Your Retirement Plan is Not the Solution

Under the current laws governing tax-deferred retirement plans such as a 401(k), withdrawing money has consequences. I have mentioned many of them here over the years, not the least of which is the early withdrawal penalty, the payment of taxes on those tax deferred investments and of course the loss of retirement money. Yet, those penalties haven’t stopped many of the people who have found it difficult to make their monthly budget work.

Of course, I am assuming a monthly budget. Without some anchor in reality, not having a budgetcan lead to rash decisions withut considering the far-reaching impact. Without a monthly budget, you will have no idea what could be cut to maintain some level of financial stability when times get rough. It is also safe to assume that if you do not have some sort of monthly accounting of your finances, you probably don’t have an emergency account. Both of these would have served the households with troubled income streams.

Two Georgia Congressmen think that those 401(k) plans might be able to help. Their idea: Hardship Outlays to protect Mortgagee Equity (HOME) Act. Introduced last week, U.S. Senator Johnny Isakson (R-Georgia) and U.S. Representative Tom Graves (R-Georgia) want their proposal considered as a way to keep homeowners in their homes. The concept, somewhat like throwing you a lifeline of your own making and designed to rescue you from poverty in the future offers a short-term fix in the near-term. They believe that if you have been a diligent saver, adding to your 401(k) religiously over the years, you shouldn’t be punished for needing the money now as opposed to later.

Rep. Graves is convinced that the housing crisis is the reason the economy has not recovered. Calling up his decades in the real estate business, he suggests: “This bill will help Americans who risk foreclosure use their own resources to make their mortgage payment on time without being penalized by the federal government.” If his assessment of who may need this money now – 23% of those who have mortgages are underwater but not necessarily facing foreclosure – the government should step out of the way and allow these folks to withdraw that money without penalty.

They are proposing that there be a lifetime cap on these withdrawals of $50,000 or one-half of the present value of one’s 401(k) account (whichever is smaller), so long as those funds are used for that purpose within 120 days of withdrawal. This is not the first bill of its kind.

Since the Great Recession began, Congress has struggled with what to do with corner of the financial world. A similar bill was introduced in 2009 and never debated on the Senate floor.

Numerous homeowners should not be in the homes they own in the first place. They may have obtained these residences with fraudulent applications, been unable to afford those homes during what would be considered a normal buying environment and failed to restructure their loans or worse, keep with the terms of their bankruptcy decisions. Because tax-deferred retirement accounts are not considered in these proceedings, some mortgage holders may have been in a position to financially right their own ship. But because of the penalties associated with tapping those accounts, they simply chose not to.

The HOME Act will allow wealthier homeowners to save their residences without penalty, while the rest of us, those that underfunded their retirement accounts or couldn’t wait for Congress to act, have already drained those accounts, paid the penalties and taxes and tried to move on. This effort woud do little to help those currently in the foreclosure vortex or who have been spat out by the continued downturn in housing.

No matter who you are, this last ditch effort is not the way to go. Reducing future retirement payouts (compounding and time suggest that $50,000 in retirement savings would provide only about $290 a month in retirement – a projected shortfall of over $1200) would set the average wage-earner, hardship or no, back decades in support of keeping the house. Few of these folks, given the opportunity and the consequence of this decision will consider the long-range impact of that decision. And if it gets Congressional approval, it will push the real problem further down the road.

On the surface, it might seem like the right thing to do. But beneath the veneer of a tax and penalty holiday the problems this money promises far outweigh the immediate salve it may provide. There are solutions, none of them pleasant.

If you are seeing the problem on the horizon, don’t wait until the day of reckoning. Contact your lender before you run into problems. If the problem has arrived, keep in mind, as devastating as it seems, it is not the end. While temporary may well last several years, longer if you successfully pursue a bankruptcy, protecting your future, a time when this will all be an unhappy bump in life’s road will be worth the sacrifice.

True, protecting your credit is important. Just keep in mind, it wasn’t as important when you bought the house as it is to you now. This too will pass.

The bottom line: those 401(k) provisions were established decades ago when the thinking was to make it painful to withdraw your money all the while giving you the illusion that if need be, you could tap it. Now provision, recent or past will stop you if you have made up your mind. But for those who see this as an exit strategy for a bad decision, this Act will add to the problem.

I know it’s old school but it is worth repeating: get a budget (and figure worse case scenario, not current spending habits to allow a downturn picture to standout), attempt to negotiate before the problem strikes (ironically, most job losses are not a surprise) and divide this time and the future into two separate lifetimes. Borrowing – or in this case, stealing from the future is not a good short-term remedy. It is a bandaid on a gapping wound.

Retirement Planning Resolutions that should be kept

Even as the news told us with the turn of the calendar that the first Baby Boomer was eligible to retire, all of us wondered if they did. Were their retirement accounts so much better than ours? Did they make promises that they kept? Were they able to dance between the raindrops rather than simply weather the storm? We may never know more than we know about ourselves. But what do we know about ourselves and our retirement plans? Does the answer lie in how we approach our New Years resolutions?

By the time you read this, your New Year's resolutions may already be broken. If not, in the next couple of days they will be seriously tested. This doesn't make you a bad person - in part because you have broken them so often in the past. But there is a pattern in your lapses and if you promised yourself to build a better financial plan, focus more of your income on your retirement accounts, and/or simply spend less, breaking those commitments can have longer range effects that simply gaining a few pounds.

Why do we break the resolutions in the first place? In large part, our resolutions are well intended. But they tend to be an all-or nothing type of promise to not do better so much as to change course. This might relatively easy to do if you are 20 years old. But the older you get, the longer it will take for that ship you call life to readjust its headings.

Which brings us to the second reason we fail to follow through: lack of patience. As much as I hate to bring up the dieting analogy, it does apply to the way you treat your finances. Nothing is instant. You can't will away years of bad habits and as soon as one of those bad habits creeps into your diet, its over. In the world of finance, it might be a purchase done outside of your budget that has the ripple effect of bringing the resolution down.

Statistics have shown that resolutions morph from something that is a need-to-keep promise to one's self to a nice-to-keep promise. This is another reason why, by the end of the first week in January, you have back-burnered the promise to increase your 401(k) contribution, put your credit cards away, talk to your children about money, talk to your husband about the course of your retirement plan. Even if the idea was to build a plan, something anything more than what you have haphazardly pieced together, you have already lost some of the goals you set forth.

Men have no problem breaking resolutions if they make them at all. Women often see it breaking a resolution as a sign of some weakness. Both are wrong. Here are five easy steps to make your financial promises stick in the new year - and if you haven't made any, this will help you make some commitment without the pressure of a change in the calendar.

1. Be patient. No retirement plan was hatched in a day or a week or a year. Most 401(k) plans have internet access available to their plan participants. Log on and find out where you are in terms of contribution. If it is less than 5%, change it to 5%. This is usually the threshold where your pre-tax contribution has no effect on your take-home pay.

2. If you are a couple, do this together. One resolution to keep is that retirement plans are best used if they are combined. Not physically, but on a decision level. One plan might be better, the other might be more generous in the match. One of you might earn more where a 5% contribution is actually a larger dollar amount. One plan might have better investment opportunities. If don't approach this together, you will not get the benefit of two plans as one.

3. Add 1% a month every month thereafter until you reach the 12% mark. This will be not-as-painful but will require you readjust your spending habits.

4. Educate yourself about risk and how much you can embrace. Women have been studied and most of those surveys have drawn similar conclusions: women are more pragmatic when it comes to investments. If men and women looked at what they want and how their plan could help to achieve it, they might find themselves much better situated 15 years down the road than if they chased the next-hot investment cycle.

5. Take a look at your beneficiaries. Your investments and insurances need to be specific. Your will needs to be clear. And if you do this, you will find that this forces you to look deep into the future at a time when one of you - most likely, the woman, will still be around.

Paul Petillo is the managing editor of BlueCollarDollar.com and Target2025.com

The Pursuit of Retirement

Ask any psychiatrist what worrying is and you might get this sort of response: it is " the ubiquitous human practice of imposing suffering upon oneself. Worry is a good example of self-inflicted suffering."  A layman might characterize the worrying as simply being not-so-positive, having crossed some imaginary line between what is feeling good and not so much.  If that is the case, we have become a nation of worriers, inflicting suffering on ourselves about a future we don't know about, preparing for a time when we have absolutely no certainty about inflation, taxes or the eventual returns that our retirement plans might yield.

Personally, I tend to characterize worrying as an activity that suggests lack of preparation or planning.  You can't possibly prepare for every contingency, life has things that simply aren't subject to any sort of plan, but you can make the effort.

Retirement planning, something I have described as a whole life effort at looking at all of the possibilities and making arrangements to address each, offers us the ability to have some control.  Worriers will still worry.  But at least they will worry less and begin to straddle that fretful line separating positive and negative.

There are several things that you can do, in the short-term to help alleviate any worrying that might be haunting you.  There will always be those who say save (although I prefer the word invest) for retirement.  I am one of them and in many instances, those with 401(k) plans will have the easiest time in accomplishing this first and most vital step. But those who don't will need to develop a discipline that isn't quite there or if it is, not fully formed.

Those with a 401(k), who have been on the job long enough to have access to the plan, should contribute 5% of their pre-tax income. To further alleviate the worry - and you will once you are faced with the choices in the plan, many of which are not that great - simply put it in an index fund, either one called Total Market or one that tracks the S&P500. (You can learn more later, after you tackle the next problem.)

Those without a 401(k) (and now that those that have a 401(k) have begun to invest) should begin to focus on what they can do in the short-term.  In the vast majority of instances, your household spending needs to be reexamined. As much as I want to avoid saying so, if you are living paycheck to paycheck, it is not the size of the check that is the problem, it is what the check is paying for.

Credit may be the great social equalizer, giving everyone the impression that you are worth more than you are able to pay for but debt is an economic destabilizer and a very serious threat to your ability to remain positive.  This is and should be the short-term focus for those who wonder what life will be like in retirement.

Oddly, you may always have debt of some sort and even more oddly, some of it will be considered good. Good debt is fixed at a certain rate for a period of time with a pay-off date when the balance will be zero. This includes a house payment and a car payment.  Credit card debt is not considered good debt. It can be paid off although and this is where you will develop the discipline to take the first step towards retirement.

Using a sliding scale plan, your credit cards could be paid off in full in a much shorter time than you imagined.  Try this: Suppose you have three cards - and most of us carry a balance from month to month on this amount - list all three cards in terms of their minimum payments.  It might be $15, $25, $50.  Take the lowest minimum and pay double on it while paying the minimum of the other two (paying double the minimum on all three is better, but we are dealing with manageable amounts here).  Do this until it is paid off.

Now roll the minimum payment you doubled onto the next card's minimum making that payment $55 ($15 x 2 + $25) and continue the $50 minimum on the other card.  Once that accelerated paydown is complete, roll the $55 to the remaining card.

This could take several years to accomplish but what it will do is keep you from stepping backwards each time you try to move forward. While investing for your future is always a priority, the longer you have this sort of debt, the markets where you have invested your retirement dollars will have to outperform to a degree that may not be possible.  They would have to return almost twice as much as the interest rate you are paying your creditors to get to even.

Yes, you will still be behind in the pursuit of retirement but you will know be able to look at the discipline you have created as a new found way to keep worry at bay and begin to build the next phase of your retirement plan: the emergency fund.  having solved this problem and the next will be giving you the ability to resist using credit in times of crisis and tapping your retirement in times of emergencies.  For those of you that have a 401(k) and began your investment plan at 5% of your pre-tax income - a level of investment that in most cases does not alter your take-home pay, your focus on debt and then your emergency account is critical as well.

These remain the two biggest problems facing your future retirement.  I'll never suggest you stop worrying.  But getting these tow things - your debt and your family's emergency fund - under control will put you on a wholly different path, one you will never have to worry about again.

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

Retirement Planning for the Next Generation

Most of us are barely able to accumulate enough wealth for own retirement let alone thinking about providing for generations far removed from the event.  But if you could, would you?

The assumptions you make about how much money you will need in retirement are probably the most difficult exercise in the whole of retirement planning. The unknowns are so numerous that simply thinking too much about it gives many people the incentive to simply ignore the question. Taxes and inflation play a role in how much money we will need along with the condition of our health, our portfolios and our living arrangements. Who could possibly guess with any accuracy what those costs will be?

Yet, some of us can with certain investments. If you can wait until you are 70 1/2 years-old to begin taking your distributions from an IRA, and you take only the minimum amount needed, you may be in a position to make that IRA last much longer, across generations. Called a Stretch IRA, the sort of planning can create untold wealth for a child or grandchild.

More on the Stretch IRA from Paul Petillo, managing editor of Target 2025.com

Can Actuaries Make a Good Retirement Prediction?

When we do retire, we do tend to spend more during those initial years.  And because of that, we try an calculate just how much is enough so we won’t outlast our funds.  This is often based  on the 4% rule, an initial distribution that is adjusted upward as retirement continues based on inflation.

Because no one, not even the actuaries know how long we will live, whether we want to perserve some of those funds for our heirs, what the tax rate will be over those years and whether inflation will begin to rise significantly, this decision is incredibly difficult to make, even when you are close to retirement.

You can read the full article here

Should You use Annuities in Retirement?

Annuities are back in the news.  And the insurance industry is jumping for joy.  Should you?

The Obama Middle Class Task Force is looking to annuities as a way to make retirement just a little more secure.  While they have come up with numerous incentives, they should also consider a fixed lifetime tax on all retirement income up to a certain amount.  They have discussed this for the first $10,000 of annuity income but they could also extend this incentive to IRAs as well.  If the retiree (or future retiree) could determine how much of a bite taxes would take, they could better estimate how much they will actually get when they retire.  Currently, the assumption is that retirees will earn less and therefore be taxed at a lower rate.  Guaranteeing that rate will enable folks to project better. 

Unless you or the insurer passes away!  More on annuities at Target2025.com

Yet Another Spotlight on Your Retirement Plan

A short while back, I wrote about a company that uses a series of benchmarks and mathematical equations to determine whether your 401(k) plan is doing what it should. Brightscope's product was designed to help plan sponsors find the problems in their plans and make an effort to correct them. As noble as that effort may be, the hurdles are numerous for plan participants to get their companies to make the necessary changes to their plans.

Now we have another entrant to the market place, this one offering the plan sponsor a look a their employee's retirement readiness. Fiduciary Benchmarks, based in Kansas will provide a snapshot look at a company's plan and the chances that their employee will arrive at retirement with enough cash to be considered adequate.

Using 100% as the retirement readiness benchmark, a number that represents different things to different income groups, the report, provided free in brief and at the cost of $100 for more detailed analysis looks at the average employee. From there, the report then analyzes various pathways that employee can take, and if they did, how well the plan allowed them to reach the optimum amount in their retirement accounts.

In a downloadable pdf, they suggest that a person earning $20,000 a year will need 94% of their pre-retirement income to survive. Although the plan does take into account conservative longevity predictions and the available investments in the plan, it does not look at the statistics for this particular group and their overdependence on Social Security benefits.

Their benchmark also suggests that someone earning three times that amount would need only 78% of their working income to hit the 100% mark in the company's index. Some industries fair much better than others. But this is not reflective of the whole of the employees in the plan, simply what the plan may do for you should you use it to its fullest.

And therein lies the rub. Most employees, no matter how good the plan, do not max out their retirement contribution, leaving them with a huge gap in what they will need and what they enter retirement with. Without full participation, there is little another tool for plan sponsors can do. The vast majority of plans are adequate even if they fall short on the educational side.

While there is emphasis on educating the participant through education of the plan sponsor, it is beginning to seem a little overdone, even as this type of spotlight is still in its infancy. Most employees wonder why their plans weren't improved sooner. And still more see the incremental improvements as a way to sustain the current level of contribution rather than an enticement to increase it.

The real improvement will come from the IRS. Once they fix the expected tax rate for retiree's plans when disbursement begins, and not leave the rate the big unknown, employees will see the future through a much clearer light. Not having any idea what those future taxes will be make it difficult to determine how much will be enough.

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.

Retirement Planning: Your Business Plan for Retirement part one

Those of us who write about personal finance will, almost by default attempt to explain your personal finances, even your marital finances, as a business endeavor. And as truthful as those analogies might be, it still doesn't prepare you for your own business. If the entrepreneurial spirit is truly alive, then chances are you have given some thought to opening your own business.


More than the business plan is needed. More than just that great idea; the one that you know is just what some consumer somewhere cannot live without. More than just that spirit of being your own boss. More than the freedom to call the shots, be the builder of your own destiny. Being in business for yourself is a huge risk against your retirement.

Your reliance on your skills will sap the very lifeblood out of you, leaving you thrillingly exhausted at the end of each day. It will be great and terrifying, all at the same time. And many of us will fund that venture with money that may not come directly from your previous employer's 401(k) - at least I hope not - but from money you could have put away for that future.

There is a way to not lose out on that future as long as you apply some of the principles that guided your retirement plan before you struck out on your own. And if you tapped those funds, there are ways to recoup those lost dollars quickly.

But you have got to act fast. Right from the beginning. Without a doubt, you will need a salary from your business. And just like when you had that other job, the one with the 401(k), you should account for a pre-tax retirement contribution.

There are several ways to get going. First, we will discuss the easiest one to set up. In the next post, we will talk about other plans to think about as your business grows.

The solo 401(k) is for a sole proprietor, a business of one. It was created for people with great ideas, folks like you Your business can have a spouse for an employee but generally, the self-employed, the entrepreneur, the small business owner must go it alone. The good thing about solo 401(k): simplicity.

Simple to use and easy to maintain, you may contribute up to $13,000 of tax-deferred income with a bonus incentive thrown in for good measure in allowing you to add up to 25% of profit from your business as well. You might be living on tuna and crackers, but this type of plan can allow the start-up business owner the advantage of playing 401(k) catch-up in a relatively short time. The contribution limit is $41,000.

The relaxed rules that come with a solo 401(k) offer you the ability to decrease your contribution or suspend it altogether. By try not to. Because other rules in the plan might come in handy during some rough spots in your business's future. Known as hardship withdrawals, these loans against your solo 401(k) often have more favorable terms than those plans administered by larger enterprises. You might, at some point in time consider rolling over your previous 401(k) into your new plan.

Yet, like everything that seems too good to be true, there are a few drawbacks to the to the solo 401(k).

First, you need to find a plan administrator. Typically, these might be mutual fund managers but not always. The fund families are generally less expensive (trust and equity companies can charge anywhere from $400 upward to set up the account, and an additional percentage or fixed fee on the balance of the account) costing about ten dollars to set-up the account and 0.25% against the account balance, it may on the surface seem like a no-brainer to chose these folks. But the funds they offer you may add additional costs to the account in the way of fees and some fund families, like Fidelity want $10,000 upfront to begin with any fund.

Here is a list of plan administrators (a downloadable pdf.).

You should also consider your business's growth potential. If its quick, and you anticipate hiring employees, setting this kind of plan up may be a waste of time. Once your solo 401(k) is set up and your business grows, you will need to transition to a traditional 401(k) sooner than you would have liked to - or had the time to.

If you do anything, keep this in mind: this is a taxable event and should have the stamp of approval on it from someone who is a professional. Find a good one through references or very good friends.

Next up, the SEP-IRA.

Taxes and Retirement Planning

As the late George Carlin once said, “the poor are only there to keep the middle class going to work each day.” And so it goes, we are off to work each day, hoping beyond hope to scrap by without having your life’s work stripped away by health insurance costs, lack of creditworthiness and kids and/or parents who are becoming increasingly dependent on your incomes.

And the one hidden menace, lurking in the background is taxes. Sure, I focus a great deal on the influences of the economy at large, the subtle impact of inflation and the political landscape of money, but taxes, the thing that no one likes to admit keeps the public engine running in communities across the country, are about to increase. But will you notice?


On the Local Level
Revenue for state and local governments ebb and flow with the state of the economy. When property values jumped dramatically, taxes tied to the assessed value of those home filled the coffers and made new project planning easier. But as those values decrease, those revenues will still be needed to keep the communities running even if its residents feel as though those taxes would be better kept on their own side of the balance sheet.

Some states are making swaps, using one revenue source to pay for another that may not be doing as well. A good example of these kinds of swaps is cigarette and alcohol taxes increasing as property taxes are frozen (usually at 1-3% of assessed value), capped or cut.

Expect sales taxes, if your state has them, to increase over the next several years. This does help tourist rich cities to capitalize on outside sources of revenue but for the most part, it slows the economic growth by taking spending money from the consumer.

Look for an increase in amnesty programs, events designed to get delinquent taxpayers back into the system using the lure of payment without penalties of late fees.

On the Federal Level

This is the big unknown question. Senator Barrack Obama has made I clear he believe that the families with household incomes exceeding $250,000 should be paying what he refers to as “their fair share”. Investors expect that this group, the ones most likely to support the capital gains tax of 15%, to pay more for the sale of stocks if he is elected. (The prevailing belief is that even if Obama is elected and increases this tax on the wealthiest of families, it would be capped at 28%.)

Senator John McCain on the other hand, is offering much of the same program that has been successful, but only if you ask the right people. Mr. Obama’s plan would force many folks who have not diversified, specifically those with illiquid assets, to do so before the new president takes office.

If Obama gets his way, states and local municipalities would see a huge influx in revenue from tax-exempt municipal bonds. This can be tricky territory though. Some munis trigger the alternative minimum tax (AMT) because they pay interest.

The Effect on your Retirement Plan

Unless you are among the highest wage earners, your approach to retirement planning should be focused not so much on how much is in the nest egg but how much income, less taxes and inflation, will allow you to be comfortable. That number is generally different for each of us and unfortunately is based on a perfect situation (usually calculated without considering taxes and inflation).

Most of us can expect to take home – after retirement – a paycheck that is 30% lighter than we estimate (3% for inflation – modest and hopeful guess, 15 – 20% income taxes on earnings from deferred income sources like pensions and retirement accounts, and 10% on property and local taxes).

That means you will need to save an additional 30% above what you are currently putting away for your future or, lower your expectations on how much you will need.

We can count on one thing: Your elected officials feel your pain but can do little about it. Taxes will not go down no matter whom takes the helm in Washington or at the local level. The best you can do is plan for the worst.

Retirement Planning at 60-years-old

Now is the time to ask the serious questions.

Are you considering what your after-work sources of income will be? Can you live on them now? Take your Social Security payments, any pensions you might receive, and any other source of income from savings or retirement plans, add them together and create a household budget around them. Does this support your idea of retirement?

Can you afford taxes, insurance and upkeep on your home? Is it too big? Will it need major repairs to last until you are eighty, or ninety? Do you still have a mortgage? Have you created equity? Do you have debt?

It is the classic observation that George Foreman made: “The question isn't at what age I want to retire, it's at what income.”

There is an excellent chance that you will still be working when you celebrate your sixtieth birthday. The ability to remain viable and contribute something to the workplace should be worn as a badge of honor. Unless you are working for the wrong reasons.

If you are working because you failed to save enough for the retirement you envisioned, then now is the time to lower those expectations just a little bit. Many of us harbor outsized visions of what we want retirement to be. By age sixty, we will either be disappointed or overjoyed.

Perhaps you have been blessed when better than average health. If so, working beyond what many consider normal retirement age is creating wealth that will make your post-work years more comfortable.

But far too many adults are entering this time of life with less-than-perfect health and worse, the inability to pay for health insurance to cover it – if they have insurance at all.

Debt, and not just mortgage debt, has become a problem among this age group, weighing on their mental well-being and forcing many to work because they have to rather than because they want to.

It is possible that you have more than you think. If you have lived in the same house and built up a good deal of equity – the difference between what you owe and what the house is worth, this might be a solution to your problem. You could downsize, selling the property, satisfying your debts and even creating a small, but much needed nest egg to help with your retirement years.

If you do, you should consider places where the amenities meet your needs. Do you want to be close to your family? For many people thinking about retirement, this is a serious consideration. They want to be near their families, help with their grandchildren and even be closer to their own children.

If you intend to move, ask yourself if there a viable and mixed population present? Recent studies have proven that communities that cater exclusively to seniors do not fulfill many of the social needs of people entering retirement. They like the neighborhoods they live in to have a good mix of people already living there. Businesses often look for the same types of neighborhoods and in doing so, increase the livability of the area.

If you are considering working until you are seventy, you can delay taking your Social Security withdrawals until later. Any retirement savings in 401(k) plans or IRAs will need to begin distributing funds by age 70 ½. Until then, you can continue to make contributions.

Additional reading

• Investment news
  
• Retirement Planning
  
• Personal Finance

Retirement Planning at 50

If you are fifty right now, you are among the last wave of Baby Boomers scheduled to overwhelm the retirement system, bankrupt Social Security, and tax the health care system of our country as never before.

Unless of course you have subscribed to what author Louisa May Alcott suggests this age should be. She wrote, "Have regular hours for work and play; make each day both useful and pleasant, and prove that you understand the worth of time by employing it well. Then youth will be delightful, old age will bring few regrets, and life will become a beautiful success."

Is it that easy? In most instances, the answer is yes. At age fifty, something you could not possibly have imagined at 20, even thirty-years old, you should have a fairly good idea of what your retirement will look like.

Finding ways to improve what might be an unclear vista are a little harder at this age but far from impossible. You know more financial stuff than you would care to admit, made more mistakes than you would like to acknowledge, and probably regret decisions you have made along the way. No matter. They can all be fixed.

The solutions unfortunately, will be a little more severe because of it but they will not imprison you in a life without some joy.

The plan is threefold. You need to determine how long it will take to get completely debt free. There are lots of websites and blogs out there professing a debt-free existence � which if you are working is just a silly notion. Retirement is no place for a mortgage payment. It is no place for credit card bills. Do the math and find a solution. If you need to see a credit counselor, do not hesitate. Pick a not-for-profit one and stay on the budgetary diet they give you.

Then ask yourself, how is your health? Can you work until you are seventy? If the answer is yes, then begin to save as much money as you can in your employer's tax-deferred account. Remember, seventy is only four to five years beyond our current notion of retirement age. If you have chosen an occupation that allows you to continue working, consider it. If you have a job that will not accommodate you into your seventies, begin to develop some alternatives now.

It is not too late to begin saving in your 401(k) at work. You must structure it differently and contribute a good deal more (the maximum will help you catch-up and the government has allowed for additional catch-up contributions when you reach fifty), but it will prove to be better than not having one.

• What is a 401(k)?
  
• How much should I contribute?
  
• What is an index fund?
  

And lastly, begin looking at your after-work sources of income. These are generally fixed sources of cash. Take your Social Security payments, any pensions you might receive, and any other source of income, add them together and create a household budget around them. Can you live on this amount of money? Can you afford taxes, insurance and upkeep on your home? Is it too big? Will it need major repairs to last until you are eighty, or ninety?

These are hard questions. But you are not without options.

Additional Reading

• Investment News
  
• Retirement Planning Help

G is for Gross Income - Retirement Planning

We continue our look at some of the important factors of a good retirement plan. This alphabetical look at what you need to know continues with a look at gross income.

In Retirement Planning, G is for Gross Income

There are very few downsides to owning a Roth IRA. Of course there is the tax advantage. After five years, the money can be withdrawn tax-free. Unlike a traditional IRA, all of the withdrawals are taxed at your regular income. (The reason for this difference is based on whether the money was taxed prior to deposit – traditional IRA deposits were a deduction from taxes whereas a Roth IRA is funded with after tax contributions.)

A traditional IRA requires you to take withdraws by age 70 ½ (actually the date is April 1st in the year following your 70 ½ birthday). A Roth does not have any such requirements, allowing you to keep the money invested until you need it – if ever. And that “if ever” allows you to pass the Roth IRA on to your heirs who, although they would be required to take distributions, would find the added income from the inherited Roth IRA would be tax-free.

While there is no guarantee that your Roth IRA will grow without set-backs – what you pick for your investments determines the portfolio’s possibilities, the ability to save more is restricted not only by age but by gross income.

Age and Income

Your contributions before you reach fifty-years-old are limited in both the Roth IRA and the traditional IRA to $5,000. But after fifty, the annual contribution jumps to $6,000 with adjustments being made thereafter based on inflation.

But gross income also plays a role in how much you can contribute. More specifically, modified gross income. If you are single, that income cannot exceed $101,000 and if you are married, filing jointly, the income limit is set at $159,000. Modified gross income is calculated using IRS publication 590 (turn to page 61) and does not include any Roth conversions you may have made in the current tax year.

What if you make too much? It is a nice problem to have but to avoid not investing at all, the IRS allows you to make non-deductible IRA contributions. Conversions have income limits as well ($100,000 a year for individual or joint filers – sorry, married filers filing separately re not allowed to convert). But hold onto the non-deductible IRA until 2010 and convert without penalty.

There are still taxes to be paid on the conversion however but they can be spread over the following years (2011 and 2012).

A is for Asset Allocation

B is for Balance

C is for Continuity

D is for Diversity

E is for (Tracking) Errors

F is for Free-Float

Retirement Planning and Your Personal Finance Skills, Part Three

Personal Financial Literacy Quiz:

(Answers and explanations by me are at the bottom of the page)

21. Matt has a good job on the production line of a factory in his home town. During the past year or two, the state in which Matt lives has been raising taxes on its businesses to the point where they are much higher than in neighboring states. What effect is this likely to have on Matt's job?

a.) Higher business taxes will cause more businesses to move into Matt's state, raising wages.

b.) Higher business taxes can't have any effect on Matt's job.

c.) Matt's company may consider moving to a lower-tax state, threatening Matt's job.

d.) He is likely to get a large raise to offset the effect of higher taxes.

22. If you have caused an accident, which type of automobile insurance would cover damage to your own car?

a.) Comprehensive.

b.) Liability.

c.) Term.

d.) Collision.

23. Scott and Eric are young men. Each has a good credit history. They work at the same company and make approximately the same salary. Scott has borrowed $6,000 to take a foreign vacation. Eric has borrowed $6,000 to buy a car. Who is likely to pay the lowest finance charge?

a.) Eric will pay less because the car is collateral for the loan.

b.) They will both pay the same because the rate is set by law.

c.) Scott will pay less because people who travel overseas are better risks.

d.) They will both pay the same because they have almost identical financial backgrounds.

24. If you went to college and earned a four-year degree, how much more money could you expect to earn than if you only had a high school diploma?

a.) About 10 times as much.

b.) No more; I would make about the same either way.


c.) A little more; about 20% more.

d.) A lot more; about 70% more.

25. Many savings programs are protected by the Federal government against loss. Which of the following is not?

a.) A U.S. Savings Bond.

b.) A certificate of deposit at the bank.

c.) A bond issued by one of the 50 States.

d.) A U. S. Treasury Bond.

26. If each of the following persons had the same amount of take home pay, who would need the greatest amount of life insurance?

a.) An elderly retired man, with a wife who is also retired.

b.) A young married man without children.

c.) A young single woman with two young children.

d.) A young single woman without children.

27. Which of the following instruments is NOT typically associated with spending?

a.) Debit card.

b.) Certificate of deposit.

c.) Cash.

d.) Credit card.

28. Which of the following credit card users is likely to pay the GREATEST dollar amount in finance charges per year, if they all charge the same amount per year on their cards?

a.) Jessica, who pays at least the minimum amount each month and more, when she has the money.

b.) Vera, who generally pays off her credit card in full but, occasionally, will pay the minimum when she is short of cash

c.) Megan, who always pays off her credit card bill in full shortly after she receives it

d.) Erin, who only pays the minimum amount each month.

29. Which of the following statements is true?

a.) Banks and other lenders share the credit history of their borrowers with each other and are likely to know of any loan payments that you have missed.

b.) People have so many loans it is very unlikely that one bank will know your history with another bank

c.) Your bad loan payment record with one bank will not be considered if you apply to another bank for a loan.

d.) If you missed a payment more than 2 years ago, it cannot be considered in a loan decision.

30. Dan must borrow $12,000 to complete his college education. Which of the following would NOT be likely to reduce the finance charge rate?

a.) If he went to a state college rather than a private college.

b.) If his parents cosigned the loan.

c.) If his parents took out an additional mortgage on their house for the loan.

d.) If the loan was insured by the Federal Government.

31. If you had a savings account at a bank, which of the following would be correct concerning the interest that you would earn on this account?

a.) Earnings from savings account interest may not be taxed.

b.) Income tax may be charged on the interest if your income is high enough.


c.) Sales tax may be charged on the interest that you earn.

d.) You cannot earn interest until you pass your 18th birthday.

ANSWERS: 21) c; 22) d; 23)a; 24)d; 25)c 26) c; 27) b; 28) d; 29) a; 30) a; 31) b

Part One

Part Two

Retirement Planning and Future Calculations

The internet is littered with a wide variety of calculators, many of which are designed to help you focus on a certain goal. Many are just flat out depressing.



As we have found out, retirement planning is more than just saving money. It is a strategic position, a plan for all of the possible things that could go wrong from health issues not only for you and your family but job interruptions, career changes and forces that exert a certain pressure of which we have little or no control.

Inflation and taxes play a huge role in how we plan but they are almost completely unpredictable. Nonetheless, the calculators still try to paint a picture that will best, and in most cases, sell an idea, product or company that can help you attain that dream. Charles Schwab is no different.

The company is hoping that more companies will begin offering a Roth inside of a company’s 401(k) or defined contribution plan. But is a Roth good for everyone?



Not necessarily. The differences in the two types of retirement plans are based on the way taxes are handled. If you assume that you will be in a lower tax bracket when you retire, sticking with the traditional form of 401(k) will still be the best choice. It provides you with the same contribution opportunities as a Roth 401(k) would but may, especially in the lower income brackets – below $100,000 income, provide you with a better funded paycheck.

Once you get above the $100k limit, a Roth might serve you better.

The calculator that Schwab offers can give you some indication of the differences although it does not calculate the net result of inflation on those contributions nor does it discuss investment options or the fees associated with those investments.

If you use the tool, be sure to check the box at the lower right hand corner. It might give you a more accurate read on where you might be going and whether it is worth changing. If you can take home 9% more now and use that money to control your debt and even increase your emergency savings, a Roth may not be the best option.

Retirement Planning and Cash Positions

Retirement Planning and Cash Positions

As many of us, future retirees and current ones watch in horror as the stock market gyrates on almost any news, as we watch the Fed struggle with the credit crunch, sub-prime defaults and any number of financial missteps, some of which have yet to come to light, we worry that our long-term investments are in jeopardy. And we would be fully justified to do so.

Your mutual fund managers are doing something about it. In an article posted on Bloomberg recently, fund managers are shifting away from buying stocks to selling them and holding on to the cash. The key here is to let them do it and not do it yourself.

Mutual funds do not have the luxury of taking inordinate risks such as their more volatile brethren in the hedge fund world might. Because, not only do they deal with individual investors, mutual fund managers must look at pensions and insurance company investors and make their plans based on a much longer horizon than you might think.



You will do more harm than good by panicking. Your fellow investors will feel the pinch from your redemptions – when you sell shares, the fund must sell stock to cover your exit leaving those left behind in a little worse shape than before. This also creates tax problems for not only those redeeming their shares but for those left behind as well.

As Eric Martin and Alexis Xydias write: “Forty-three percent of managers surveyed this month by Merrill Lynch & Co. moved more money into cash than their funds stipulated, the highest percentage since the New York-based firm began compiling the data in April 2001. Their cash relative to total assets also rose to a five-year high as managers found fewer stocks to purchase and anticipated redemptions.”

Stay put. Even increase your pre-tax contributions and let the fund managers do what you pay them to do.