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Martha M. Hamilton
Retirement Special:
Post Reporter Martha M. Hamilton
Planning Your Finances for Retirement

Wednesday, September 29, 1999, at 11 a.m.

Welcome. I'm Martha Hamilton and our guest today is Gregory Anderson, second vice president of TIAA-CREF Trust Company, part of the nation's largest pension plan.

Gregory Anderson
Mr. Anderson has worked in the financial services industry for 16 years, and he is a certified financial planner. He's not here today to provide financial planning that's something that requires more time and information than we could get into. But he is here to answer general financial planning questions you may have about how to ensure a comfortable income in retirement.

Transcript Follows

Martha M. Hamilton: Good morning. Thanks for joining us. There seems to be an endless curiosity about financial planning for retirement, so we'll get right to the questions.

Bethesda, MD: What can a couple with moderate income, three kids --one a senior in HS-- a new home and a large monthly childcare expense; do to increase contribution to 401k or save for retirement?

Gregory Anderson: By making contributions on a before tax basis the actual contribution is less than the amount that is contributed to the 401k program. For example, a $100 contribution will generally reduce take home pay by $72. If a person is in the 28% tax bracket. The other advantage is all earnings are tax deferred. So, you have two tax advantages.

Martha M. Hamilton: We're working on your questions. Keep them coming, and we'll try to answer faster.

Martha M. Hamilton: Our guest is having technical problems. Please hold on.

Germantown, MD: Hi Martha. I am 24 years old and currently work in Sales and Marketing for a well-known company. I currently make close to $35K a year, however, I am not investing in any type of stock plans or 401K, but would like to. Do you have any suggestions about how I could plan for my retirement early which isn't too complex and that I can start now? -I am really unsure if it is better to go with stock plans, 401K, or IRA's-. Thanks.

Gregory Anderson: It would behoove you to a start retirement savings program either in a 401K or IRA but preferably the IRA because you would be able to save more. And generally over a longer period of time stocks will provide a higher rate of return.

California, MD: I have the option to take payments from my annuities for 10, 15, or 20 guaranteed years. What happens after that guaranteed period ends? Do I still receive money from the annuities or is that the end of the payments?

Gregory Anderson: You will continue to receive payments after the guaranteed period as long as you live. The guaranteed period applies to your beneficiaries if you die prematurely.

Shelton CT.: I've been paying social security since I was 19. I plan to retire early at 55. I plan to take 80% social security at 62. How is my social security payment affected if I don't work for the next 7 years ?

Gregory Anderson: In general Social Security is based on your average earnings over your lifetime, so by taking early retirement at age 55 that could lower your benefit.

McLean, VA : I'm only 57 and plan to retire
before my 58th birthday. My main concern is health insurance. Where can I find the best options available -I will primarily need coverage for regular office visits and prescription drugs.-

Gregory Anderson: Generally you may be able to continue your health insurance through your employer, usually at a higher rate. Or, you may contact AARP for price comparisons.

Martha M. Hamilton: Isn't technology wonderful? We've resolved the technical problem and should be able to respond faster now, so feel free to send questions.

Arlington, VA: HI Martha,
Thanks so much for holding this chat. I'm 26 and I earn $37,000-year. I am putting away $2000-year in an IRA and $1,000-month for general rainy day-future house savings. I am also working to pay off my car -have a plan to be finished with that by next March- and off my student loan from graduate school -have a plan to be finished with THAT by April 2001-. I am single now and live in an apt -shared with a roommate-. Is there anything else I should be doing to ensure that I am financially stable in the near and distant future? After I pay off my car and student loan I will have more money for savings or retirement or general disposable income. But stories of impoverished bag ladies SCARE ME and I don't want to end up like that! Thanks.

Gregory Anderson: It sounds like you are on track to pay-off your car and student loan. With the additional funds that you will have in the future you'll want to make sure you increase your savings and tax advantage accounts such as IRA's and 401k's. Based on your age, you can afford to be more aggressive with your investments by investing in stocks.

Martha M. Hamilton: We haven't gone away--we're just plowing through the backlog.

Washington DC: In regard to Germantown's question, can you explain how an IRA allows you to save more than a 401K?

Gregory Anderson: Generally 401ks will allow you to save up to $10,000/year vs. an IRA which is limited to $2,000/year.

Martha M. Hamilton: Also in response to Arlington, you may want to take the monthly amounts that you're using to repay your college and car loans and put the same amount into savings--since you're already used to not having that money.

Jacksonville, Fl: My wife and I are 53. We have $325,000 in IRA's. We hope to retire at age 60 and our only income, other than from our IRA's will come from Social Security. We would like our IRA's to generate about $60,000 a year income when we retire. How aggressive should we be in order to achieve this goal?

Gregory Anderson: In order to generate $60,000 in income from the IRA the account will have to more than double in the next 7 years. This means that you would assume a considerable amount of risk. I would suggest a balance of stocks and bonds that would generate a lower rate of return and offer more stability. The goal of $60,000/year from the IRA may be unrealistic. The goal should be closer to $50,000 as opposed to $60,000/year.

Fairfax, VA: I currently receive stock options from the company I work for. I also purchase company stock through my 401K plan. Should I drop the stock purchase through my 401K and purchase other companies stocks instead?

Gregory Anderson: It's always good to diversify your portfolio. Relying only on your company's stock limits your investment exposure to other sectors in the market.

Martha M. Hamilton: It's interesting how often this question about an employer's stock comes up. There seems to be a tension between people diversifying, as everyone tells them to, and their instinct to bet on their own employer.

Portland, ME: Do you recommend long term care insurance? Women do most of the caretaking, and live longer than men thus are more likely to require long term care - at least that's what I've been told.

Gregory Anderson: Long term care insurance is a good investment if you can afford it. Otherwise, you are faced with spending down your assets to cover medical expenses and relying on government assistance.

Martha M. Hamilton: One theory about long-term care insurance is that it makes sense for middle-income people but not for those who are low income (because the government will take care of them) or those who are high-income (because they can provide for themselves).

Martha M. Hamilton: We have 15 minutes left. We'll try to go a little longer since we were handicapped by problems at the outset, and we'll get to as many of your questions as we can. Thanks for bearing with us.

Greensboro, NC: At what level of assets is it important to 'spend down' in order to minimize final taxes?

Gregory Anderson: Every citizen in the U.S. can shield up to $650,000 (in the year 2006 the amount is $1 million) from estate taxes. Any assets above this amount would be subject to estate taxes. Ways of reducing your estate value currently include gifting to individuals and charitable gifts. An example, you may gift up to $10,000/year to a child or if you are married a couple can gift up to $20,000 to an individual.

Danville, CA: What's your recommended asset allocation between equity and bonds for one who's 55 and planning on retiring in 5 yrs? Also, how would this allocation change once retirement begins?

Gregory Anderson: A majority of the portfolio can be in equities in general terms 50-65% and the balance in bonds and money markets. Yes, the allocation would change during retirement, with more investments in bonds. However, it's very important to maintain an equity position to provide inflation protection.

Washington, DC: With respect to long term care insurance, when is a good time to buy it? My husband and I are in our 40's now and his employer is offering long term care insurance for the first time. My suggestion was that we wait about 10 years or so to buy it, since in all likelihood we would not need it in the next 10 years.

Gregory Anderson: Now is a good time. As you get older the premiums are more expensive. Generally, the premiums will be relatively fixed and some insurance companies provide rebates if the policy is never used.

Martha M. Hamilton: We're almost out of time, but we'll try to answer a few more questions before we stop.

Arlington, VA: How do you choose a financial planner? What kind of questions should you ask? Is there a risk to going through a discount broker for financial planning, like Schwab for instance? How do you find a person like you? Second -or third, or fourth...- how often should you meet with a financial planner and when should you start?

Gregory Anderson: You may want to consult with a friend, relative or an associate that has had success with a financial planner, or you may want to consult the Certified Financial Planners Board of Standards in Denver, CO for a list of CFPs in your area. Usually, financial planning is an ongoing process. At least an annual review is warranted.

Martha M. Hamilton: My own rule of thumb is that if someone is simultaneously trying to sell you something and is offering financial planning advice at the same time, it's a conflict. I want my financial planning advice straight.

Martha M. Hamilton: My own rule of thumb is that if someone is simultaneously trying to sell you something and is offering financial planning advice at the same time, it's a conflict. I want my financial planning advice straight.

Martha M. Hamilton: I seem to be repeating myself.

Washington DC: What do you think of mutual funds that specialize in tech stocks or telecommunications? What is the common wisdom about longterm investments in these kinds of funds? Do you agree with the common wisdom?

Gregory Anderson: Limiting your investments to tech stocks and telecommunications stocks is not advisable. Your portfolio should include other sectors to participate in the overall market.

Alexandria, Virginia: My husband and I have made very good progress in saving for retirement through 401ks. In addition, we both have retirement plans that our employers fund that we are hopeful would provide for half our retirement needs alone. I am a little worried though because about 80% of our 401ks are in growth stocks. We are in our mid 40's with 2 kids and college about 7 years away. Is this investing too aggressive? Also, is there some rule of thumb, if you know, about how much life insurance should we have on the primary breadwinner -my husband-when we still have nanny and education expenses to worry about?

Gregory Anderson: The 80% in growth stocks may be a little aggressive. However, you may consider diversifying the growth stocks with large and mid cap stocks. For life insurance you generally want to have 6-10 times your income.

Martha M. Hamilton: We've got one final question which I think is on the minds of a lot of us.

Elkton, MN: Is it generally better to pay off debt or invest?

Gregory Anderson: It's always better to pay off debts before you begin and investment program. A general rule of thumb is to have an emergency fund of at least 3 times your monthly net income. This provides a safety net for a rainy day.

Thank you very much for having me today. I enjoyed responding to the questions. Unfortunately we were not able to get to all the questions today, but we tried to provide responses to the general themes.

Martha M. Hamilton: That's it for today. Tomorrow we have Martha Priddy Patterson of KPMG as our guest. She has written a book about the particular problems women face in preparing financially for retirement, but you can ask her general questions as well. Please join us here at 11 a.m. EST. And thanks for joining us today.

© Copyright 1999 The Washington Post Company

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