding "administrative fees" for patients covered by regular insurance. I just dropped one of my doctors because she did so. It appears your doctor wants to keep the percentage of Medicare patients at a relatively low level.

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Gaithersburg, Md.: Per your article on Medicare last Sunday, what do you think about doctors charging an extra fee for processing Medicare claims?

Martha M. Hamilton: Gaithersburg, are you talking about an annual fee, like the $250 that a previous chatter mentioned, or something else?

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Gaithersburg, Md.: My employer does not offer a match for my 401k plan but instead takes a set percentage of my base salary every year and deposits it into my 401k plan. Since I'm not enamored with the plan options, I only contribute to a Roth IRA that I've selected. Is this strategy OK?

J. Mark Iwry: Doesn't sound good. How is the employer contribution invested? If you have any say over that, focus on it and make sure the investment suits you. If there are no options in the plan that you like, can you ask the employer to add some? Sometimes k plan investments are lower cost than IRA ones.

Coordinate the way you invest in Roth IRA with the way the employer contributions are invested in the k (and any other investments you might have), so they make sense in the aggregate.

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Bethesda, Md.: Can we explore your comments Sunday about inability to find a doctor for new Medicare patients?

washingtonpost.com: On Medicare And Scorned By the Docs

Martha M. Hamilton: Bethesda, I'm not sure what aspect you want to explore. Tell me more.

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Go to a fee-only by the hour financial adviser and spend a few hundred bucks for advice.: Set realistic expectations! A person walks into a fee-only adviser with $200k windfall and no idea what to do with it. There's a lot of questions to be asked and a lot of planning to be done. You are talking a couple of thousand in fees. Better to know what to expect than to try to cheap out and end up losing a significant chunk of the windfall!

Martha M. Hamilton: I don't think that's necessarily accurate. If I were going to a fee-only by the hour adviser, I would make sure that I walked in with a complete picture of my current finances already organized and with a set of questions I would want answered about how to invest my inheritance. If you do advance planning about how to approach your quest for advice, it need not be as time consuming as you portray it.

J. Mark Iwry: Follow Martha's advice re how to do this. Garrett Financial Network has hourly based planners. Why not give them your info in writing and then ask them for a basic plan for the $200k based on 2 hours of advice? This might not work if the rest of your situation is complicated, but should work for most people. Much of the advice would be pretty standard, I'd bet, but depends on your other circumstances and assets.

And go to one of the good web sites for basic advice before visiting the planner, and you'll already be part way there.

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Oakton, Va.: When are after tax IRA savings supposed to be convertible to a Roth IRA? And how will I be able to figure out my taxes owed, is it up to me or will my brokerage firm (Vanguard) be able to tell me?

Martha M. Hamilton: If you are income eligible for a Roth, you can convert a traditional IRA now. Otherwise, the rules change in 2010.

J. Mark Iwry: Re the conversion, we assume you are referring to traditional IRA (you deducted your contributions), as opposed to aftertax IRA (you didn't deduct).

The income limit for conversions is different from that for contributing to a Roth -- check out IRS publication on IRAs, I think it's pub 590.

Bear in mind that the rules might not really change in 2010. Congress will need to decide what to do.

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Bethesda, Md.: If you can get a physician to accept you as a new Medicare patient for $250 you have a good deal. The physician is losing money everytime he/she sees you, unless the visit is limited to under 3 minutes. That's the economics of giving care under Medicare rules.

Martha M. Hamilton: I'm guessing you're a doctor. Thanks for the comment.

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401(k) vs. IRA:"k plans insulate assets from potential liability (lawsuits, etc.) better than iras, tho most of us don't have to worry about that."

Would you please explain this a little more? I'm considering rolling an old 401(k) into an IRA (rather than into the gov't TSP, which I'm in now), partly because my previous employer's fund choices aren't great performers and partly because I can get lower admin fees and expense ratios in a Vanguard IRA. (Not considering a Roth because I'm not eligible.) I don't have specific liability concerns, but you never know what might happen down the road. Thanks.

J. Mark Iwry: Qualified plan assets such as 401ks are generally insulated from liability to a greater extent than many IRAs (for which the degree of protection for your assets depends largely on state law). But most people would not weigh that factor heavily unless they knew they were at risk of being sued or all other things were really equal. In your case, it sounds like you've got a better deal in the IRA.

Can you roll into the TSP? If so, why aren't TSP's low cost index fund options at least as good as the IRA's options?

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Bethesda, Md.: We would like a discussion on the economics of medical care for Medicare patients. It's a losing proposition at this time, and reimbursement to physicians is set to decrease by 10 percent in July.

Concerning your comment about moving to a retirement area, any physician moving to that area, in order to see patients, would have to pay off a large malpractice insurance "tail" from prior state, incur a new malpractice policy, get licensed, and lease office plus hire employees. All this to treat Medicare patients for rates that don't pay their way.

Martha M. Hamilton: I think there will be lots of discussion of that as Congress approaches the July deadline.

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Oakton, Va.: For the general, mom and pop investor, is Vanguard still the cheapest for mutual funds? I thought I recall Fidelity trying to become cheaper a while back, but that may have just been for retirement accounts.

J. Mark Iwry: Depends on the particular fund, so compare apples to apples re a particular type of fund you're interseted in. My general impression: V traditionally very cheap and Fidelity has been lowering prices and getting competitive with V.

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Martha M. Hamilton: We're out of time, so we'll have to resume in two weeks. Thanks for all the good questions and especially thanks to Mark Iwry for sharing his considerable expertise. If you have ideas for future columns, feel free to e-mail me at hamiltonm@washpost.com.

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