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Retirement Category

No match? Save anyway

Jan 13, 2014 | | Comments (10)

Dear Liz: Lately I have been reading a lot about how people aren’t saving enough for retirement. Every article I read talks about the need to put enough into employers’ 401(k) programs to get the maximum possible company match. What do you do when your employer doesn’t match your contribution?

Answer: You contribute anyway, and start looking for a better job.

The advice that people should contribute at least enough to get the maximum match is designed to ensure that workers don’t leave free money on the table. That’s essentially what a match is — a free, instant return on your contributions.

Maximizing the match doesn’t mean you’re contributing enough for a comfortable retirement, however. The match may be 50 cents for every dollar you contribute, but most companies won’t match more than 6% of your salary. Most people need to save more than that — sometimes much more, especially if they got a late start.

If your company’s 401(k) doesn’t offer a match, then you will need to save more to make up for the free money you aren’t getting. Because most plans offer a match, though, it may be worthwhile to look for an employer that offers this benefit as it can make retirement saving easier.

To figure out how much you need to save, use a retirement calculator such as the one at the AARP.org website.

Categories : Q&A, Retirement
Comments (10)

How couples can agree on a retirement plan

Jan 07, 2014 | | Comments Comments Off

Dear Liz: My husband and I are 56. We need to plan for retirement, but whenever the topic comes up, I find that either we have no idea or we disagree on what we will do during our retirement. Naturally, our activities during retirement will affect the funds we will need. We need help to figure out the things we agree on and where we might want to plan for different individual options. Do you have some resources to suggest?

Answer: You can start with a visualization exercise that some financial planners use to clarify their clients’ values.

Imagine your ideal day in retirement. Start with when you’ll wake up and where — what type of dwelling and in what area. In your mind, walk through your day hour by hour — where you’ll be, what you’ll be doing and with whom. Write it all down, even if you don’t think what you’re visualizing is realistic or even possible. The point is to identify, for yourself and your partner, what’s most important to you: what you want your life to be like and whom you want in it. If you visualize waking up in Paris, for example, it doesn’t mean you need to move there. You may be just as content with a trip to the City of Light or travel to less-expensive destinations.

You each should do the exercise separately and then compare what you’ve written. Don’t despair if you visualize yourself on the Champs-Elysees and he’s fishing off his back porch. As you correctly note, you can have different goals and desires for retirement. Complete harmony has never been a requirement of staying married, and that won’t change when you quit your jobs.

Let’s say you want to get deeply immersed as a volunteer for a local, at-risk school, and your husband wants to spend a year roaming the country in an RV. He could opt to pursue other interests during the school year, and you could take extended trips together during the breaks.

Once you’re clearer about what you want for your retirements, you can start working the numbers and figuring out compromises that work for both of you. Start with your expenses — what you’re spending annually now — and subtract any costs that will disappear or substantially diminish when you retire (such as commuting expenses and work clothes). Add in the amounts you’ll need to pursue your passions. (Will you buy the RV used or new? In retirement or before? Tip: Buying a lightly used vehicle before retirement will give you both a chance to get the hang of RVing and its costs so you can decide whether it’s really for you.)

Compare your expected expenses with your expected income, including Social Security, any pensions and withdrawals from your retirement accounts (which initially should be just 3% to 4% of the total balance, planners say). If there’s a gap, that’s what you’ll need to fill in the coming years with increased savings.

Still at an impasse? Hire a fee-only planner who has experience in “life planning,” or helping clients figure out their life goals. You can get a referral from the Kinder Institute of Life Planning at http://www.kinderinstitute.com/dir/.

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Dear Liz: I have about $16,000 in student loans at 6.8% interest. At the current monthly payment it would take me about 7.5 years to pay them off. I contribute 10% of my income to my company’s Roth 401(k) plan (my employer matches the first 6% contributed). I also contribute 3% to the stock purchasing plan. I am thinking of cutting back my 401(k) contribution to 6% and not contributing to the stock purchasing plan. Applying the extra money to my loans would reduce the payback period to about 2.5 years. After that, I would increase the contribution amount and diversify with a Roth IRA as well and maybe even begin the stock purchase program again. What do you think?

Answer: Not contributing to retirement accounts is usually an expensive mistake. The younger you are, the more expensive it can be.

Every $1,000 not contributed to a retirement plan in your 30s means about $10,000 less in retirement income. That assumes an average annual growth rate of 8%, which is the historical average for a stock-heavy portfolio.

In your 20s, the cost of not contributing that $1,000 is $20,000 of lost future retirement income. The extra decade of not getting those compounded returns makes a big difference.

People have the erroneous idea that they can put off retirement savings and somehow catch up later. Catching up, though, becomes increasingly difficult the longer you wait. A better approach is to save as much as possible starting in your 20s when the money has the longest time to grow. Then you’ll be in a better position to withstand job losses or other interruptions of your ability to save. If those setbacks don’t happen, you’d have the option of retiring early.

Granted, your plan would require reducing retirement contributions for just a few years. But the federal student loans you have are fixed-rate, tax-deductible debt that you don’t need to be in a hurry to pay off. In the long run, you’d be much better off boosting your retirement contributions.

If you’re determined to pay down your loans, however, use the money you’ve been contributing to the stock purchase plan. Continue making at least a 10% contribution to your retirement plan and increase that as soon as you can.

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Dear Liz: I would like to start a Roth account for each of my kids. (They’re in their 30s.) Is it better to start an account in my name with them as beneficiaries or to start the accounts in their names?

Answer: Roth IRAs can be a wonderful way to save, but they’re not custodial accounts. You won’t be able to control the accounts or prevent your adult children from spending any money you deposit.

If you still want to help, though, let your kids know you’ll contribute to any Roths they set up. They can open a Roth if they have earned income at least equal to the annual contribution and their incomes are below the Roth limits. The ability to contribute to a Roth phases out between $178,000 to $188,000 for married couples in 2013 and from $112,000 to $127,000 for singles.

Ideally, you’ll contribute to your own Roth first. The limit on contributions is $5,500 this year.

Categories : Kids & Money, Q&A, Retirement
Comments (9)

Dear Liz: My 401(k) plan has grown exceptionally well this year. I think we all know that it can’t last. I just recently heard about self-directed IRAs. I was intrigued at the possibility of opening one by rolling over a portion of my 401(k) money directly. The problem is, my company’s 401(k) provider will not allow the direct rollover of funds. Is there an alternative means of withdrawing 401(k) funds without penalty and still get them into a self-directed IRA?

Answer: You can quit your job. Otherwise, withdrawals while you’re still employed with your company will trigger taxes and probably penalties.

Your premise for wanting to open a self-directed IRA is a bit misguided, in any case. Your 401(k) balance may occasionally drop because of fluctuations in your stock and bond markets, but over the long term you should see growth.

You may have been sold on the idea that self-directed IRAs would somehow be less risky. Some companies promote self-directed IRAs as a way to invest in real estate, precious metals or other investments not commonly available in 401(k) plans. The fees these companies charge as custodians for such accounts are usually much higher than what they could charge as traditional IRA custodians, so they have a pretty powerful incentive for talking you into transferring your money to them.

The problem is that you could wind up less diversified, and therefore in a riskier position, if you dump a lot of your retirement money into any alternative investment. It’s one thing for a wealthy investor to have a self-directed IRA that invests in mortgages or gold, assuming that he or she has plenty of money in more traditional investments. It’s quite another if all you have is your 401(k) and you’re putting much more than 10% into a single investment.

Also, there’s a lot less regulation and scrutiny with self-directed IRAs than with 401(k)s, which increases the possibility of fraud. (Southern California investors may remember First Pension Corp. of Irvine, a self-directed IRA administrator that turned out to be a Ponzi scheme.) So you’d need to pick your custodian, and your investments, carefully. You also would need to understand the IRS rules for such accounts, because certain investments — such as buying real estate or other property for your own use — aren’t allowed.

If you’re determined to diversify your investments in ways your current 401(k) doesn’t allow, you can open a regular IRA at any brokerage and select from a wider variety of investment options. Or you can look for a self-directed IRA option with low minimum investment requirements to start.

Categories : Q&A, Retirement
Comments (5)

Dear Liz: I read with interest your recent column about the filial obligation law possibly coming into effect in California. I hope this is true. I have three grown daughters who make terrific money and who will not offer a pittance to me. I live on Social Security, period. I could really use a few hundred dollars a month to supplement. They had a glorious childhood and this is really sad and inexplicable. I want to contact someone involved with this law, if possible. I am puzzled and hurt. More than money, this situation has a strange malignity to it.

Answer: Currently, California’s filial responsibility law — which makes adult children responsible for supporting their indigent parents — isn’t being enforced. When similar laws in other states have been invoked, it’s typically because the parent is receiving governmental aid or has racked up a bill with a nursing home that wants to get paid.

One of the reasons the laws aren’t enforced is because most people feel an obligation toward their parents. The fact that your daughters apparently don’t indicates that there’s either something missing in their characters or in your characterization of the situation.

Here’s another perspective:

Dear Liz: I am 67 and live in a retirement home. I strongly feel that children should not have to take care of their parents. We all have time to save for our own futures. I left a marriage with very little other than a small child. We did lots of free events together because there was not money to spend. I did immediately start saving for retirement and her college. It all worked out, but had it not, I would not expect her to support me in my old age. I chose to get pregnant and have her…. She did not chose to have me!

Answer: Thanks for sharing your experience. My guess is that if your financial life had not worked out — if you hadn’t been able to save enough or if your savings had been wiped out — your daughter happily would have stepped up to help if she could. People who do their best to take care of themselves often find the support that isn’t offered to those who don’t.

Categories : Elder Care, Q&A, Retirement
Comments (14)

Dear Liz: In your answer about filial responsibility, your statement that the letter writer’s financial situation is the result of her own choices and that she needs to stop blaming her parents is completely misjudged and inappropriate. Clearly, the writer is not blaming the parents and seems amazingly strong and clear thinking for one with her early background.

Answer: Here’s what the writer wrote about her situation:

“I am an only child in my late 30s and received no financial help from [my mother] from the age of 18. In addition, my father died when I was very young, leaving us fairly destitute with no life insurance. I feel that both of these legacies have contributed to my less-than-optimal financial situation.”

The writer goes on to say that she’s trying to catch up financially but she feels it would be futile because she may have to support her mother in the future.

The writer started her adult life at a financial disadvantage compared with people whose parents helped them pay for college. She may now regret the choices she made — perhaps she took on too much student loan debt or spent more than she earned to make up for early deprivation. Those were her choices, however, and at some point she needs to take responsibility for them. Twenty years later, it’s time to let go of the idea that her financial situation is her parents’ fault.

Comments (6)

Dear Liz: My mother is 65 and refuses to plan for retirement. She has worked for the same organization for almost 20 years and, despite my begging her over the last decade, has not contributed a dime to her 403(b).

I am an only child in my late 30s and received no financial help from her from the age of 18. In addition, my father died when I was very young, leaving us fairly destitute with no life insurance. I feel that both of these legacies have contributed to my less-than-optimal financial situation.

I have had to work very hard on my own for everything, with very little support from anyone. I am now trying to catch up financially but am afraid that all of my efforts will be futile as I will be required to take care of my mother.

She says she expects to be able to live on Social Security and the $70,000 her company contributed to her 403(b) over the years. I’ve been advised by friends that I have no legal obligations to provide for her. I certainly have social ones though. What are her options once she becomes too old to work and doesn’t have enough money to cover her expenses?

Answer: Your friends may be wrong about your legal obligations, because 29 states — including California — have what are called “filial responsibility” laws. These laws create a legal duty for adult children to support indigent parents.

Most states don’t enforce these laws currently, but that doesn’t mean they won’t in the future, said elder-law attorney Michael Amoruso, a past president of the New York chapter of the National Academy of Elder Law Attorneys. States struggling with money issues may be tempted to step up enforcement, he said.

According to Katherine Pearson of Penn State‘s Dickinson School of Law, who has studied such statutes, the states with filial-responsibility laws are Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia and West Virginia.

Your mother isn’t indigent yet, but she may be soon if she thinks Social Security and a five-figure retirement account will sustain her.

The good news is that you may still have time to influence her decision-making, because she hasn’t quit work yet. You should tell her, gently, that you can’t afford to support her if she runs out of money, and suggest that together you consult a fee-only financial planner about her future.

The planner can review your mother’s financial situation and offer suggestions — which are likely to include delaying retirement and considering part-time work in retirement. The planner also can explain that her $70,000 nest egg will provide only about $200 a month if she withdraws 4% initially. Four percent is considered a sustainable withdrawal rate by many financial planners.

You can tell her that consulting a planner is a good idea for anyone considering retirement — since that’s quite true. If you like the planner, you can book a session for yourself and learn some concrete strategies for getting your own finances on track. This may require an attitude adjustment.

You’re still blaming your parents for your financial situation, but your father’s been dead for decades and you’ve been on your own since age 18. In other words, the statute of limitations on blaming your folks has long since expired.

Your finances are the result of the choices you’ve made, just as your mother’s situation reflects the choices she’s made. Let’s hope you both make better choices in the future.

Categories : Q&A, Retirement
Comments (1)

Dear Liz: I’m in my late 60s and plan to retire in about two years. I have a pension that will pay close to my current take-home income. I also have about $500,000 in annuities and IRAs. These plus Social Security make retirement look good. But right now finances are tight. Should I continue to put $1,300 a month into my retirement plan or use that money for expenses and travel now — while we’re still relatively young?

Answer: You appear to be in the fortunate position of being able to try a “practice retirement.”

The term was created by mutual fund company T. Rowe Price after it discovered that people who have saved substantial amounts for retirement by age 60 may not have to save much more to have a comfortable retirement. Just putting off the day when they take Social Security and tap their retirement funds may be enough. That’s because Social Security benefits grow about 7% to 8% a year, plus inflation adjustments, for each year you delay starting your checks. Not starting retirement plan distributions also allows your nest egg to grow, and the delay shortens the length of retirement you’ll need to cover.

T. Rowe Price found that people who have saved four to eight times their annual income by their early 60s may be able to crank back on their retirement contributions. Instead, they could use the money to “practice retirement” by taking some trips and doing some of the other things they had planned for golden years while continuing to work.

The company recommends practice retirees continue to contribute enough to employer retirement plans to get any available match (it’s free money, after all), while delaying the start of Social Security to age 70 if possible.

T. Rowe Price researchers assumed that its practice retirees would live only on their savings and Social Security. The fact that you have such a generous pension means you may not need as much saved as they recommend. In any case, if this idea appeals to you, run it past a fee-only financial planner who can review your situation and ensure the plan is viable for you.

Categories : Q&A, Retirement
Comments (4)

Divorced spousal benefits cause confusion

Oct 15, 2013 | | Comments Comments Off

Dear Liz: You’ve been writing about Social Security and how people can qualify for benefits based on a spouse’s or ex-spouse’s earnings record. Please add that given the parameters you already cite, a divorced spouse may remarry after the age of 60 and collect Social Security from the ex. However, if a person is collecting a public pension, any Social Security, whether one’s own or that of the former spouse, will be offset, possibly to the extent that one cannot collect anything from that former spouse. It is important to have all of the information.

Answer: It is indeed — but you’re incorrect about the availability of divorced spouse benefits after remarriage.

Only spouses or ex-spouses who are receiving survivors’ benefits may remarry after 60 without worrying about losing their checks. If the primary earner is still alive, the rules are different. Here’s what Social Security has to say on its website: “Generally, we cannot pay benefits if the divorced spouse remarries someone other than the former spouse, unless the latter marriage ends (whether by death, divorce or annulment), or the marriage is to a person entitled to certain types of Social Security auxiliary or survivor’s benefits.”

People who are eligible for pensions from the government or from a job not covered by Social Security should learn about the offsets that affect their benefit. The Social Security website has information about these offsets at http://www.ssa.gov/gpo-wep/. Information also is available by calling 1-800-772-1213.

Categories : Q&A, Retirement
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