Certified financial planners from the Financial Planning Association of Puget Sound answered retirement-savings questions for free. Here is the third set of those answers.

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Certified financial planners from the Financial Planning Association of Puget Sound answered retirement-savings questions for free. Here is the third set of those answers.

Advice given during the hotline is for educational purposes only and does not signify that those e-mailing engaged the services of a financial planner. It relies solely on the information provided by readers.

If I have $ 300,000 to invest from the sale of my home, what investments would yield a safe return on my investmewnt without draw down on principle ? I would like to know what monthly income I could plan on in my retirement stratedgy.

FP: You have a great oppportunity. Before making an investment it would be important that you determine your goals, risk temperament and time frames for your financial life. As financial planners we assist you to put your finances into the overall context of your life.

If you score as pretty conservative, you may want to invest in a latter of Treasury Bonds. If not, maybe a ladder of corporate bonds. Then, of course if you are relatively young, under 45, I would recommend some corporate value stocks or stock funds and international
funds. If you have a broad enough set of these and a long enough number of years your principal will probably hold up.

As far a income goes, you will need to tell me when retirement is. If now and the sum is $300,000, that will give you an aveage of 5 or 6% annually, without disturbing the principal. Thus, you could count on $15,000 annually from the $300,000.

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My wife and I plan to retire at 60. Where can we get the cheapest insurance until we’re 65. We are both in good health but of course getting older. We just want the minimum coverage.

FP: You could try office of insurance commissioner for health insurance options and availability of carriers in your area. Then call the carriers and ask them to send you information for you to compare.

Could you recommend a website with matrix to compare Health Care Insurers by name, coverage and costs? 2. Although providing the exact, verbatim ‘Risk Profile’ I have not received a proposed program with a large degree of similarity from any two Financial Planners. – Is this the norm do to so many investment products available that FPs limit their familiarity to few and recommend only from that few?

FP: Try the insurance commissioner’s office website, maybe they have a cost comparison matrix. Otherwise, i don’t know of anyplace.

Re FP and their recommendations-remember there are thousands of mututal funds and planners have their preferences, ways of doing diligence…
We hope that helps.

Both my wife and I are now receiving Social Security monthly benefits. When I die, what will be my wife’s monthly benefit be?Clyde Hill

FP: Which ever is larger. You would need to look at your benefit compared at 75% compared to her benefit. She would get the larger number. I would double check with the social security office to verify.

What should my husband and I look for in a financial planner in terms of certification, degrees, experience, etc? Ideally I would like to find someone who can offer advice about taxes and insurance as well, keeping our financial situation in mind. I am 51 and my husband is 59. Our combined income is around 100,000. We have very recently completed paying for our home and have roughly 200,000 in various retirment instruments. I’d like to get some great advice to keep us on track and maximize and protect what we’ve been able to set aside.Seattle

FP: A Certified Financial Planner (CFP) by training has a good general background on cash flow management, tax law, retirement plans and retirement projections, estate planning and insurance. In complex tax or estate planning situations they typically consult with specialists as the situation warrants. The key focus in working with a planner should be the process of the planner identifying the important goals and objectives of the client and then having a plan to achieve the goals. Look for experience of more than 10 years. Ask what type of clients the planner tends to work with. Ask if they will be completely transparent about fees, commissions, other costs. I have a bit of a bias in that I think planners who charge hourly fees (or an asset-based fee) for managing investments tend to be more more objective. Interview a minimum of three people. Congratulations on paying off your mortgage and having a healthy balance for retirement.

Do I need to have earned income to convert some of my traditional IRA to a Roth IRA?

FP: No.

I plan to retire when I am 62, and my wife will be 63
in July 2007. In 2008 my wife and I plan to start collecting social
security and supplement that with money from our traditional IRAs. It looks like my IRA withdrawls go on line 15a of the IRS form 1040 and social security payments go on line 20a. Does that mean I have to pay income tax on our social security payments? If my wife and I take out $75,000 yearly
from our IRAs and we recieve $40,000 from Social Security (combined) what would be the income tax and would there be social security penalties. We will not be working, and therefore do not have W-2 forms.

FP: Your IRA distributions are fully taxable. 85% of Social security payments are taxable when your combined income is over $44,000.

I was tired of keeping track of various mutual fund statements, so now all of my traditional and Roth IRA accounts are invested in six Vanguard mutual funds. Is it safe to invest all of my IRA accounts in one mutual fund family?

FP: I am with you. With Vanguard’s on-line tools to track your investment and even other funds, I think keeping it in this one fund family is fine. Vanguard is the second largest mutual fund company that offers hundreds of funds so diversity is not an issue. If it was a smaller mutual fund company it could be a concern.

Your have picked a good company.

Asset diversification: Presently (age 61 retirement 62) have 70% stock/30% bond in savings. When looking at diversification, do I look at the total picture including my SS and pension in the asset mix? Do I comitt more of my saving to stocks? I am a moderate investor.
Maple Valley

FP: Your asset allocation is likely over invested in bonds. As a financial planner, I would calculate the present value of your pension and social security payments and include them in the fixed income portion of your portfolio. To maintain your 70/30 split, a moderate allocation, more of your assets should be invested in fixed income. Also, you should have about 5% of your total assets in small cap stock and 5-10% in foreign equities.

Could you please give more detail on the “pay yourself first” idea. I (being older) think this means a cash reserve of several months, a 401K, and other savings. Others near and dear to my heart (young guys!) think paying additional on the mortgage and keeping debt free otherwise is more the current thought, but without cash reserves. Comments, thoughts?

FP: To me “pay yourself first” means to save. Savings could be through investing or putting aside money in a retirement plan. I would not qualify “pay yourself first” has anything to do with paying off mortgages or debt. This is probably a good idea to pay off debt but saving is my answer to your question.

windfall/ofset? my wife worked in a state with their own retirement system,then wa.under ssa. if she draws that money out of that state will she still be penalized by the social security system.we are not sure about how this works. thank you

FP: Unfortunately I am not a tax specialist. I think you need to talk with a CPA.

I have contributed about $90000 to social security during my career. I am assuming that taxes have already been paid on this amount. How will this be reflected when I start collecting at retirement and will taxes be witheld from my ss check? I am 64 1/2, Thanks

FP: Social Security will be taxed if your adjusted gross income is above certain levels. When you file your income taxes you will need to complete a form in the 1040 that will determine if you owe taxes on the social security payments or not. If I remember correctly if your adjusted gross income is below 25,000 as a single person your social security payment would be not be taxed. For filing jointly I believe it is $32,000.

Unfortunately if you have too much income the government will tax your social security benefits.

Good luck in your retirement.

Currently, I’m putting $400 a month to my work 401K plan and $375 a month to a ROTH. Would I be better off not getting the ROTH and putting all my money into the 401K. It appears to me that the growth would be better in the 401K. (I’m 50 years old and have $58,000 in the account).Kent

FP: Unless you have maxed out your contribution to the 401(k) I would not put any more money in the ROTH IRA. Since you are 50 the maximum 401(k) contribution in $18,000 ($14,000 + $4,000 catch up for 50 and older).

I would guess you are not contributing $18,000 to the 401(k). The 401(k) grow taxed deferred.

Keep on saving for retirement. Good luck.

With a real rate of draw-down only ~1.5% per year (after
inflation), I wondering if it makes sense to use the tax-deferred IRA account as an estate planning tool, that is an tax-sheltered savings instrument to pass on. We don’t need more than a minimal withdrawal and should be able to manage 3 – 7% nominal rate of return on long term investments.

FP: Typically we see the IRA as somewhat problematic in estate planning as it is received as a fully taxable investment to survivors. However, if the survivors follow the rules, they can stretch out the required withdrawals from this asset over their life expectancies. Perhaps in this instance the IRA can be taxed in lower brackets of the beneficiaries (than in your higher one now), and they might view this part of inheritance as an “income for life”. Typically if the (non-spouse) survivors don’t begin this withdrawal process within 1 year of death, then they must withdraw the inherited IRA fully within 5 years and pay all the tax at ordinary income tax rates. It should be noted that other assets generally pass without capital gains or ordinary income tax due – like regular stock accounts, or real estate, etc. For example, let’s say you’ve held onto a stock forever (outside an IRA), like GE and it has a value of $100,000. Maybe your tax basis is $20,000. If this asset passes to survivors as part of your estate (not in trust) they take the tax basis at death. A capital gain tax has been avoided. A similar thing happens with real estate and residences.

Another idea: There are also folks who name a charity as the beneficiary of the IRA (if they are charitably inclined), to avoid paying federal income taxes on the distribution eventually. The Charity doesn’t have to pay tax on the eventual distribution. This is money that doesn’t go to the IRS, but stays with the charity. If the parents are healthy, and the survivors want to replace this asset, they might purchase a second to die life insurance policy on the parents joint lives. Upon the second death, surviving children receive a similar asset tax free.

You might see an estate planning attorney or planner with estate planning proficiency to talk over the costs and benefits in greater detail.

What rate of inflation does one assume for retirement
planning that projects ahead 25 years? does it make sense to do one’s planning in real current dollars to maintain perspective rather than nominal inflated costs and dollars?

FP: Thank you for asking this question.

This is what financial planners debate continually – and the answer changes depending on the economic times. Currently, we’re using inflation rates of 3-3.5% and a draw-down of 4-5%. Draw-down is the amount of withdrawals from your assets during retirement. We used to use 8% but, with the current and
recent past, we’ve revised that on down.

Many of the retirement planers ask, how much money do you think you will need, monthly or anually, to live on after you retire? I have a really hard time answering that. I can tell you what I want, but that may not be realistic. Is there a good formula? Thoughts?

FP: Since I don’t know how far you are away from retirement my answer would probably be different given your current age.

What I suggest you do is record your expenditure, if you don’t already, though a software program like Microsoft Money or Intuit’s Quicken. After a year you would have a realistic picture of your current living expenses. In retirement think about what will change (will your mortgage be paid off, you will no longer pay social security taxes, do you want to travel, what will health care costs be in retirement- could be a big number). Many of these are unknowns. I would probably use 100% of your current living expenses or even more with the health care cost consideration.

My wife is disabled – a declining lower back condition. She is bed-ridden roughly 80% of the time. She was oblidged to quit her job with Department of Social & Health Services approximately 7 years ago due in large part to this condition. We have hesitated from filing for Social Security Disability because we fear that this will weigh negatively against our ability to qualify her for Long Term Health Care Insurance. We are meanwhile hoping for some medical break-through which can rehabilitate her condition so she can return to the workplace while getting by on my income. We are both 50 years old and have a 10 year old daughter. I figure that worst case I’ll remain in the workforce until 65 – 70. We both have pensions, small IRA’s and deferred Comp-like accounts.

Together with our house which is half paid for, Id value our current assets at roughly 1.25 million. I earn $80K/year. Question: Should we file for Social Security Disability? Would this be treated as taxable income? Are we “leaving money on the table” by not getting Social Security Disability? Will this in fact eliminate our ability to qualify for affordable Long Term Care Insurance? Should we go ahead and try to get Long Term Care Insurance now so our premiums are as low as they could be? Which kinds of retirement planners would best be able to help us sort this out? Our chief fear is that, for lack of planning, health care issues will deplete our retirement assets regardless of when I retire. Would it be better to get DIsability now and bank that against this real possibility?

FP: Social Security disability is very difficult to qualify for. I suggest that you apply for it, it would not hurt.

Long term care insurance is predicated on her being able to qualify. I would guess that if she qualifies for social security disability she would not qualify for long term care insurance. If she was able to go back to work and her employer had a long term care insurance plan, she probably would have an open enrollment period where she could enroll without any medical evidence needed or preexisting conditions.

I hope it all works out for you and her.

My husband and I are 30 years old and about to have our first child. We have approximately $200,000 invested in stocks and mutual funds in a combination of IRA’s, his 401k, and some investment accounts. I feel good about our investments, but I worry about my parents, who carry some debt and have little saved for retirement. Is there any suggestion for how to plan for the needs of my parents (each about 60 years old right now) without hurting our savings for our own retirements and for our children?

FP: Congratulation on the impending birth of your first child. Given your age your are doing well with you investments. Keep putting money aside for your retirement, take advantage of the tax differed rules that are available.

You are very thoughtful thinking of your parents. This cannot be easy for you especially since you will now have a new mouth to take care of.

It does not make any sense to jeopardize your own future for your parents. If you can swing it financially you might look at purchasing long-term care insurance for your parents. This is pretty expensive but if doable it could give you some piece of mind in the future.

Can a person who does not have earned income still pay into some type of IRA? What are the options?Seattle

FP: You do need earned income to contribute to an IRA. If you are divorced or separated and receive maintenance that does qualify as earned income.

My husband and I migrated to US about 9yrs ago with 2 kids, one a senior in high school and the other in elementary.Own 2 homes, live in one and the other rented out. We both have average paying jobs but donot have much investments for retirement.Can you pls give us some advise about how we are doing so far?

FP: Sounds like you are doing fine with hard assets, your home and rental property, but are falling short when it comes to retirement planning. I would increase the amount your put towards retirement. If your employers have a retirement fund contribute at least enough to get the employer match. Work towards increasing your investments until you max out the amount you can contribute ( for a 401(k) the total is $14,000 and for an IRA it is $4,000). If you don’t have retirement plans through your employer open an IRA. Need to get going on your retirement planning because the earlier you start putting money away, the more you will have when you retire.

I’m wondering about the 40k limit of $15,000. Does the $15,000 limit include employer matches, or is it just the amount that I contribute?

FP: The 401(k) limit for 2005 is $14,000 for elective employee contributions (not the matching). The limit rises to $15,000 in 2006. There are catch up amounts that raise this level of you are over age 50.

Would you please advise how I can find a Financial Planner who will be compatable with my needs?Seattle

FP: Try these websites for a referral to Certified Financial Planners: www.CFP.net , www.fpanet.org . Be sure to interview a variety of planners using an interview form available at one of these websites. I have a particular bias in that a planner who can charge an hourly fee for providing advice may be more objective and less “product-oriented”. But of course, this is not always the case.

Do I need to have earned income to convert some of my traditional IRA to a Roth IRA?

FP: No. You need earned income to contribute, but not to convert. There are limits on AGI that affect whether or not you can convert.

I quit my job August 2004 to take a break. I took $26,000 saved in a 403B and put it into an IRA. I was told I have no access to those dollars for 7-years. Is it true the government mandates withdrawls began at age 70? If so, how does the “non-withdrawal for seven years affect this federal madate; and if the mandate is true what are withdrawal amounts. I only live on social security, $969 a month. My adult children pay my mortgage, $1,343.22 with money they owe me until May 2004. I owe $222,222 on my house with about $150,00 equity. I’m wondering if I should sell my house and I am looking for new employment. I have no debt beyond daily expenses.

I am 67 in complete health most of which pays various insurances (car, supplemental, life insurance, utilities, etc.) I am not taking your word as gospel and I need some ideas about what I need to consider.Seattle

FP: I hope I have understood your questions. There is a tax law that requires one to begin drawing from IRAs and other retirement plans like 403(b)s if he/she is no longer employed there beginning in the year after the individual turns 70 1/2. I am not sure what the “non-withdrawal” for seven years refers to, unless it is a surrender period during which any withdrawals are subject to surrender charges – just a guess. Most products with this limitation do allow you to withdraw your required minimum distribution amount without penatly. Have this point clarified. Was it appropriate to recommmend you buy a product with a 7-year surrender without ability to draw given your circumstances? Maybe not. If you have reservations (I do!) speak with an office manager of the institution from whom you purchased the product.

If it is clear that your children will soon stop paying your morgage (is it May 2005?) once the loan is repaid, then it may be time to reconsider the housing situation. What about this: Go speak with a local AARP representative to get info on the variety of reverse mortgages that are available. Some of these programs allow you to purchase a condo with your equity and some amount of cash provided by the reverse mortgage provider . You don’t make any mortgage payment. The lender does. Your home equity will be used up during your lifetime -but you can stay there as long as you live. An alternative would be to try to find a condo that meets your specifications with the net proceeds of the house sale and don’t use the reverse mortgage option. However, you will need to budget for condominium association fees. Given that May is approaching this may be an opportune time to make a change. If you can save the money the children were paying to the mortgage in April and May for savings, that would be great.

– Some people obtaining reverse mortgage arrangements use them to assume the mortgage payment. However, your morgage balance may be too high based on what is available.

My concern about you staying in your residence with having to pay the $1,343 monthly mortgage after May 2005, is that if you couldn’t find work or earnings were sporadic, you would be forced to draw from the 403(b) -and deplete it pretty quickly (and perhaps pay surrender charges).

Try to clarify your IRA plan (1) Confirm that you cannot withdraw at all from the IRA over the next seven years – many providers do allow some monthly withdrawal (if it is needed) that does not trigger any surrender charges. (2) Confirm whether this seven year limitation is because of surrender charges.

Both my husband and I put 10% of our income into our 401ks. We have two boys (11 and 14) and never have started a “college fund” thinking that we should fully fund our 401ks first. We are not even close to the $14,000 max contribution allowed per year. Is there any reason to start a separate college fund? We are thinking we will borrow against our home or our 401ks when the time comes.

FP: You are doing fine. Your first priority should be retirement funding not funding for children’s college education. I would stay the course the way you are handling it. I would not fund education cost by borrowing against your home or taking out any of your 401(k).

There are many options when children get to college (they can get a part-time job, get a loan or qualify for a scholarship). I would not jeopardize your retirement future, let the children share in the cost of their education through a loan of some form.

Keep putting money towards retirement. Also given your children’s ages it would be difficult to start now to have enough available when they reach college age.

I am thinking about switching to a qualified high-deductible health plan in order to take advantage of the new Health Savings Accounts. Do these plans work on a schedule similar to IRAs? That is, do I have until April 15 to get a high-deductible plan and set up an HSA so that I can claim a deduction on 2004 taxes? Thank you.

FP: Yes, you do have until April 15th to make a 2004 contribution and take a deduction on your 2004 tax return. You may want to check out the IRS website ( www.irs.gov/publications/p969/ar02.html#d0e108) for detailed information.

My husband and I are in our early 40s. Overall, we feel we need some direction regarding our investments, college planning for our children, taxation, and general financial decision making (pension plan, 403B plan, life insurance, etc). I have always felt it would be better to go to someone who was fee based rather than commision based. What are your thoughts on this and how much are the fees for consultation/planning? Advantages? Disadvantages? How do I go about finding someone that I can trust and who has experience as well as the credentials necessary?

FP: I am a fee only planner so my answer is biased. Most fee only planner do not sell any product and do not receive management fee to handle people’s investments. The fee only planners look at each situation and recommend what would work best without any obligation to promote or sell anything (their lenses are not clouded).

Fee only planners either charge by the hour (running from $100-$200 per hour) or by a contract to do a specific task.

In spending down assets in retirement, is it more advantageous to first use tax-protected assets such as iras and 403B’s or non-protected assets?

FP: There’s not a black and white answer to your question. Depending on the size of your estate, IRA’s and 403B’s are not the most tax-friendly vehicle when you die. If that’s an issue and the majority of your assets are in these tax-deferred accounts, you may want to start spending these down first. If you are trying to benefit from more tax-deferred growth, then you can spend the other assets first and give your deferred assets more time to compound without taxes. Key variables to understand are your tax rate, your potential estate tax liability, and how much you need to draw from your investments to fund your living expenses, other sources of income,etc…

My teenage daughter has received a small sum of money from her grandfathers inheritance and we would like to invest it in an IRA. What kind of IRA would you recommend so that we can withdraw money in a few years to use towards her education.

FP: As a teenager, she will need a custodian(parent usually, but not always) for whatever she sets up. Why specifically an IRA? Both 529 plans and Educaton IRA’s offer tax-deferred options, but if she is over 14, any gains/income would be taxed at her rate anyway which is presumably very low to none. You could also just do a custodial account for her (UGMA/UTMA) which is taxable at her rate. Depending on how many years she has until you want to draw the money out will determine how aggressively or conservatively she wants to invest the money. www.planningforcollege.com has some helpful tools for college planning and additional information on education savings alternatives.

We are a married couple with a new baby. (age 27/35) We have about $35K in savings and want to put our money in something…perhaps real estate or a 529 plan….we make about $85K and don’t contribute to a 401K…how can we maximize our future retirement goals? How much do we need to save monthly to live at approx. the same standard as today ($80K)?Mukilteo

FP: I would make your priority to start a retirement fund and continue to increase the amount until you approach the maximum you can contribute (currently $14,000 for a 401(k) plan). If your employer providing a 401(k) plan with a match then at least contribute the maximum amount that would get this free retirement money.

I would put this ahead of putting money away for college funds, this should be a secondary goal.

Unless you are a sophisticated investor I am not sure putting money in real estate is the best option. It take much hands on work. You might look at a REIT mutual fund. This would get you in real estate without having to manage property.

Given the time we are living in, most people should look at their current standard of living and project it into the future. It probably won’t cost any less in retirement.

If a person dies before their annunity is completed does the remaining money go to a beneficary or is it lost?Sumner

FP: If your annuity is in “accumulation” phase, the annuity goes to your designated beneficiary. If you are in a distribution phase, it depends on how you have elected to receive your distribution (it is usually not possible to change this election once it’s made). Your annuity company can answer specifically based on what you have set up.

I am 31 years old and have $25,000 in my 401k. I am married, and our combined annual income is about $125,000. I also will be eligible for a pension when I retire. My question is, if I want to retire at 65 and live on about $70,000 a year, how much should I be setting aside each year? Also, my 401k is 100 percent stocks because I have time to weather the ups and downs of the stock market. Should I diversify a bit?

FP: Retirement planning calculators are available on different websites www.mymoney.gov, www.tiaacref.com, www.vanguard.com

What percentage of your income are you putting into your 401k. A good target is 10%. You definitely want to take advantage of any company match. How much is your pension? That will determine how much shortfall there is between the $70000 you want and how much you will get. 100% to stocks is aggressive and whether it’s a good idea or not depends on what else you own. You do have time on your side; but you may want to explore what diversification options are available to you even within stock types (international, small/mid cap/growth value etc..)

I am a single mother raising three children 10 and under. I would like to begin college funds, savings for myself and children as well as purchase a home. How can I accomplish these things with one income of approx $34,000 a year and no child support?

FP: There are unfortunately no easy answers to your situation. First and foremost is to be in a position to live within your current income without incurring debt. Are you doing that today? If not, make what ever changes you can to get rid of credit card debt and have a life style that you can support on your current income.

You then need to have cash reserves. Set aside some amount every paycheck to savings or a money market. THis money is safe, liquid, and accessible. It’s there for TRUE emergencies; not the everyday things that always come up.

While I appreciate the desire to focus on college early, I feel the greatest gift you can give your children is to take care of your own retirement. If you have a retirement plan through work, sign up, even if it’s only for 1%. If you don’t have a plan from work, consider a ROTH IRA. You can contribute up to $4000 this year(2005). Whatever amount you start with now, try to increase every year. After 5 years, you can access funds in the Roth for a first time home purchase. Small changes today can make a big impact over time.

Beyond asking all 1200 of the CFP’s on the list how they are compensated (which IS a key factor to us), any other tips?

FP: I would look for a fee only planner. They charge either an hourly/as needed fee or on a contracted amount. They are not compensated on commissions or selling anything.

I would like to retire early in about 8 years. For the next 8 years, is it better to invest what savings I can afford into my home equity (which I plan to sell on retirement and move to another location) or to invest in a non-matching 401K plan, or something else?Bellevue

FP: The analysis goes like this: Your “rate of return” for paying off your morgage early equals the pre-tax mortgage rate. By example, if your mortgage rate is 6%, then you would compare the mortgaeg pay-off option with a rate of return achievable in an alternative investment. Unfortunately there are no 6% guaranteed rates of return available at the moment(Treasuries, CD rates aren’t that high.) Therefore one would have to accept some uncertainty of return over the timeframe in a non-guaranteed option within your 401(k). The rule here is that your risk temparement will dictate. If you want to take the uncertainty of earning more than 6% (averaged over 8 years)than going the route of putting the excess in your 401(k) might be your better choice. You would probably need to invest it in one of the stock fund or balanced fund options to have a likelihood of achieving an average return above 6%.

Most planners do advocate having both in place, a healthy 401(k) as well as a plan to reduce the mortgage by retirement.

No one really knows what returns will be. However, generally we suggest that if you are really only planning to remain in the residence for a short time, then putting more funds into home equity isn’t all that productive – we are back to the rate of return that equals your mortgage rate versus the upside (or downside) in the 401(k).

My wife and I would like to start saving for our son’s (1yr) college education. Would the college savings plans be a better option than drawing from our IRA when the time comes? Seems as though there are less investment options with the education plans.Kent

FP: You have not supplied enough information to give you a very helpful answer. In general you should put your retirement funding first and your educational funding second. I would suggest you leave the IRA alone and not use it for your child’s educational funding. I would suggest a 529 educational plan. There are many of these out there that provide great flexibility of investments with large tax deferral amounts.

We purchased a home last year that we hope to continue to live in after retirement: $330k 30 yr mortgage, 5 3/8% interest. I plan to retire in 20 years @ 67. Should we 1)make extra payments ea. yr. to pay off mortgage in 20 yrs or 2)invest that money to pay off at retirement or 3)invest that money to make payments after retirement, i.e. pay-off in 30 yrs.Maple Valley

FP: To best answer your question I would need to know a bit more about your big picture.
For example, we are all unique. It is very important to some of us to have our homes paid off. There are others who have a traveling, moving life style and to put that much of your life into your home would be unnecessary. Where are you on that continuum?

A second consideration is your risk temperment. Are you a risk taker? Do you have a goal to leave a large estate? We have no idea what taxes or investment results will be in the future, but we do know what the mortgage payments are and what it will take to pay this off. Maybe you should go with the certain thing. Certainly, don’t invest money you may need someday to use to pay off the mortgage. ONe approach will be to pay just the mortgage while you are young and still traveling etc. Don’t tie up all your cash flow into the house. You could add two or three hundred monthly to pay down the mortgage early and then develop an illness and not be able to travel during your retirement. Balance, balance, is often the answer. Good Question.

I may retire in 2 to 5 years. We have a cuurent mortgage balance of 50,000 at a 6.7 interest rate. What are the pros and cons of refinincing at a lower rate, paying off the mortgage in full now, or standding pat?

FP: That sounds like a straigtforward question, but there are actually several complex issues to look into. I won’t be able to answer your questions; but can give you an idea of variables to consider.

How many years are left on your current mortgage?
Do you plan to stay in your house?
WHat is your overall balance sheet (assets and liabilities)?
Are you trying to take cash out by refinancing?
What will your cash flow be in retirement? Will it adequately cover the mortgage?
In general, I dont’ recommend accelerating paying off a mortgage as you sacrifice the liquidity and flexibility that those asset offer you elsewhere. There are defnitely lower rates available today; a good mortgage broker can help you evaluate alternatives.

I am young (25) and have approximately $15,000 in a retirement fund. I’ve recently purchased a condo and am worried about making steep condo payments while I’m also paying off my car (I have about 1 1/2 years left of payments or a total of about $7500). I have accepted a job offer in another organization and will be leaving my current position soon. I am wondering if it would make sense to take the cash from the retirement account (at a hefty tax penalty) and pay off my outstanding car debt, or if I should roll it over into an IRA. I plan to join the retirement system at my new job.

FP: I commend you for putting money in a retirement plan at an early age. This will compound and be a sizable amount when your retirement day comes. I would look at other ways to pay off your debt rather than taking the money from the retirement fund. Can you change your living expenses and live within your means? You might have to create a budget that will help you handle the debt payment, paying it off quicker.

I think it would be short sighted to use your retirement funds to pay off your debt especially since you will have the 10% penalty to pay plus it will all be taxable to you in one year.

I am trying to strengthen my retirement but keep getting weakened by a $10,000.00 credit card debt. Presently, I have a 401K program through my employer. I invest 2 percent of my paycheck and have accumulated about $4,000.00. My wife also has a 401K program through her own employer. She invests the maximum 15 percent of her paycheck and she has accumulated about $47,000.00. We also both have Roth IRA’s but only have around $400.00 in each account.

Finally, we have fourteen-years left (of a 15-year home mortgage), a refinancing a year ago, with a balance due of about $115,000.00. How do you recommend that I best get rid of that credit card debt so that my wealth can instead go toward my already established retirement programs? I make $30,000.00 a year salary. My wife makes around $17,000.00 a year salary.Kent

FP: Congratulations on doing so much toward building a secure financial situation – building home equity with a 15 year mortage and putting funds into 401(k)s. It probably hasn’t been easy.

If you believe there is absolutely no extra monthly funds to reduce the credit card debt, then consider this:

You might pay-off the credit card with a home equity loan and be very disciplined about paying off the home equity loan in the following fashion: (1) Divert your 2% contribution to the new loan (2) divert 1/2 of your wife’s contribution to the loan – this is about $1,790 per year. This would still take about 7 years to retire early. Divert any future wage raises to this home equity loan? While it makes one a little uncomfortable to retire credit card debt with home equity, it could keep your interest costs lower especially as rates rise over the next few years. Good luck. I don’t really like the idea of borrowing from the 401(k) to pay credit card debt – because the payback period may be as short as five years, although this can be another option if the 401(k) plan allows borrowing.

Are there any creative ways you could “raise” some additional funds? -Garage sales,etc? Can you negotiate a little higher salary?

Have you the discipline needed to avoid additional credit card charge to accrue? Remember to try to build up emergency reserves to avoid having to take on debt when unexpected expenses arise….

I will be 76 yrs old on May 22, 2005. Currently I have a $125,000 universal life policy in the 19th year. I paid a one time premium in the amount of $47,528. This policy has a current death benefit in the amount of $158,161 and a surrender value of $150,630. A financial planner located in Portland, OR (my policy assigned to his agency), has recommended that I move from the position of being self-insured–obtain a policy with a lump sum premium in the amount of $100,000 with a guaranteed death benefit in the amount of $230,000. The life of this policy is 24 years at which time the policy terminates upon my reaching age 100. At age 85, my current policy has a guaranteed death benefit of $194,985 and a guaranteed surrender value of $185,700. The proposed replacement policy would have a guaranteed death benefit of $230,000 and a guaranteed surrender value of zero. At age 95, my current policy has a guaranteed death benefit of $226,531 and a guaranteed surrender value of $229,972. The proposed replacement policy would have a guaranteed death benefit of $230,000 and a guaranteed surrender value of zero.

The lump sump premium payment of $100,000 for the replacement policy–to be paid from surrender value of the current policy would enable me to recieve the balance of approximately $50,630 of which $47,528 would be tax free. The replacemnet policy has a limited surrender value–$58,133 at age 80 and zero at age 85 and beyond. Effectively, I make a $100,000 investment that can return $130,000 only through my death. Keep my current policy or take the cash surrender, put $100,000 into a replacement policy and invest and/or spend the remainder of the cash value.

FP: Your situation is complex and you did a great job of providing details. However, you didn’t really clarify what your objective is. Are you trying to free up cash or increase death benefit. What is the purpose of the death benefit (for estate taxes, gifting to family, charity???). These questions have more to do with which is better than anything else. It sounds like you may be moving from a fixed rate to a variable rate policy. Do you want that additional risk/volatility? If you need cash, you can access it from your existing policy very easily and affordably. With a new policy you also restart a contestability and surrender charge period which may not be desireable. From the limited information provided, I would assess carefully what you are trying to accomplish before proceeding.

What kind of IRA account actually gives you compound interest? When I transferred from an IRA account on the East Coast to a West Coast IRA, the East Coast person told me, “Be sure you change this account to a ___ after the transfer, or you won’t get much interest.” I forgot what she said, and sure enough, I get almost nothing growing in the account. When I asked the question of the place I transferred it to, they didn’t seem to know much.Carnation

FP: You need to find out how your IRA is invested. You need to call the custodian of your IRA. You might be invested in something that is not to your liking. Compound interest applies where the investment throw off earning and then these earning start making more earnings. There are many different types of investments that will have different long-term returns.

Good luck, hope you like it on the west coast.

I have recently switched jobs and am not sure what to do with my previous 401k. My previous employer uses a different management company then my current employer. Can I move that money into my current account? If so, how do I go about doing that?Seattle

FP: Whether or not you can roll your old 401k plan into your new one depends on whether or not your current plan allows for rollovers(it varies by plan). Your human resource department can tell you. Whether or not you can, doesn’t mean you should. You should evaluate your plan options, quality, etc..You can always roll the old 401k into an IRA and invest in a wider array of investment choices. You have more flexibility here and can complement your current 401k options.

My question concerns my part of our retirement savings (my husband’s is doing well through his company’s 401K and a pension earned from a previous employer). I have around $50,000 in a SEP/IRA (I am self-employed) with Nations Funds (B shares) that I was talked into by BofA’s financial advisor. This is half of what I started with, apparently due to the stock crash. It is now 5 years since I did this, so I won’t owe a penalty to take the money out. What can I do with it more safely, and who with (what fund/mix of funds/bonds, etc.)? Based on what I read and my experience with B of A, I don’t trust these “financial advisors”, and read that they are only interested in people with lots of money (millions). Similarly, I have roughly $200,000 in one company’s stock (from employee options exercised years ago for $15,000) — who can I trust to do something good with it?Seattle

FP: You discussed your families array of investments. It will not be possible for me to give you specific answers. With my client’s I administer several goal and risk and reward instruments to get as your risk temperaments. Short of that I need to advise you both to keep a mix or good diversification. Presently, for example, the internationals seem to be heating up, the small caps are slowing and the bond funds sluggish. another time that could all be different.

It is possible that you got into the Nations Fund right at the top of the market in the late 90’s . It might be an ok fund, but your timing was not great. I suspect it was a new fund, also, and untested because B funds just came about at the end of the 90’s. My sense is that you are not a totally “do it yourself type on this” The bankers and stock brokers are fine for people who do a lot of their own research. You may wish to go on the hotline link and interview at least three certified financial planners. You have $250,000 to plan for carefully and to put into the proper asset allocation for your goals, timelines, and risk temperment. You will be well served to do some planning for these dollars.

Some of the mutual fund companies have risk and goals instruments on line and will help you with planning an asset allocation. The one limitation to that is that you can expect all the recommendations to be their family of funs. Keep studying and reading and try a planner.

I want to know how much money I will need to retire at age 65? I currently spend about $85000 a year after taxes. My house will be paid for at age 65. According to my latest SSA statement I will be at the maximum level of benefits if this trend in my income holds, though I wouldn’t be eligible for full benefits until age 67. I would like to plan on living until I am 100. I don’t want to leave any cash in my estate at my death – i.e. I want to use it all. So, given all that, how much do I need to have sitting in my retirement account when I turn 65? (I have a certain amount of faith that I can achieve at least 8% return on my investments.)

P.S. What I have never been able to figure out is the part about leaving nothing behind – I want to use both interest and principal to live on as I age from 65 to 100. I just don’t understand the mathematics of that.North Bend

FP: Unfortunately we don’t have the ability to do this calculation for you through this email process. I would advise you to consult a financial planner to do this for you. They can plug the numbers into a software package that will many different scenarios and options.

An accountant advised me that an inheritance I will soon receive would be wisely invested by paying down/paying out my mortgage, as real estate values in Seattle reliably increase. Does this make sense compared to other investment options?Seattle

FP: I don’t know if you accountant is licensed to give financial advice or how these recommendations fit into their practice, however there are different viewpoints on the value of paying down/off a mortgage and whether or not it is appropriate for you depends on a number of variables that aren’t disclosed in your email. In general, the real estate prices to up or down no matter whether you have a mortgage on it or not. If the alternative is to spend the money, then yes, you are better off investing the money in your house. However, if you have the discipline/committment to invest the funds then you have to look at the cost of your mortgage. Rates are typically very low today relative to other time periods. You need to know your tax rate to determine the true after-tax cost of your mortgage. Then you evaluate other investment alternatives (conservative ones for a most accurate evaluation). Compare the two to see which makes the most sense for you.

I’m a 31 year old single father of two children, ages 8 and 6. I make $50k annually, and have no real assets. I want to buy a house in the next couple of years, but I need to clean my credit up first. I have about $350 per month I can start putting towards debt, college for the kids, and retirement. What should I do first and where should I allocate my funds? I have term life insurance, should I look at switching to universal or whole life?

FP: Your first priority should be to get out of debt. It makes no sense paying high interest charges. After you pay off your debt set aside an emergency fund that will cover 3 months (at least) of living expenses. Once you have done this then use the money for building your retirement. I would not worry about putting money away for college education. There are many programs (grants and loans) when the day comes that your children can utilize.

Just the little that you have shared, I would only buy term insurance for say a 10 – 20 year term. You can purchase much higher limits which is important for providing for your small children if you are no longer around.

Good luck.

I have 2 questions. 1) My H & I are in early 50’s. He vested in Boeing pension before being laid off 3 years ago. I am self-employed. We have approx. $350K in IRA/Sep plans in diversified mutual funds (currently 60-40 stock/bond mix). We are becoming more risk averse with our uncertain economy, deficit. Q: What investment products exist outside the stock market for a portion of our retirment funds? Variable annuity (despite the double tax deferral) seem attractive to us. Anything else? 2) Our teenage daughter has part-time jobs while in college. She’d like to start an IRA but doesn’t have $500 or $1000 for the usual start-up account. Q: What can she invest in to start an IRA?Burien

(1) The 60/40 mix you mentioned is often considered appropriate for sometone in your age group. However, you should review the what if scenario during which your stocks might drop in value by 20%-25% in a quarter. (We often look to the decade of the 70’s to see how nasty a sever market drop can be – worse than 2002.). That being said it is a balance between preserving principal and reaching for the returns often achievable with stocks. It may be that a slighly more conservative mix is appropriate if you are particularly concerned.

(2) Other non-stock market investments. Bonds (lower return) Fixed insurance (lower return). There are funds (which should be used in small doses because they are volatile) that don’t move with the stock market (commodities, funds that move opposite the 30 year Treasury,etc)

(3) Is the variable annuity idea attractive to you due to guarantees of a certain balance or return guaranteed in the contract? Maybe this would fit your preferences, but there are some negatives: The contracts that are sold by brokers/planners can be very expensive (2%-2.5% or more annually in expenses). Some of these have seven year or longer surrender charges. Maybe paying the insurance company for a guaranteed “floor” performance provides some piece of mind.

(4) It may take a bit of research to find the companies that have low minimums. Oftentimes one can start with a $25 per month contribution if an auto investment plan is established. Morningstar is one resource that lists fund companies and minimum investment amounts.

My partner and I have been together for 7 years, and are discussing marriage and a sharing of our assets. He is 48 years old, and employed at Boeing. He can retire at age 55 with a full pension. He owns our $500,000+ home outright, and has approximately $450,000 in other assets. I am 56 years old, a writer and artist, and partially retired from my earlier professional pursuits (marketing and public relations). I earn less than $15,000 each year, an amount that may rise over time, though it is more important to both of us that I manage our home and large garden, and pursue my artistic/entrepreneurial endeavors. I own a 4-bedroom, 3-bath home just two blocks from us which includes a 1-bedroom MIL. The house is valued at approx. $325-$350,000. $135,000 is owed on the 14-year loan. Between the two houses, there has been too much expense, work and stress, and with renters leaving at the end of March, we are sorely tempted to sell the rental property. How
ever, the sale would be taxed as an investment, with expected capital gains of $30-35,000. What makes the most sense in terms of managing and positioning our joint resources for retirement? Should we sell or keep the rental property as a secure ongoing investment? And if we do sell, what would be your recommendations as far as reinvestment of those funds? Also, would it be wise for Meegan to help her 31-year-old son with a down payment on real estate? Thanks very much for your advice and help! What a wonderful service, and how timely for this family.

Congratulations on your future together. It is difficult to answer your questions without knowing more about you. You would have to ask yourself if you want to get out of the rental business. Is it providing you a reasonable return without undue headaches? Depending on how you answer this question will determine which is the right choice for you.

It might be piece of mind to go ahead and sell the property and take the income after capital gains and invest it. I cannot provide you an investment options without knowing more about your risk tolerance and your time horizon.

I know my parents helped me purchase my first house with help with the down payment. Without knowing more about your family dynamics I cannot answer if this would be appropriate for you. You could run into gift tax rules if the help is more than $11,000.

If you need additional assistance I suggest you talk with a financial planner.

I’m a 22 year old college student. What steps should I start taking now to ready myself for retirement in 30 years?Bothell

FP: Great question and congratulations on proactively planning ahead. There are two general things you should do.

1. Learn to live on less than you make (manage debt wisely and carefully) and 2. Invest regulary for yourself.

A good guideline to shoot for is to save 10% of everything you make. Living on 90% starts to feel normal after a while. Ther are two key areas for saving/investing that should be a priority now. One is to build up emergency reserves (savings, money market) this is liquid, accessible money that will help you not have to use credit cards. A guideline is 3 to 6 months of living expenses (if your expenses are $2000/month, try to have $6000 to $12000 in your emergency reserve fund). Secondly, and not last, as soon as you have earned income, set aside funds for retirement in a tax deferred vehicle. This could be a 401k through your employer, a ROTH IRA, or other similar plans.
You may want to check out some websites for retirement planning calculators: www.mymoney.gov, www.tiaacref.com, www.vanguard.com

Happy Investing and keep up that forward thinking attitude.

I have a Roth IRA, conventional IRA, and just starting a 401(k) through my temporary employer. I need to know the absolute dollar limit on my ability to contribute to these accounts this year. Parameters follow: I am over 55 years old. I contribute $150 a month to the Roth, which is in the Vanguard STAR Fund. I am just now deciding how much of my salary to contribute to my 401(k)-this will go to the Dreyfus S&P 500 Index Fund (the best of a terrible lot of choices). I do not intend to retire until I can no longer work-I am a purchasing professional, and have a nice desk job. I am married to a Boeing engineer who is 9 years younger than I, so I have the freedom to invest for the long term. Right now, though, I just need to know how much I can contribute to my tax-deferred investments.Everett

FP: One factor in answering you question is what your family income level is. ONce you have a joint income of $110,000 your allowed amount into IRA contributions decreases. I am actually surprised that temporary employment would make you eligible for the 401(k) plan. Usually, you have to work for an employer for three years.

You wanted to know your annual limits for all the retirement savings you can do. This year,you can only do a total of $3,000, (plus $500, because you are over 50) in your IRAs.
You cannot do that is both a traditional and a Roth. Total over both in $3,500.

You may place $14,000, plus a $4,000 catch-up, into a 401(k) in 2005. This is in addition to the IRA, if your total income is under the $110,000.

A brief comment on your investment choices. In both cases you mention an index type of investment, which is ok, but what about a good value large cap fund and some smaller amount in international funds. instead? You are doing great.

My employer does not offer a 401K plan. Last year I started putting roughly 12% of my post tax income ($500.00 per month) into an agressive Mutual Fund via a traditional IRA. I receive a tax break on the first $4000.00 invested on my federal tax return. Is there a smarter way to invest the additional $2k per year that might also receive a tax break?Seattle

FP: You are right that you cannot put more than $4,000 into a deductible IRA for 2005 ($3,000 for 2004)if under age 50. Unless you are self-employed your ability to contribute more on a tax-deductible basis is limited.

Do you think your employer would be willing to put a retirement plan in place? Many plans allow employees to contribute more, with minimal employer matching required. A Simple plan comes to mind as an example (some employer matching is required).

Regarding your choice of an “aggressive” mutual fund – be careful that this is consistent with your return objectives and ability to withstand a loss in the short term.

If no employer plan is possible and you are an employee, you could invest the additional $2,000 in a tax efficient mutual fund (no deduction, but hopefully won’t create too much taxable income from year to year).