Employers’ Retirement Seminar May Be a Wise Time Investment
Dear Liz: No question here, just a suggestion. I think you should emphasize to your readers that they should avail themselves of retirement and financial planning seminars that may be offered by their employers early on in their careers.
That way, they’ll have the maximum time possible to make the right decisions and allow their investments to grow.
I finally went to one of my employer’s retirement seminars at age 40, after working for the company for 16 years. Although I found out that I was not too far off track, there were definitely things I could have done differently to maximize my retirement benefits. As you know, timing is everything in investing.
Answer: Actually, “time” is everything in investing. The earlier you start and the longer you stay invested, the better as you now know.
Your point about attending employers’ education seminars is well taken. Many people put off investing for retirement or aren’t comfortable making decisions about how to invest, and those seminars can help them get over those barriers. A few hours invested in one of those seminars can pay huge dividends.
Contributing to Ex-Employer 401(k) is Not an Option
Dear Liz: I’m working for a new company and they don’t have a 401(k) plan. Until they put one in place, can I put money into to my prior company’s 401k plan?
Answer: Sorry, but that’s not an option.
You have other alternatives, however. You can put up to $4,000 this year ($5,000 if you’re 50 or over) into a traditional individual retirement account or a Roth IRA. You also can save for retirement in a taxable account.
Your contributions to a traditional IRA would be deductible if you’re not covered by another retirement program at work (such as a defined-benefit pension).
Even if you are covered by such a plan, some or all of your contribution could be deductible if your income is below certain limits (adjusted gross income of $60,000 or less for singles, $80,000 or less for married couples filing jointly).
If your income is very low (generally $30,000 and under) you also might qualify for a tax credit.
Your contributions to a Roth IRA wouldn’t be deductible, but any withdrawals in retirement would be completely tax-free. That’s an enormous advantage.
If you’re young, expect to be in a higher tax bracket in retirement or if you can’t deduct your IRA contributions, the Roth is almost certainly the way to go.
If you can save even more, then a taxable account might be the way to go. You won’t get a deduction for your contributions, but you can qualify for low capital gains tax rates for any investments you hold for more than a year.
Choosing low-cost index funds or exchange-traded funds (ETFs) will help you keep fees and taxes in check.
Whatever you do, don’t allow your new company’s foot-dragging to disrupt your retirement savings plans. You need to be putting money aside–whether your employer is helping or not.
Help with Investment Portfolio Near Retirement
Question: I have been steadily investing in stock mutual funds since my early 20s. I have been following the buy-and-hold strategy, and unfortunately I have not been rebalancing my portfolio. Consequently, the vast majority of my portfolio is invested in growth mutual funds that have appreciated in value over the years.
I am now approaching retirement and want to reduce my risk. Should I leave my portfolio as is and invest any new money into fixed-income securities, or should I sell some of my growth mutual funds, which will trigger a substantial capital gains tax?
Answer: It sounds as if you’ve done a good job investing for your future. Now, you need to call in some help.
An objective, experienced, fee-only financial planner could take a look at your total financial situation  including your age, life expectancy, risk tolerance, expenses and other sources of income  to construct a portfolio strategy that will guide you safely through your retirement years.
This really isn’t a do-it-yourself project. There are too many ways to mess up your retirement income stream and too few ways to fix any errors you make. Take too much risk or withdraw too much from your accounts, and you could run out of money. Take too little risk, and the same thing could happen.
You really want professional help. Two sources for referrals are the National Assn. of Personal Financial Advisors (www.napfa.org or by phone toll-free at [888] FEE-ONLY) and the Garrett Planning Network, http://www.garrettplanningnetwork.com ).
If your portfolio truly is overweighted with growth funds, the planner perhaps in consultation with a tax pro might have you gradually sell off some of those investments so you can diversify into bonds, cash, value funds and international investments.
Â
The good news is that the top federal capital gains rate, 15%, is low, so you should still have plenty of money to reinvest.
Be Cautious with Reverse Mortgages
Dear Liz: This is not a question, but a comment on a recent column regarding reverse mortgages. Although your information was factual, reverse mortgages are not a prudent choice and should be considered as a last resort only. I investigated this option for my parents, and the fees are unbelievable: a minimum 2% origination fee and an annual 0.5% service fee to send out their checks. This does not factor in the other closing costs (title, escrow, appraisal, etc.). If you understood the usury involved by the lenders, you could not recommend it in good faith.
A: The fees that come with reverse mortgages can be steep compared with a conventional mortgage, which is why it may not be the best option for many borrowers.
That’s one reason borrowers applying for a federally insured reverse mortgage must undergo special counseling to help determine whether these loans are the best choice. You can call the Department of Housing and Urban Development at (800) 569-4287 for a referral to a HUD-approved housing counseling agency.
Origination and servicing fees can vary substantially from lender to lender. That is why it’s important to shop around to get the best deal.
The earlier column mentioned the AARP booklet “Home Made Money,” which you can download from its website (www.aarp.org) or order by calling (800) 209-8085. If you have any questions after reading the booklet, you can call the same number to be directed to the AARP Foundation’s Reverse Mortgage Education Project.
You might also check out the website maintained by National Center for Home Equity Conversion, an independent, not-for-profit organization that provides consumer information at http://www.reverse.org .
Reverse mortgages can be a prudent option for elderly homeowners who want to remain in their homes, but you’re right that they should understand the costs before they proceed.
About Reverse Mortgages
Q: My mother, who just turned 77, lives on Social Security. Although she’s grateful for her checks, they’re just not enough to ease her financial worries. I am able to help her pay for some of her medications each month, but she still barely makes ends meet. She invested in an IRA while she was working, but this year she will draw the last of her money from that account. Is there a safe and smart way she could borrow money against her house, which is paid off? Would she have difficulty getting a loan because of her age?
Â
Â
A: There’s at least one kind of loan where your mother’s age will actually help her get more money than she might otherwise: a reverse mortgage.
Â
Reverse mortgages allow older people to borrow against the equity in their homes and receive either a lump sum or a monthly check. The older you are, the larger the amount you can typically receive. If your mother’s home is worth $200,000, for example, she could boost her monthly income by $699 to $777 with a reverse mortgage. If she were 10 years younger, the amount she would get could be as low as $319 a month.
Â
These payments would continue until she dies, sells the home or permanently moves out, at which point the loan must be repaid. Typically, the repayment comes from the proceeds of selling the house; any remaining equity in the home would go to her heirs.
Â
AARP has a free booklet about reverse mortgages called “Home Made Money” that you can download from its Web site (www.aarp.org) or order by calling (800) 209-8085. You might also check out Tom Kelly’s book, “The New Reverse Mortgage Formula” (2005, Wiley Publishing) for help in evaluating the various reverse mortgage products.
