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Financial Planning

Answers to Your Planning Questions

Are you saving enough for retirement? Do you have enough life insurance? Should you lease your next car? Here are answers to some of your most common investing, planning, money management and spending quesitons.

Kiplinger's experts take on the major dilemmas of your financial life -- where to invest now, how much insurance is enough, how to prepare for retirement, the best way to save for college -- and wrestle them to the ground.

Retire, Budgeting and College FAQs appear below. Use the links in the box below to jump to more.






Do I need a financial adviser to rescue me? I've failed miserably with my investments over the past few years.

Failed miserably -- that describes almost all of us lately. Did you own respectable stocks, bonds, funds and real estate securities, avoid at least the most egregious Internet and telecom stocks, and lose about what you'd expect in the worst bear market in more than half a century? Then stop beating up on yourself. Maybe it's worth a $500 fee to get a second opinion. But it's not necessarily time to turn your investments over to an adviser, whom you'll pay to manage what you can manage just as well.


Perhaps you really did blow it -- thought yourself a genius stock picker and instead got your pocket picked. Paying an hourly fee for a financial planner to reacquaint you with investing basics is in order. The best thing the planner could do, short of investing your money for you, is to get you away from individual stocks and into mutual funds -- they're far easier to pick.

Even worse than that, eh? You want out of the whole bloody process and are looking for a cool, calm hand to do all the investing on your behalf? Visit the National Association of Personal Financial Advisers to find an adviser near you, and, yes, expect to pay 1% or 2% of your investments annually. But before going that route, consider a simple alternative: ultra-low-cost index funds from the Vanguard Group or even lower-cost exchange-traded funds.

Suze Orman and others are big proponents of living trusts. Do I really need one?

It would probably be a waste of your time and money. With a revocable living trust you transfer legal title of assets to a trustee (usually yourself), who manages them according to your instructions set out in the trust document on behalf of beneficiaries you name.


Why would you do this? The first reason is that these assets will not go through probate when you die, but directly to your heirs. Probate is a legal proceeding for settling an estate, but in most states -- California is one exception -- it is neither drawn-out nor expensive. Most of your assets would likely escape probate anyway. That's the case with jointly held property, pension benefits, life insurance, government bonds, and bank and brokerage accounts with a pay-on-death beneficiary.

Another reason cited for having a living trust is that you'll save on taxes. Not so. Because all living trusts are revocable, income from trust assets is taxable to you.

Finally, it's true that you can name a successor trustee to manage your assets should you become unable to do so yourself. But it's much easier and far less trouble to draft a durable power of attorney for financial affairs.

Now, do you still want a living trust? We didn't think so.



How much allowance should I give my kids?

Start with a weekly allowance equal to half their age. As a quid pro quo, have them take on certain financial responsibilities, such as paying for their own collectibles and entertainment. If they'd like to earn more, pay them for extra jobs around the house (but not everyday chores).

How much cash should I set aside for emergencies?

Set aside enough money to cover three-to-six months' worth of living expenses -- mortgage or rent, food, utilities, debt service. You could get away with a smaller slush fund if you have access to a home-equity line of credit.


Where should I keep it?

Keep it safe and accessible in a bank money-market account or money-market fund. See and for competitive rates.


What's the best way to save for college -- a 529 plan, a Coverdell education savings account or a Roth IRA?

A state-sponsored 529 plan gives you the straightest shot to a paid-up education. The plans set no limit on how much you can kick in each year, and, depending on the state, you can contribute as much as $305,000 without paying federal tax on the earnings if you use the money for qualified education expenses, such as college tuition. Most states won't tax your earnings, either, and 24 states plus the District of Columbia will let you deduct your contributions if you invest in your home state's plan.

On the down side, 529 plans limit your investment options to the portfolios offered by each state. You're allowed to change the investment mix within a plan or switch to another state plan only once a year.

The advantages of a Coverdell account are that you can pick pretty much any fund or stock to invest in, and the money can be used for tuition bills at private elementary and secondary schools. You reap the same tax-free earnings on withdrawals as you do with 529 plans, as long as the money goes toward qualified education expenses.

One disadvantage: No more than $2,000 per year can be saved for each beneficiary. Singles who earn more than $95,000 and married couples earning more than $190,000 cannot fully fund a Coverdell, and contributions must stop when the beneficiary reaches age 18.

It's tough to save for both retirement and college. A Roth IRA might be your ticket. Although primarily for retirement savings, Roths make a nice parking place for college money because contributions can be withdrawn at any time without tax or penalty. You can also withdraw earnings to pay college costs without being penalized, but you will owe income tax unless you're over 59½. Just don't use all the money for your children's education, or you'll end up depending on your kids to support you in your old age.

What's the best 529 plan?

Ask this of your own state's 529 plan: Do you feel comfortable with the investment options, and is it cost-effective -- expenses of 1% or less per year? Yes both times? Then the best plan is the one closest to home.

We especially like the 529 plans (open to residents of any state) run by Michigan, Minnesota, Missouri and New York, all of which offer conservative portfolios with respectable track records and low fees. Each plan's investments are managed by TIAA-CREF, which takes a balanced approach in its age-based portfolios, concentrating on stocks when your children are young and then shifting toward more conservative bonds and other fixed-income investments as their college years approach.

Slightly more aggressive are plans in Utah, Iowa and Nevada, which invest in low-cost Vanguard index funds. Nevada's Upromise program offers the most investment choices (see all states' 529 plans).

Will I lose out on financial aid if I save too much for college?

At today's prices, how can anyone save "too much" for college? Don't worry about shooting yourself in the foot by saving. It's your salary that takes the big hit when the government figures how much you can afford to pay: You are expected to be able to send up to 47% of your income to the bursar. Only a relatively paltry 5.6% of parents' savings is tapped -- and that's after a chunk is exempted based on your age and family size.

Say you have $50,000 in savings and, at age 50, you're the elder spouse. The federal aid formula ignores the first $47,700, leaving just $2,300 for the 5.6% squeeze. So 50 grand in savings can't cost you more than $129 a year in aid.

And, speaking of aid, at least half of it is likely to be loans. With nothing set aside, you could wind up borrowing big-time.

How can I help my grandchildren with college expenses?

Open a 529 plan or Coverdell education savings account on behalf of your grandchildren.

If time is short, or if you want to keep control of the money yourself and don't want to commit to a college-savings account, make tuition payments in any amount directly to your grandchildren's schools when the time comes. Such payments aren't limited by the annual gift-tax exclusion of $11,000 -- the maximum amount you can give an individual each year without having to worry about gift taxes.

Or, if you want to reward your grandkids for their hard work (and be sure you get your money's worth), help them pay off student loans after they graduate.


Can I open a Roth IRA for my 10-year-old daughter?

Not unless she's a child actor, a model, or is otherwise gainfully employed. To open a Roth or a regular IRA, you need earned income from a job (an allowance doesn't count). If your daughter meets that criterion, she can contribute up to $3,000 a year or the amount of her annual earnings, whichever is less.

I'm worried about retirement. How do I know if I'm saving enough?

To be on the safe side, you should limit annual withdrawals in retirement to 5% of your nest egg. Suppose you're planning to retire in 20 years and figure you'll need $30,000 a year from savings to supplement your pension, social security and other sources of income (estimate your social security benefits; use the retirement-planning calculator at That means you'll need an initial nest egg of $600,000.

While it may sound like a lot, you could be well on your way to meeting that goal. If you have $50,000 in your 401(k) account right now and it grows at an average annual rate of 7%, it will be worth nearly $200,000 in 20 years. That means you need to save $400,000 more, or about $790 a month, assuming a 7% annual return. That would include your current 401(k) deferrals and any employer match.

As your salary grows and family expenses decline, you'll be able to accelerate your savings. And you might be able to count on other sources of retirement income, such as the equity in your home or an inheritance.

Should I rebalance my 401(k) account?


How often? Once a year should do the trick. It's easy to make changes to your 401(k) without triggering tax consequences, so you can move money from one fund to another or leave current allocations alone and direct future contributions to the sectors that need beefing up.

Should I save in my 401(k) or prepay my mortgage?

Your 401(k) wins, hands down. The typical "k plan" adds an additional 50 cents to your account for every dollar you contribute (up to 6% of your salary), and you'd be crazy to pass up free money. Moreover, 100% of the cash you contribute to your 401(k) reduces your taxable income; mortgage prepayments are 100% nondeductible because they apply only to principal. And your finances will be healthier because your investments are more diversified.

Should I start taking social security benefits at age 62, or should I wait?

It makes sense to take social security benefits as soon as you can. But you may not be able to collect benefits if you're still working at age 62. You will lose $1 in benefits for every $2 you make over the earnings limit, which this year is $11,520.

Also, people who choose to take early benefits at 62 this year will have their checks permanently reduced by 20.8%. If you are the higher-wage earner in your family and you die before your spouse does, his or her benefits would be permanently reduced, too.

By the time you reach normal retirement age -- which this year rises from 65 to 65 and 2 months -- the earnings test disappears, so take your benefits even if you continue to work.

After age 65, you get a credit that boosts your benefit amount for every year up to age 70 that you put off collecting benefits. But it doesn't pay to wait because you may not live long enough to enjoy the extra money.

I'm more than ten years from retirement. How should I invest my retirement money? Please keep it simple.

Glad to oblige, with two ideas. You can't get much simpler than Vanguard Total Stock Market Index fund (VTSMX; 800-635-1511). It mirrors the entire U.S. stock market. For even more diversification, you could invest 80% of your nest egg in Total Stock Market and the other 20% in Vanguard Total International Stock Index (VGTSX).

There's an entirely different way to go about this task. You may be more than ten years from retirement, but as that time draws nearer you need to tone down your risk. The T. Rowe Price Retirement funds do this for you. The closer you get to retirement, the more invested you'll be in bonds as opposed to stocks.

There are four of these funds. Find the one whose name is nearest the year you plan to retire. T. Rowe Price Retirement 2010 (TRRAX; 800-638-5660) recently had a stock allocation of 67%; Retirement 2020 (TRRBX), about 79%; and Retirement 2030 (TRRCX) and Retirement 2040 (TRRDX), each about 90%.

Five years after your retirement date, your money will automatically be shifted into T. Rowe Price Retirement Income (TRRIX), with a stock allocation of 40%. Annual expenses on all these funds are 0.84% or less.

With either approach, invest regularly and don't monkey around with the funds. Buy 'em and forget 'em.

My spouse and I are divorcing. Am I entitled to a share of his pension?

You're entitled to ask for a share of his pension, but the two of you will have to agree on the details as part of your settlement.

To receive part or all of your husband's pension or 401(k) benefits, you'll probably need to negotiate a qualified domestic-relations order (QDRO), a document that names you as an alternate beneficiary and states how large a share you're entitled to. You don't need a QDRO to split an IRA, but the transfer must be mandated by your divorce decree or you'll incur a tax penalty.

I plan to retire 15 years from now. When should I start shifting part of my stock portfolio to fixed-income investments?

Once you're within five years of retirement, your portfolio should be at least 30% in fixed-income investments, rising to 50% when you retire. Depending on your tolerance for risk, you should always keep 20% or more of your assets in stocks.

I can't afford to max out both my 401(k) and my IRA. What should I do?

First, put enough into your 401(k) to take advantage of any employer match. Then fund your Roth IRA if you meet the income requirements (your right to contribute to a Roth begins to be phased out once your adjusted gross income is more than $150,000 on a joint return, or $95,000 if you're single). If you still have money left over, put it into the 401(k).

Is your income too high to qualify for a Roth? Max out your 401(k) and then invest in a traditional IRA.

How much will my social security income be taxed?

It all depends on how much money you earn. Taxes on social security benefits are based on your combined income -- your adjusted gross income plus any tax-exempt interest plus half of your social security benefits.

Your benefits will be tax-free if you're single and your combined income is less than $25,000 ($32,000 if married filing jointly). No more than half of your benefits can be taxed if your combined income is between $25,000 and $34,000 if single (or $32,000 and $44,000 if married filing jointly). And up to 85% of your benefits can be taxed if you're single and your combined income is more than $34,000 (or $44,000 if married filing jointly). The worksheet in IRS Publication 915 can help you figure out how much of your benefits are taxable.

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