Washington Post columnist Martha M. Hamilton was online Tuesday, May 20 at noon ET to answer questions about financial planning for retirement.

She was joined by Jason Scott, Retirement Research Director for Financial Engines.

A transcript follows.

To read past Financial Futures columns, click here.

____________________

Martha M. Hamilton: Good day, and thanks for joining the chat today. We have as our guest Jason Scott, retirement research director for Financial Engines, so we have impressive expertise in the virtual room.

_______________________

Bethesda, Md.: You mentioned in your May 18 column that Medicare covers only 51% of the total medical costs that one can expect to pay in retirement. Could you please explain how you calculated that figure? Did you include premium costs, drug expenses, dental bills, eye glasses, and hearing aids? I still don't see how that leads to only 51% coverage, particularly now with the Medicare drug coverage. Moreover, I thought Medicare covered 80% of doctor bills, and usually 100% of hospitalization. Are you also including long-term care expenses to arrive at 51% figure?

Martha M. Hamilton: I bellieve that figure came from a study by Fidelity. Medicare doesn't cover the cost of eye care, hearing care and dental care, which I know from taking my mother to appointments, adds up quickly. And many of those who benefit from the new drug coverage find themselves picking up large prescription costs once they get to the doughnut hole. I'm also hearing from readers that their doctors are charging them extra fees to retain them as patients once they are on Medicare.

_______________________

Rockville, Md.: I'm planning to retire in the next year. I have invested in my company's 401k and I have some savings with a brokerage firm. What is the best thing to put your money in when you start to take it for income? One suggestion from my advisor is annuities. I don't care to put all my money in these things because you lose a good amount to the investment itself. One suggestion was municipal bonds. They pay a low interest rate but you don't lose the money. Any other suggestions?

Jason Scott: One idea is to use a "Longevity Annuity" described in this previous column by Martha.

These insurance products are purchased at retirement and start making income payments if you make it to an advanced age like say 85. They are fairly cheap since they only payout if you live long enough, but they help make the planning process much simpler. For example, you could take 10% of your portfolio and purchase this type of insurance to cover income after age 85. Then you can use the rest of your portfolio to cover income needs from now until you reach age 85.

Instead of not knowing whether to plan on a 5 or 35 year horizon, you have at least simplified things a bit and can focus on making your money last 20 years.

Martha M. Hamilton: I wrote on Sunday about another option, which are funds that are designed to help you have both income and some level of protection from outliving and underspending your assets. They are mutual funds,however, so it's important to understand that the results aren't guaranteed.

______________________

Washington, D.C.: Good morning,

I was wondering what percentage of a well diversified portfolio, split 50/50 between stocks and bonds, you would recommend placing in a TIPS fund. I am about to retire and have about $1.5 million in my portfolio. I am planning on withdrawing 4 percent a year from that for living expenses.

Thanks so much.

Jason Scott: The research on TIPS funds generally indicates adding TIPS to the portfolio decreases the upside potential, but significantly decreases the chance that you run out of money. Often you can keep on adding TIPS to your portfolio and actually lock-in the 4% payout you were hoping to receive. You lose upside potential but gain security.

_______________________

Upper Marlboro, Md.: I will turn 60 in August. At what age should one purchase long-term care insurance? Who should buy this type of insurance?

Jason Scott: When and whether to purchase long-term care insurance is a very complex topic. One major problem with the insurance is the expense. As with all insurance, I think you really need to focus on buying the insurance that you really need and not try to insure things that you can handle on your own. This approach usually ends up saving you a lot of insurance costs. This idea applied to long-term care insurance would cause you to think about maximizing the "carve-out" period of coverage. The "carve-out" period is how long you have to wait before your coverage kicks in and starts paying. By setting your carve out to the maximimum (say 180 days), you pay for the first 180 days, but the insurance pays for the rest. This is like having a high deductible on an insurance policy. It saves a lot on the premium, but be aware that you need to be ready to handle the first 180 days.

Martha M. Hamilton: Not everyone needs long-term care. People at the lower end of the income spectrum will end up covered by Medicaid and people on the higher end can self-ensure with their savings. I'll attach a column I've written and some tips for shopping for it.

Should You Secure Your Health Care?

Looking Into The Long Term

_______________________

Martha M. Hamilton: Here's a question a reader sent yesterday: I haven't seen anyone address in detail the pros and cons of converting a traditional IRA to a Roth for someone who makes more than the maximum allowed for a Roth. My husband and I are in that fortunate situation, but have not been for long and still are very concerned about saving enough for retirement. My expectation is that income taxes are going up. With most of our retirement savings in a 403(b) and TSP, we are going to have very high tax bills when we start drawing down these funds.

I have not been able to get a clear answer from anyone on whether it makes sense for us to take advantage of the one year opportunity in 2010 to convert our traditional IRAs (we made nondeductible contributions for a number of years) to Roth IRAs.

We are trying to decide 1) whether it makes sense to switch our nondeductible traditional IRAs to Roth IRAs during the one-time opportunity in 2010; and 2) whether it makes sense to resume making contributions now to increase the base value of the accounts as much as possible in the meantime.

We made contributions from the mid-'80s to 2000, always with after tax. Does it make sense for us to resume making contributions and then make the conversion in 2010?

If yes, what is the maximum we can contribute? Because we are over 50, is that $5,000 each?

Am I correct in thinking that then in 2010 we would make the conversion to Roth IRAs and would pay taxes on any net gain in the accounts up to that time (spread out over 4 years if we wish), but not on the amounts we have contributed?

Then could we keep making annual contributions in after tax money?

Does the money we have in a 403(b), TSP and an Individual 401(K) (my husband has a small business), affect the taxes on the Roth? I think it may, but I am having a hard time figuring this out. They have about $76,000 in accounts.

Jason Scott: If you think taxes are going up, then converting to a Roth can be a good idea. There are a couple of arguments for having a Roth allocation.

First, with some of your money in a Roth, you have "tax" diversified somewhat. If taxes go up the Roth is a bit better, if they go down the traditional is a bit better.

Second, having some money in a Roth helps you manage your taxes in retirement a bit better. You can use the Roth dollars in years where it is really desirable to keep your taxable income low (say you want to avoid a high income that causes your Social Security to be taxable). This flexibility can be very valuable in many situations.

_______________________

McLean, Va.: Any thoughts about the recent decision made by West Virginia Teachers to switch back to a pension plan from their 401(k)? That would never be allowed in the private sector. Do you think workers in the public sector are ever going to have the burden of saving for their retirement the way the private sector does? Better question is, when will taxpayers start caring/noticing that we are funding government employees' retirement?

Jason Scott: The West Virginia Teachers are certainly bucking the trend. The past 20 years has seen a significant trend away from fixed pension promises to more 401(k) like pension programs which offer variable pensions depending on the performance of the stock market and overall economy.

A fundamental reason for this shift is the large increase in the number of retirees (it is hard for a relatively small pool of taxpayers to guarantee payments to a larger pool of retirees). Given the Baby Boomers are just now starting to retire, I do not see this trend abating any time soon.

Martha M. Hamilton: The trend to workplace savings plans instead of traditional pensions has been a great savings for employers. But many workers are uncovered, and others have saved too little. The teachers are lucky that they were able to be covered by a plan that assures them of retirement income.

_______________________

Hamden, Conn.: I am a 33-year-old male who is just now finally getting a stable job, where 401k is offered. What would be your advice for me in the market and which funds should I look at?

Jason Scott: A couple of pieces of advice

1. Definitely participate in your 401(k). It is one of the best places to save for retirement.

2. If your company offers a match (many offer to match a fraction of your contributions with employer dollars), then definitely save enough to take full advantage of the match. The match is free money, and you can't get a better deal than that!

3. As far as investments go, one thing to stay away from is investing too much in your company stock (if that is available in the 401(k) plan.) Given your age, most experts would say you should hold a fairly aggressive asset allocation which means consider a healthy amount of stock funds. Finally, pay attention to how high the fund fees are when looking at the different investment options.

_______________________

22204: Re: the advice above to purchase a "longevity annuity." Is this sound advice? If you are going to purchase an annuity of any kind, is it wise to do so through an insurance company whose reason for being is selling insurance products? I have to believe the fees would be high as well.

Jason Scott: You should always comparison shop to try and get the best overall deal on any insurance. However, the advantage of insurance is that the insurance company can pool risk across a number of policy holders. Self-insuring against a fire is expensive, but you can buy relatively cheap fire insurance because fires are fairly unlikely. The situation is similar on the longevity insurance question. Self-insuring against living to 100 is very expensive relative to purchasing an insurance contract that covers the very old (and fairly unlikely) ages.

Recent research looking into this question indicates it is not a great idea to put all of your money in an insurance contract, but a fairly small amount (10-15%) can generally help simplify the planning process and result in more retirement spending.

_______________________

Capitol Hill, D.C.: Ms. Hamilton:

I'm a CSRS federal retiree (for three years now) who lives on my federal annuity and works part-time. Although 66 next year, I plan to defer taking Social Security until the last possible minute (trying to limit, if at all possible, the effect of the Windfall Elimination Provision). I have retirement savings, having contributed as much as possible to various plans both through the federal government and the other places I've worked.

When I lay out my situation rationally, I think that I'm in solid financial shape. But at times--yesterday being the latest example--I become anxious about spending too much too fast. (My solution: to maintain an Excel spreadsheet that lists by categories all expenditures year to date.)

Do other retirees face these occasional moments of doubt? And if so, how do they escape them with a minimum of anxiety?

As always, thanks for these chats, which continue to educate me about wise and foolish choices.

Martha M. Hamilton: It sounds like you're in great shape, but, yes, I think your worries are common. Take a look at Sunday's column, posted in an answer above, where I discuss it. I mention research that Fidelity did when it was creating funds for retirees that provide monthly income. Among other things, they found many retirees in their 80s who wished they had spent more earlier. Unfortunately, however, not everyone has retirement savings to worry about. As for Social Security, if you can and if your family history suggests longevity, I think deferring is a smart thing to do.

Jason Scott: Usually deferring Social Security is a good deal. The major caveats are if you are in poor health or can't make ends meet while deferring the onset of Social Security.

_______________________

Taxes on 2010 Roth Conversion: Are spread out over two years, not four as poster believes.

Martha M. Hamilton: You don't pay taxes in the year you convert. Then you pay taxes on half of the conversion for each of the next two years.

_______________________

Sterling, Va.: My parents' future has become a source of tension between my husband and myself. He is concerned that they chose not to invest in long-term care when his parents did. He worries that they will become a burden to us one day.

They are 80 and 83 and in pretty good health. They have about $600K in equity and investments. My Dad gets $22K from Social Security each year. My Mom gets some too, but I don't know the amount. They have zero debt. They have worked with an estate planner and sat down with me to have some difficult decisions about last wishes. They tried to do everything to protect everyone's best interest.

My questions are, if they become very sick and need to go to a home, what will it really cost our family? How much does long-term care really cost per year? Is there a big difference between fancy homes like where our friend put her Mom for $10K per month and Medicaid homes? My Dad is a Veteran. Would he not be happier with men he might have something in common with?

If something does happen to my parents, I plan have them close to me, to visit that home several times a week, bring snacks to the staff and advocate for them.

By my calculations, if they had bought the long-term care insurance when my in-laws did, they would have spent enough to purchase a luxury vehicle. Is $600K plus Social Security enough? If not, what should I or they do?

Thank you!

Martha M. Hamilton: Here's a link to a good primer on long-term care that the AARP has on its site that includes some prices for different types of care. Your parents sound like they are in pretty good shape financially, and they may not need long-term nursing care or may need it only briefly. Many adult children find themselves taking on financial and other efforts on behalf of their aging parents, and you may in the case of your parents. Sometimes, even in what appears to be an excellent long-term care facility, adult children find they have to go to lengths to make sure the care is properly provided. In the case of your parents, I expect they made the best call they could at the time based on what they knew.

_______________________

washingtonpost.com: AARP: What Does Long-Term Care Cost? Who Pays?

_______________________

Silver Spring, Md.: What is your opinion on retirement payout funds? Martha had an article on Fidelity's and Vanguard's offerings. The former seem like they're self-liquidating by the future year they're established for, whereas Vanguard's are more self-perpetuating.

Jason Scott: The Fidelity funds plan on paying out the entire fund over a fixed period of time, for example 30 years. The Vanguard funds plan on an ongoing payout that is a fixed percentage of the current value of the fund.

With the Fidelity funds, you can typically expect a higher payout, but there will be nothing left at the end. With the Vangaurd option, the payouts will tend to be smaller, but the fund never runs out.

One thing to keep in mind with both of these options is that the payouts from the funds vary with the performance of the underlying investments. For example, if the stock market declines, the payouts could drop, perhaps substantially.

_______________________

On Roth conversion: Age would play a big role in that decision too. A 20-30 year old is much better off paying taxes today for money that will not be touched for 40 years. Someone in their late 50's or 60's may not have enough time to recoup today's big tax payout on conversion.

Martha M. Hamilton: That's true to some extent. It certainly makes sense for someone in his or her 20s or 30s to start a Roth, both because they will have time to grow but also because their tax bracket is likely to be higher as they advance in their careers. But it may make sense for someone in his or her 50s or 60s, too, who may have 30 or 40 years in retirement and because of the possibility of future tax increases.

Jason Scott: The general rule is that the advantage between Roth/Traditional depends on the current vs. future tax rates. If tax rates do not change, the after-tax spending available in retirement from either a Roth or Traditional approach are the same assuming the after-tax contributions were the same.

If you think tax rates will be higher in retirement, then Roth is advantageous.

_______________________

Martha M. Hamilton: Thanks for all the good questions today. Join me again on June 3. If you have suggestions for columns, email me at hamiltonm@washpost.com. Many thanks to Jason Scott for helping today.

_______________________

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