Ask Liz Weston

Get smart with your money

Retirement

Q&A: Saving for retirement

By

Dear Liz: After many years of unemployment, I finally got a full-time position. It is a state job with a pension. How much do I need to save for retirement? Can I focus on paying off debt and saving for college, and trust I will be OK in retirement?

Answer: Your long stint of unemployment should have taught you that no job, and no plan for your life, is guaranteed.

You may have to work for the state for years to become “vested” in the plan, or eligible for a retirement check. In order to actually retire, you typically have to stay employed by the state for a decade or more. Even then, your check in retirement may not replace a big chunk of your salary. Traditional defined benefit pensions tend to offer the highest benefits to those who work for the system for decades.

A lot can happen while you’re waiting for your pension to build. You could get fired or laid off or suffer a disability that limits your ability to work. The pension plan itself could change.

If your employer doesn’t pay into the Social Security system, that adds another layer of uncertainty to your future. You could wind up without a pension, or only a small pension, and less Social Security than you might have had with a job that did pay Social Security taxes.

That’s why it’s essential to save for retirement even with the prospect of a good pension. You may be offered a tax-deferred workplace plan, or you can save on your own through IRAs or taxable accounts.

Q&A: Rolling traditional IRA to a 403(b)

By

Dear Liz: My husband and I both have employer-sponsored 403(b) retirement plans. We each also have a Roth IRA, and I have a traditional IRA that I started in the 1980s before I started work with my current employer. I do not actively contribute to this traditional IRA as I am contributing the maximum amount allowed into both my Roth IRA and my 403(b) plan. My husband is also maxing out on his Roth and 403(b). We are both in our 50s. Should I contribute anything into my traditional IRA? Should I see if I can roll it into my 403(b)? Or roll it into my Roth? Our adjusted gross income is high enough where I would not be able to take the deduction if I did start contributing. Your thoughts would be greatly appreciated.

Answer: If you can’t get a tax deduction for your contributions, then putting the money in a Roth IRA is usually the better option — assuming, of course, that your income is under the Roth limits (which it sounds like it is). Nondeductible contributions reduce the income taxes owed on any withdrawals from a traditional IRA, but withdrawals from a Roth can be entirely tax-free.

If you have a good, low-cost 403(b), rolling your traditional IRA into it could be a good choice. It would be one less account for you to have to monitor and coordinate with your other savings.

You won’t be able to roll your traditional IRA into a Roth without triggering a (possibly hefty) tax bill. The older you are, the harder it is to make a good argumen

Q&A: Social Security solvency

By

Dear Liz: Can you tell us what the status is of the Social Security system? Will the money that I and my employers have paid into the system be there for me when I need it in 15 or 20 years?

Answer: The money you pay into the system provides benefits for current retirees. When you’re retired, other workers will provide the money for your benefits. It isn’t a retirement plan where you contribute money that you later withdraw. It’s an insurance fund to protect you against poverty in old age.

The Social Security system isn’t about to disappear. The depletion of its trust funds is expected in 2033, but that doesn’t mean Social Security will go out of business. The system will continue to receive enough in payroll taxes from current workers to pay 77% of promised benefits. So even if Congress doesn’t get its act together to make necessary and sensible reforms, you’ll still get a check. If Congress does get its act together, the reforms probably will affect younger workers more than those close to retirement.

For more on how Social Security works and its benefits, read “Get What’s Yours: The Secrets to Maxing Out Your Social Security” by Laurence Kotlikoff, Philip Moeller and Paul Solman.

Q&A: IRA interest rate terms

By

Dear Liz: I went to renew my IRA certificate of deposit and the bank officer suggested that I renew at the greater rate being offered for a five-year term (about 1.5% APR) rather than the lower rate for a one-year term (about 1% APR). She explained that since I am over 59 1/2, I can close the account at any time and roll it over to a new IRA should rates rise (for example to 1.75% in 15 months) with no penalty whatsoever. Is this true?

Answer: You don’t have to close and reopen IRAs when a CD matures or you want to change investments. The IRA is the bucket that holds your investment, not the investment itself. You also should be skeptical about claims that you would pay no penalty for early withdrawal. Not only are such penalties the norm, but a Bankrate survey found 9 out of 10 banks won’t just require you to forfeit the interest but will dip into your principal to pay the fees if necessary. The bank may offer a one-time opportunity to lock in a higher rate; if that’s the case, you should get the details in writing as well as the penalties if you have to withdraw the money prematurely.

In fact, any time someone pitches you an investment for your retirement funds, you should ask a lot of questions and get every detail and promise in writing. If the pitch is coming from someone who will profit from your investment — which is often the case — you should consider running it past a neutral third party such as a fee-only planner.

By the way, the Federal Reserve has signaled that it’s considering raising interest rates this year. That’s no guarantee that it will, but locking up your money now is a gamble.

Q&A: Social Security survivor benefits

By

Dear Liz: I earned more than my wife, who died at age 57 after 18 years of marriage. When I turn 60, can I take survivor Social Security benefits based on her work record and then request my benefit at age 70?

Answer: In a word, yes, and doing so may be smart.

Survivor benefits are different from spousal benefits, which inflict some severe penalties for starting checks early. When you start spousal benefits before your own full retirement age, you’re locked into a permanently smaller check and you can’t later switch to your own benefit, even if it’s larger. The only way to preserve the ability to switch is to file a restricted application for just the spousal benefit at your own full retirement age (which is 66 for people born from 1943 to 1954 and gradually increases to age 67 for people born in 1955 and later). Then you preserve the right to change to your own benefit when it maxes out at age 70.
With survivor benefits, starting early means a reduced check — your widower benefit at 60 would be 30% smaller than if you waited until your full retirement age — but you can switch to your own benefit later. And if you don’t work, starting survivor benefits at 60 is the better course, said economist Laurence Kotlikoff, coauthor of “Getting What’s Yours: The Secrets to Maxing Out Social Security.”

“Getting a reduced benefit for 10 years, from 60 to 70, is better than getting an unreduced benefit for fewer years,” Kotlikoff said.
If you work, however, the math becomes less clear. When you start benefits early, your check is reduced $1 for every $2 you earn over a certain limit, which in 2015 is $15,720. That penalty disappears once you hit your full retirement age.

Online calculators can help you determine the best Social Security claiming strategy. AARP and T. Rowe Price are among the sites that provide free calculators, but they don’t factor in survivor benefits. Consider spending about $40 for one of the more sophisticated calculators, such as Kotlikoff’s MaximizeMySocialSecurity.com, that can include this important benefit.

Q&A: Balancing savings vehicles and tax benefits

By

Dear Liz: I’m 26 and make $45,000 per year. I currently have about $60,000 saved with no debt. Roughly half of my assets are in retirement accounts, and the other half are in non-retirement accounts. I strive to save 30% of my income (about 15% in pre-tax retirement accounts and 15% in taxable accounts). I hope that my savings habits will provide me the option to retire early. But I am concerned that I am locking up too much of my money in retirement accounts and that a couple decades down the road, I will not be able to access my money when I would like to. How should I balance various savings vehicles and tax benefits, so that I have most options down the road?

Answer: Your savings habits are admirable, but you shouldn’t worry too much about “locking up” your money. There are a number of ways to tap retirement funds if you really need the cash. Ideally, you’d leave the money alone to grow tax-deferred until you’re ready to retire, but you’re not required to do so.

One way to save for retirement with plenty of flexibility is to fund a Roth IRA each year. You don’t get a tax deduction upfront, but you can withdraw your contributions at any time without penalty. If you don’t tap the money until you’re 59 1/2 or older, your contributions and your earnings are tax free if you’ve had the account at least five years. Another advantage of a Roth is that you’re not required to start distributions after age 70 1/2, as you are with other retirement accounts.