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Making Your Money Last

Chat Transcript: Jump-Start Your Retirement Plan

Planners from the National Association of Personal Financial Advisors (NAPFA) were on Facebook Oct. 12 to answer your questions. You can view the transcript of the discussions below.

Another live Facebook discussion with NAPFA planners will be held on November 16, from 10am-11am ET and 1pm-2pm ET.

Kiplinger: All right, let's get started! Our NAPFA advisor this morning is Theresa Chen, from Altfest Personal Wealth Management in New York, NY.

Question From Sally: Trying to max out a 401k. I am eligible for the catch-up contribution. Not clear if the catch-up is included in the 415 limit or if the catch-up is on top of the limit. Any help would be appreciated.

Theresa Chen: Hi Sally, the maximum contribution for 401k for 2011 is $16,500. The catch-up contribution limit if you're age 50 or over is an additional $5,500. So your total contribution limit is $22,000. Hope this is helpful.

Question From Ray: I am 60 years old and want to know if there are fixed interest investments that can generate 4-6% interest before taxes?


Question From Ray: I have 2 properties that I am selling and they will net $660K.

Theresa Chen: Hi Ray - If you need a fixed income stream, you can look into high quality bonds or bond funds, though the yield will most likely be closer to 4% than 6% these days. Just keep in mind that the higher the yield, the more likely that the investment is riskier so yield is not the only thing you should be looking for. Dividend stocks may be a good idea for income stream but with long term growth prospects as well. There are many high quality companies paying 3.5-4% in dividend yield.

Kiplinger: Ray, here are two links that might help, as well: A Strategy for a Lifetime of Income and 5 Companies with Stocks that Pay More than Their Bonds.

Question From Steve: I have two young children and no Will or estate plan. How can I go about finding an estate attorney who will not cost me an arm and a leg?!?!


Theresa: Hi Steve - It's great that you're thinking about setting up a will and estate plan early on. You may want to ask your family and friends to see if they have any recommendations for an estate attorney. Or if you have an accountant or financial advisor, see if they have anyone that they enjoy working with and would recommend. Many estate attorneys charge by the hour so if your situation is not especially complicated, it may keep the cost down. Just keep in mind that whoever you choose is an expert in the state that you reside in. Having a good estate attorney is important so feel free to ask your questions before signing up to make sure you feel comfortable with him or her.

Question From Ed: I am concerned about my long-term retirement planning given the markets. I am 45 years old and do have some money to invest. Do I sit tight and wait the volatility out or do I jump in and hope to buy on the cheap?

Theresa: Hi Ed - If this is money that you want to invest for the long term, I wouldn't wait out the volatility. It's difficult to time the markets to find the "bottom". In my opinion, the stock market isn't too expensive right now. However, if it would make you feel more comfortable you can consider dollar cost averaging. If you invest a portion today, another portion a month from now, and so on, that might spread out the "risk" of investing in a volatile market. Just keep in mind that you're investing for the long term, so don't get too anxious if you see short term drops in the stock markets, especially if you're invested in solid companies.

Question From David: I am searching for monthly dividend stocks (good companies) to supplement my other income? I am not sure how many stocks to purchase or which ones to receive at lease $200 a month or which companies to choose?


Kiplinger: David, here are 12 great stocks with a payment schedule that will line your pockets with cash every month.

Comment From David: Great! Thank you.....I continue read Kiplingers....great resource...

Theresa: Hi David - the link sent by Kiplinger is a great place to start. Just keep in mind that most stocks pay dividends quarterly so in order to get a consistent monthly income stream from dividends, you'll have to buy stocks that pay on a different quarterly schedule. $200 per month equates to $2,400 per year. If you assume on average a 4% dividend yield, that's about a $60,000 investment. Hope that is helpful in terms of the numbers.

Comment From David: Yes it is...thank you...


Question From Stephanie: I am able to contribute to a Roth 401K through work. I am 43. My husband is 47. We have a combined $450,000 in retirement savings so far. We contribute the maximum to each of our 401K accounts each year. Would it be better to contribute my $16,500 to the Roth 401K. I would assume that taxes will only be higher when we retire around age 64, so the tax free Roth 401K might make more sense.

Theresa: Hi Stephanie - the question really depends on your tax bracket now versus tax bracket in retirement. If you believe that your tax bracket will be higher in retirement, then the Roth 401k might make more sense. Also, we've done some analysis on this topic at our firm, and we find that contributing to a Roth is particularly beneficial if you plan on passing down the assets to the next generation because it can grow tax free for an even longer period of time.

Question From Ray: In calculating my net yearly distribution from these fixed income investments, what is a good inflation rate to use for the next 25 years?

Theresa: Hi Ray - for the long term, we generally use 3.5% in our projections. However, it may be a good idea to also run your calculations using a higher inflation figure to see how that affects your situation, kind of as a worse-case-scenario check.

Robert Long (Kiplinger): Ray, re: inflation, I hate to break it to you, but The Kiplinger Letter is forecasting a significant bump in the inflation rate in the years ahead -- 5% or more.

Question From Carol: Please help! I'll turn 65 in February of 2012. I need your advice on which Medicare plans are best for me. 1st, should I choose the original Medicare with a Supplement or do I choose an Advantage plan? I've read so much about Medicare and I'm reading your 2011 and even 2010 (yes, last year's) articles on Medicare. Theoverntment's Medicare "Plan Finder" stops me from navigating its system when I get to the page where I'm to list my prescriptions. I don't take any scripts. I need to enroll within the next 7-8 weeks so your answer is very time sensitive to me.

Kiplinger: Carol, here is a piece we just published about how to more easily navigate the Plan Finder tool to compare Medicare policies. For more help, feel free to reach out to our Ask Kim columnist by e-mailing her directly (e-mail address at bottom of the article).

Theresa: Hi Carol - The answer to your question really depends on the coverage that you need and want. The primary different between the Medicare Supplement plan and the Advantage plan is that the Supplement plan is used to pay for all or some of what Medicare Part A and B do not cover, while the Advantage plan takes the place of Medicare as the primary health coverage. Hope the link that Kiplinger sent helps.

Question From Ray: Are inflation indexed bonds a secure investment and can you lose money with these?

Theresa: Ray - inflation indexed bonds are "secure" in that they won't default but the market value of the bonds still do fluctuate depending on the investor demand and market environment.

Kiplinger: This question came from one of our readers: I converted $25,000 of mutual fund shares from a traditional IRA to my existing Roth IRA early this year. That conversion is no longer worth $25,000, and I don't want to pay income tax on the $25,000. To undo the conversion, do I return the same securities to my traditional IRA at their current value? Or do I have to return $25,000 worth of shares from the Roth to the traditional IRA to avoid taxes?

Theresa: Hi Kiplinger reader - if you converted $25,000 from Traditional to Roth early this year, you have until October 15 of 2012 to decide if you want to re-characterize or not. By then it's possible that the amount is back up to $25,000 or higher. If you want to undo the conversion (recharacterize) you would return the same securities that you converted at their current value. However, you may want to check with your accountant on this because generally we open up a Roth IRA conversion account specifically for the securities that are converted so I'm not 100% sure if it's the same process if you commingled it with an existing Roth.

Question From Marie: I have worked with advisors in the past but, to be honest, I am not sure who to trust anymore. You hear about the Madoff-type situations and it makes you question who you can trust. If I am going to hire an advisor, what do I need to look for?

Theresa: Hi Marie - It's important to find an advisor who is objective and acts in the best interest of the clients. I work for a fee-only advisor, which means we do not get commission for "selling" any products, our only fee is paid directly to us from the clients. Also, it's important to find an advisor who works with a custodian (for example, Schwab, TD Ameritrade, Fidelity). One of the biggest issues with Madoff was that there was no third-party watching over the accounts, it was all done internally. All of our clients money is held at third-party custodians so everything is much more transparent. Also, ask the advisor what they invest in - if they can't produce publicly available information on most of the investment recommendations, then it might be a red flag. It's a good idea to ask for recommendations of advisors from friends and family, but most importantly, you personally have to feel comfortable with them so feel free to ask lots of questions.

Kiplinger: And here's our last question for this hour!

Question From Roy M. in Chicago: I own two homes and am underwater on the tune of $180,000. At one point my homes were part of my long-term retirement plan. What do I do now???

Theresa: Hi Roy - you are certainly not alone, there are many who face similar situations today. If you are unable to make the payments, you can consider talking to your mortgage lenders to see if they are willing to adjust the mortgage payments. Otherwise, if you can hold off on selling your homes until the market recovers, you might make up for some of the $180,000. Is there a possibility of renting out one of them to generate some income to help pay for your monthly payments?

Kiplinger: And we're back! Thanks for your patience. Our new NAPFA advisor is Ryan Jeffries, of Deerfield Financial Advisors in Indianapolis, IN. Thanks for joining us, Ryan!

Kiplinger: This first question will be from Mary, which was originally posted at 1pm. "I am a big-time saver, but that doesn't mean I want to give all my savings to a college next year when my son starts school. Where is the best place to put my savings so that it isn't all taken for tuition?" -Mary

Ryan Jeffries: Mary, When calculating the family contribution towards education expenses, a greater percentage is placed on income/assets of the child than on those of the parents. Although the calculations can be complicated to explain they do tend to exclude the retirement savings of parents. Funding qualified savings accounts such as your employer sponsored 401k, 403b, etc. followed by an IRA should prove best.

Kiplinger: Mary, Ryan is correct in that the calculations can become complicated- here is an article that addresses which family assets matter most in the financial aid formula. We also have a more general report on smart ways to save for college.

Question From Kara: In a volatile market, is it better to focus on paying off low interest debt faster or invest for the future, even if your stocks might be losing more value than the 2-4 percent in interest you are paying?

Ryan Jeffries: Kara, Paying off debt versus saving and investing always proves to be a tricky balance. Without knowing the specifics of your cash-flow or debts here is a general priority list: Save into any employer sponsored retirement plans (401k, 403b, etc.) to maximize any match, payoff any consumer debt that is non-deductible (credit cards,auto, unsecured line-of-credit, etc.), continue funding contributions to company retirement plans or a Roth (or IRA). Remember: you can always finance a house or an education, but not retirement. Always pay yourself first.

Kiplinger: Kara, Ryan wrote a great list of recommendations. We also took a look at this tough financial conundrum in our "Do This or That?" cover story in September. Here is what we recommend when it comes to paying off debt vs. investing for the future.

Question From Dewey: I work with an advisor from a brokerage. I think what he is providing is a financial plan, but I am not sure. What is the difference between financial advice and a financial plan?

Ryan Jeffries: Dewey, I'm not sure there is a definitive difference, but I would define advice as verbal and a plan as written. Advice may answer a simple question, whereas a plan should provide analysis and recommendations of a more complex scenario. Eventually a plan should also include a review of the outcome following the implementation. Planning is a circular process; defining the relationship, gathering data, analysis, presenting recommendations, implementation, and monitor/review.

Question From Liz: I am a novice when it comes to my retirement planning. But it strikes me that in order to do it effectively you need to know what you can invest and save. How can someone approach this? Is it a matter of knowing your cash flow and that's it?

Ryan Jeffries: Liz There are various rules of thumb on how much one should save. One of the most popular centers around 80% spending, 10% saving, 10% give away. The key to this plan, or any, really centers around living below your means. This allows you to not only save, but reduces your spending need when you eventually slow or end your earning years (retirement). You right. Knowing your cash flow is the biggest step towards developing a savings plan. Ensure your spending is less than your income. Next, begin directing all or a portion of the excess (10%, 5%, or even 2%) towards long-term savings. A good start is to fund any employer sponsored retirement plan (401k, 403b etc.) to maximize the match. Next, work to maximize annual contributions to a Roth IRA.

Question From Ron (42 years old): I have young children and an aging mother who will need assistance to live out the rest of her life. While I know I need to help her, i don't want to do it at the expense of ensuring my kids are taken care of in the future!

Ryan Jeffries: Ron, This is becoming a growing issue across our society. Many people like you are finding themselves between helping aging parents with a variety of healthcare and emotional needs, while still providing for younger children. Given the complexity and multitude of details in these situations I'd recommend you seek the adivce of an elder care planner/counselor. This could be a financial advisor or attorney who speacilizes in this area, or a healthcare representative knowledable in helping families with this need. Often a group of professionals in your area will work together to provide this service. Most people tend to start with the professional where there is the greatest need; be it healthcare, financial planning, or legal planning.

Kiplinger: Ron, Ryan is right that this is becoming a growing issue today- you're not alone. We recently wrote a long article about the difficulties faced by America's "Sandwich Generation," which is squeezed between grown kids who can’t find work and elderly parents who need care. We also include some tips on how to lighten the burden.

Question From Katherine: I have a variable Universal Life cash value life insurance, but I always read that I pay too much for life insurance when i can find it for cheaper and that I should move that money to securities, the result is do not pay taxes when retire. Can I move this to Roth IRA? With no costs? Also what should I look to to make the right allocation. Can I research myself? do I start? Please help.

Ryan Jeffries: Katherine, You cannot move the cash value of a viable universal life policy (VUL) to a Roth (or an IRA). Depending on the amount of the cash value you could consider a 1035 exchange to an annuity as this would avoid taxation of the proceeds. However, annuties can also carry significant charges and do not provide the same death benefit. Depending on how long you've held the policy surrender charges may also be a concern. As you can see VULs can prove very complex. I'd recommend consulting a fee-only financial planner for a review of your options. Cost of the VUL aside, if you still need the death benefit of the VUL (to provide for your family) you should not surrender the policy until you have new coverage in-force. You absolutely want to protect your insurability.

Kiplinger: Folks, unfortunately we have run out of time for today's chat. Mark your calendars for our next Jump Start Your Retirement Plan mini-chat, which will be held on November 16, from 10am-11am ET and again from 1pm-2pm ET. Thanks so much for joining us!