If You're asking "now what" perhaps an Investment Plan

I've been away a couple of weeks on hiatus but is seems there is nowhere in the world you can escape the marketplace concern. We have turned into a nation of economy-watchers. It's as if the voyeuristic nature of simply gazing helplessly, frozen in place or prompted by muscle memory, should force us to make investment, retirement and personal finance decisions right now even though we might just regret them at some point in the future. So I offer you a four part series on what we should do in the coming weeks as we anticipate that the previous weeks will give us more of the same.

So we begin with Now What Retirement

Believe it or not, some people, the true Boomers are actually on track for retirement. Right on the cusp of making the decision is quite possibly the wrong time to make most difficult one you will ever make. You may have second guessed your investment strategies over the last several years but had you been closer to what we consider traditional retirement age, those choices became fewer. And harder.

In fact, had these Boomers been preparing as they should have, sitting on their well-diversified portfolios and riding out the downturn in 2008 until the present, they may have actually found inaction more fruitful than shifting gears - gears that should have been set for low in the first place. And now, as the market roils for what looks to be another rise, dip and with any luck, rise again in the coming months, the nearest retirees need to make choices that are just as prudent as they are. For those of you who are not ready but at that age, the sooner you answer the following questions, the closer you too will get to the point.


What to do with your 401(k)? For this person, the choices are relatively narrow with consequences on each decision possibly impacting their income decades down the road. To leave your money in your old employer's 401(k) might be a good idea if your old employer has a good plan. They may have low cost fund options and on the other hand, have higher than needed administrative costs. If your plan had the foresight to include an annuity and you are a woman, this quasi investment (part mutual fund/part insurance plan) will give you a relatively clear look at your future income based on a unisex life expectancy. (Annuities bought outside your 401(k), will cost a woman more because of the expected longer-life span for women as compared to the same age man.)


And if I have to rollover? In most cases, you will be jettisoned form the plan which means you now have to make the choice. If you are a man, the decisions you make should always include "what if I die first" as the ultimate determination of how you take money from your retirement plan. For women, the consideration should be less about what your spouse may or may not do but what you should do should he make the wrong choice. You will need to protect your life first, and doing something that goes against your very nature: putting everyone else second.

Once again, you will consider the annuity. But you probably shouldn't commit your entire nest egg to it. You will need access to cash and keep that money invested at the same time has been the hardest job seniors have had in the low interest rate environment we have right now. A 10-year Treasury, based on inflation at its current levels, is actually considered a loss. So you will need to keep some of your money invested, perhaps across low-cost index funds.


Does Debt have an impact? It will be tempting to use this payout to get your retirement debt in order. This is generally not considered a good option unless that debt is so large that it will saddle you for the rest fo your life. On a fixed income, a debt counselor can construct a good plan and get the process moving along quicker and more efficiently. Keep in mind, you may love the house or condo you live in, but if the debt from trying to own it is too high, a debt counselor will tell you what you can't admit to yourself. If you overpaid for your home and do not expect to live long enough to recover your payment and equity, the counselor should be able to help with this as well.

Without debt, your home may be the single greatest retirement safety net you have. But don't use it until you are actually about to fall. Tapping the equity in advance of when you might have an emergency need is foolhardy in most instances. Wait as long as possible. Involve your children and your attorney (who has your will) and if you have one, a financial planner. You'll need experts.


Should I take Social Security? As to Social Security, take it when you need it. Experts are telling us to wait as long as possible. And it is sage advice. But if it is possible to take it, save it and return it at full retirement without having spent it, you can upgrade your monthly payment to the full payment due at full retirement. But you have to save it. And even if you don't, you now have the emergency medical account you might need is the interim. But if you can do it, don't calculate this income until the last possible minute. Ladder your retirement income so as to get an economic boost every several years with Social Security withdrawal being the last step.

And don't become frustrated with the argument that you could have done more. We all could have. But regret doesn't solve the issue at hand: dealing with what you have is the most important job right now.

So take your eyes of the news. Long-term issues are rarely reported on any channel. They just aren't sexy. If this reality is difficult to imagine, live the sixth months before you retire on half of your current income. Can't seem to do it? Then you need to rethink how much you will need, in part because for most retirees, even if they are beginning retired life with 75% of their current income, inflation, taxes and health care considerations will soon bring it to fifty percent. So calculate from there.

Next up: now what investments


Paul Petillo is the Managing Editor of BlueCollarDollar.com/Target2025.com

Job Separation Investing

Keeping the money in a 401k has its advantages. For older workers, the ability to begin disbursement at age 55 is an attractive plus. Although it is generally ill-advised under almost every circumstance, keeping the money in the 401k retains your ability to borrow from the plan. Some of us will consider keeping this option open. It's an option albeit, not a good one.

Generally, the fees are better in a 401k. Institutions may get a much better deal from the plan sponsor and consideration of this is important in the rollover decision. A much larger plan may come with more options or simply less expensive ones. Fees are an important aspect of total return and a worthwhile item to focus on when making any decision to move.

But you may not have an option if the balance is less than $5,000. This means you are faced with the choice of taking the cash in the account (along with the 20% the account must hold for income taxes and the 10% penalty). The scariest statistic, two-thirds of you take the money and pay those hefty penalties.

The terms of disbursement are spelled out when you leave the job in the 402(f) notice. This explains your options for handling a 401k disbursement. Even if you want to stay, your old employer really doesn't want the continued burden.

Bottom Line: Once you receive that 402(f), begin to research your options. And even if you think that money will come in handy, never take the cash.

Next: rolling to an IRA.

Paul Petillo is the Managing Editor of Target2025.com

Retiring with a Plan: Is the Roth 401(k) Conversion Worth Trying?

In 2010, you will be allowed to convert not only your current 401(k) plan but your IRAs and any 401(k) plan you might have rolled over into an IRA. The question: is rolling your retirement money into a Roth 410(k)the right move to make?

As with all financial decisions, this takes a little bit of planning and consideration. The conversion will cost you money, mostly in tax dollars paid because your 401(k) plan, IRA or rollover action, saved you from paying on taxes that a Roth 401(k) will require you to pay.

Traditional plans defer those taxes. But once you opt for the Roth 401(k) or even a Roth IRA, the taxes on the transferred amount will need to be paid. This is because the money invested in a Roth is done after taxes. The first consideration is whether you will be able to pay those taxes.

A Window Of Opportunity
You do have a window of opportunity though. Taxes due on these types of conversions in 2010 are payable in 2011 and you have two years to pay them. Estimate the taxes on what you have in these accounts based on your ordinary income tax rate. There are no penalties other than this in the conversion. But depending on the size of your account balance, you will need to set aside this amount starting before you make the conversion.

The simplest way to do this is to set aside the money in a separate account - preferably away from your emergency account. (An emergency account is savings set aside for emergencies and if you can have a minimum of three months set aside, you are well ahead of what you neighbor probably has.) On the other hand, this money should not be invested either. This is cash for taxes and has no risk potential. Some of you might be tempted to put it in a taxable indexed mutual fund to get some work out of the cash, but this would not necessarily be the wisest choice.

This is also an opportunity best used for those who are above the current $100,000 a year income threshold. These folks have been unable to save more for their retirement because of this ceiling. Expect this group to do this in droves - if they are smart. For the rest of us, the transition may not be worth it.

Many of us are underinvested as it is. We cannot accurately see what the future tax rate will be on these invested dollars yet we can be assured that we will not have the same tax rate as we do know. If studies are correct, most of us will be in a far lower tax bracket, lower than most of assumed we would be in come retirement.

Keep in mind that if you do exceed the AGI (adjusted gross income) of $100,000 the conversion doesn't necessarily mean that you will be able to contribute more. There is way around this. If you were to make nondeductible contributions to a Traditional IRA and roll them into a Roth IRA in 2010, but only the contributions, not the investment gains, that part of the rollover is not taxable. The gains on those "nondeductible" contributions would however be taxed.

Ultimately a Tax Issue
Phase-outs are linear, meaning what you make determines the level of contribution. Because this is a tax issue and you should always consider speaking with a tax professional first, the following is just a guide to see where you fall in terms of income, phase-outs and contribution levels.

If you are a Single filer, your Roth contribution limit is reduced when your modified AGI or adjusted gross income exceeds $101,000.00, It is eliminated completely when it reaches $116.000.00

A person wishing to determine their contribution status if they are Married Filing Jointly will find their limit is reduced when their modified AGI exceeds $159,000.00 and is eliminated completely when it reaches $169,000.00. When it falls in between those amounts, the linear contribution phases in. For instance, if you were half way between, your contribution would be reduced by 50%.

Another tax filing status might affect your contribution levels differently. A person Married but Filing Separately, (and) Living Apart would find their Roth contribution limit is reduced when the AGI income exceeds $101,000.00. It would be eliminated completely when your modified adjusted gross income reaches $116,000.00

Those choosing the Married Filing Separately, or Other has a limit as well. These folks will find their contribution is reduced when their modified AGI exceeds $0 and is eliminated completely when your modified adjusted gross income reaches $10,000.00.

Once it exceeds those limits, you will not be allowed to contribute.

But as with all financial investments, they are not static. They may in fact be worth less. Because of that, you may want to look into a IRA Recharacterization.