Ask Liz Weston

Get smart with your money

Investing

Q&A: When should retirees stop actively investing?

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Dear Liz: I am retired. My income is from a small pension, Social Security and dividends and interest from investments. I’ve made some bad investments, but I’m still earning a satisfactory return. Is there some kind of formula that I can use to determine whether I should sell a stock, take the loss and seek another investment or keep the stock, enjoy the dividend and worry the stock might drop further?

Answer: One approach is to ask yourself if you’d buy the same stock today. If not, then it may be time to sell these shares. Be sure to consult with a tax pro first because you may be able to use losses on one investment to offset taxable gains on another.

You also might ask yourself if it’s time to transition away from active investing and individual stocks. Most people aren’t able to buy the stock of enough companies to be truly diversified. Then there’s the daunting task of staying up to date on the fortunes and prospects of each company and industry. That’s way more work than most people can handle. Even if you’re up for the task now, you might not be in the future.

Also, most people don’t do well with active investing. Trying to figure out when to buy and sell for maximum gain usually results in excess trading costs that lower your returns. It’s also too tempting to hang on to a losing stock rather than admit you made a mistake, or to chase “hot” stocks that have already had their biggest gains.

A better approach would be a portfolio of mutual funds or exchange traded funds that’s regularly rebalanced, either by a financial advisor or a computer algorithm. If you opt for funds that mimic a market benchmark, you’ll be assured of matching the market and getting a better return than most active investors can achieve.

Q&A: A surprise pension creates investment concerns

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Dear Liz: Before my husband died, I encouraged him to find out if he had a pension. He worked for his company for more than 10 years and was vested, but he didn’t think he qualified. A few months after he died, I found an unopened letter stating he would receive a pension after he reached his retirement date. I contacted the benefit plan service center and submitted the required documents. I now have two options for receiving the money as his beneficiary: a lump sum or a single-life annuity that would pay a monthly benefit for my lifetime only. The lump sum could be rolled over into an eligible employer plan or traditional IRA, neither of which I have, or paid directly to me, in which case the whole amount is taxable. I am 65 and my only income is his Social Security survivor benefit and a small pension from my company when I retired. So what is the best thing for me to do?

Answer: Thank goodness you found that letter. It’s unfortunate your husband didn’t understand that “vested” meant qualified to receive a pension.

You don’t have to have an employer plan or an existing IRA to keep the lump sum from being taxed right away. You can open an IRA for the sole purpose of receiving the rollover. A bank or brokerage can help you set this up.

Any withdrawals would be taxed, but you wouldn’t be required to start taking withdrawals until you turn 70½. Even then, you would be required to withdraw only a small portion each year (a little less than 4% to start). You can always take more if you want.

Your income is low enough that taxes shouldn’t be driving your decision. Instead, consider whether you’d rather be able to tap the money at will or have more guaranteed income for the rest of your life.

If you don’t have other savings, you may want to have this pool of money standing by to use for emergencies and other spending. On the other hand, an annuity is money that you don’t have to manage and that you can’t outlive or lose to fraud, bad investments or bad decisions. If you have enough emergency savings, adding more guaranteed income could help you live a bit more comfortably.

Q&A: Weighing investment choices

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Dear Liz: I felt your advice about using an inherited IRA to pay off a mortgage was spot on, but I would add one suggestion. The person could use their required minimum distribution (or a little extra) from the inherited IRA each year to pay down the principal on the mortgage. Then they could see what the remaining loan balance is when they are approaching retirement in 10 years.

Answer: That could be a good alternative if being debt free is more important than maximizing their returns. Using just the distributions to pay down the mortgage would allow the bulk of the money to continue earning tax-free returns as long as possible, while reducing the mortgage balance over time.

The letter writer might do better financially by investing the distributions, but using them to pay down the mortgage could get them closer to their desired goal of being mortgage free.

Q&A: Inherited Roth IRA distributions

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Dear Liz: You recently answered a question about whether someone should use a Roth IRA to pay off a mortgage. In your answer, you mentioned the requirement to take minimum distributions from the account. One of the huge advantages of a Roth, besides tax-free distributions, is that there are no required minimum withdrawals. Did I miss something?

Answer: You did. You missed the word “inherited.”

The letter writer was asking whether to use an inherited Roth IRA to pay off the mortgage. (Specifically, an inherited non-spousal Roth IRA.) Although the original Roth IRA owner was not required to take distributions, the heirs must. Money can’t be kept in tax-deferred retirement accounts indefinitely.

Q&A: Strategies for overcoming a spouse’s bad investment decisions

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Dear Liz: I tell people we lost a huge chunk of money in the Great Recession, but it wasn’t the downturn that did us in. My husband made some incredibly poor choices. I’m embarrassed to admit that he absolutely refused to listen to me and stop the financial self-destruction until I grew a backbone. I told him I’d divorce him unless he stopped. He has mended his ways and we’re still together (which is really for the best; we’ve been married almost 47 years).

He’s now being very transparent and prudent about investing, but we’re still looking at an underfunded retirement and I’d like to maximize what we have. We’re both 71 and still working (we’re self employed). Our home is worth about $800,000 and we owe $160,000. We have a rental nearby with about $100,000 in equity that pays for itself, but there’s no extra income from it. We have $210,000 in investments and $25,000 in savings with no debt.

I think more real estate would be a good investment vehicle for us, but we’d have to cash out some of our limited portfolio in order to purchase more. So instead, I make an extra principal payment equal to half the regular mortgage payment on each of the properties each month. I’m not sure if that’s the wisest thing to do, but I figure it’s still investing in real estate and will help us when we finally retire, sell and downsize.

Answer: Right now, the vast majority of your wealth is tied up in two properties in the same geographic area. A financial planner would want you to diversify, not double down by putting even more money into real estate.

And a fee-only financial planner is what you need to help you map out your future while easing the investment reins out of your husband’s hands. As we get older, we’re more vulnerable to fraud, exploitation and just plain bad choices. Your husband may have been scared straight for now, but he easily could make future decisions that could again imperil your finances. That’s especially true if his prior behavior was related to a gambling addiction. Not all problem gamblers choose casinos or horse tracks; some are day traders.

Given all that, you may want to consider purchasing a single premium immediate annuity when you retire. These annuities offer a guaranteed stream of income for life, in exchange for a lump sum. This would be income that can’t be lost to stock market downturns, real estate recessions, bad investments or fraud.

That’s something to discuss with your planner, along with ways you can use your businesses to maximize your retirement savings. (The self employed have many options, including a basic Simplified Employee Pension or SEP, solo 401(k) plans and traditional defined benefit pension plans.)

You can get referrals to fee-only planners at the National Assn. of Personal Financial Advisors, the XY Planning Network, the Alliance of Comprehensive Planners and the Garrett Planning Network.

Q&A: Can this marriage’s finances be saved?

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Dear Liz: I am 64 and my husband is 63. I retired five years ago after a 30-year professional career. My husband is an executive and plans to work until 70. We own two homes and one is a rental property. Both our boys are successfully launched. Currently, 67% of our retirement money is in stocks and stock index funds. The rest is cash and IRAs or 401(k)s. I am working on re-allocating that 67% to safer investments, but our two investment advisors don’t even agree on what that would look like. And my husband does not want to leave potential stock market gains. Help! I think it is time to switch to more conservative investments. What do you think?

Answer: Many financial planners would say you should only take as much risk as required to in order to reach your goals. Exactly what that looks like depends on how much you’ve saved, how much you spend and how much guaranteed income you expect to receive from Social Security, pensions and annuities, among other factors.

Most people need a hefty exposure to stocks in retirement to get the returns they’ll need to beat inflation, but whether that proportion is 30% or 60% depends on their individual circumstances. Your current allocation could be fine if your basic expenses are entirely covered by guaranteed sources (Social Security, pensions, annuities) and you want to leave a substantial legacy for your sons. Or you could be way overexposed to stocks and vulnerable to a downturn if you’ll need that money for living expenses soon.

Your IRAs and 401(k)s are not investments, by the way. They’re tax-deferred buckets to hold investments. How that money is allocated among stocks, bonds and cash matters as much as how your other investments are allocated and should be included when calculating how much of your portfolio should be in stocks.

If neither of your investment advisors is a certified financial planner, consider seeking one out to create a comprehensive financial plan for you and your husband. The plan should consider all aspects of your finances and give you a road map for investing and tapping your retirement savings. You can find fee-only financial advisors through the National Assn. of Personal Financial Advisors, the XY Planning Network, the Alliance of Comprehensive Planners and the Garrett Planning Network.