Boston_com_Moderator: Good Afternoon. I'm looking forward to taking your questions this afternoon. As a Certified Financial Planner practitioner, I have worked with individiuals and companies for the past twenty years or so, helping people to plan for retirement and manage their investments towards that goal. We can talk about whatever questions you have today. I can also be reached by e-mail - firstname.lastname@example.org.
christine__Guest_: Hi I have a money market w/TIAA cref and I don't really understand it. I have it through my employer. Is this my 401k? I wanted to get one because I thought I could take loans out against it. Right now since I just started I have only $250.
Dan_Galli: Christine, a money market account is an investment in what is sometimes called "short term paper." Essentially, it's considered a safe place to put money while receiving current interest on the money. It may be more important to know what type of account the money market account is held in. I just guessing here but if you work for a non-profit or a school, your account may be a 403(b) account. If that's the case, this is a retirement savings account similar to a 401(k) account. You receive a tax deduction for all money that you contribute and the account grows tax sheltered. Taxes aren't paid until you actually take money out to spend. You may be able to borrow for these accounts but I don't usually recommend doing so. You're borrowing pre-tax dollars and paying them back with after tax dollars. Also, you may have to pay the loan back if you terminate service, but this isn't always the case. Also, money in long term retirement accounts should be put to work, meaning that money market investments may not provide any amount of real growth. If I'm right that this is a 403(b) account, you may want to consider investing in other choices that will give you the potential to enjoy some real earnings over the long term.
Jeff__Guest_: Hi Dan -- I am 23 years old and finished my undergrad last May...so I have been working for just about a year now. My question is: my employer does not offer a 401(k) plan as part of my benefits, and I plan to see here for a while, so what would your advice be on how I should invest my money in something similar to a 401(k)?
Dan_Galli: Jeff, if an employer based retirement savings plan isn't available, I suggest you use a personal retirement savings plan like a traditional IRA or a Roth IRA. With the traditional IRA, your contributions are deducted from your income for the year. Money is taxable when you take it out to spend. With a Roth-IRA there's no tax deduction now but withdrawals of untaxed money after age 59 (or after 5 years for a first time home purchase) are tax-free. Either way, you can set one of these up at a mutual fund company. You can also set up automatic monthly deposits to the IRA from your checking account to add some discipline to the process. For long term investments like these, select funds that offer the opportunity for growth. You can deposit up to $5,000 per year to an IRA. This is a great start for someone your age.
bpoinier__Guest_: Hi Dan, are I bonds a good option with the market the way it is?
Dan_Galli: Bonds offer regualr interest payments and can be very useful when income is required from investments. However, for long term goals, bonds are often included to reduce volatility from stock investments, such as we have seen recently. If your investment goal is long term, I would stay course with a mix of stocks and bonds; bonds to provide income and help offset volalility and stocks to provide for potential for real growth.
Jack_Dempsey__Guest_: Hi there - my question is, say an individual has no 401k or equivalent program at work, has maxed out IRA contributions - what are the remaining tax sheltered ways to save for retirement and if there arent any obvious candidates, what non tax sheltered invest,ment would you recommend looking at next? thanks in advance for your answer.
Dan_Galli: Jack, Without an employer plan, if you've maxed out your IRA options, there really are very few tax sheltered options left. Variable annuities offer tax sheltered savings but usually come with pretty high expenses. You may want to consider tax managed mutual funds. Several of the large fund companies offer these types of funds that take income tax considerations into account and try to keep realized gains as low as possible. Individual stocks offer a type of tax shelter as you don't pay taxes on the gains until you sell them. However, that brings in some investment diversification and stock picking issues. I'd look at the tax managed or tax sensitive mutual funds.
o_b__Guest_: I am a 53 year old male. My wife retired last year and has a pension of roughly 50k per/yr. Between stocks, 401 ks, annuities etc. we have roughly another 1.5 million dollars saved. We owe 100k on our home on the North Shore that is appraised at 500k. My current income is roughly 175k per/yr. Our children's education is paid for. My question is in order to live a comfortable lifestyle in retirement, how much will it take.
Dan_Galli: There's no way for me to answer this question in the time provided with the information at hand. However, your assets should be able to produce inflation adjusted income for both your lifetimes of $60,000 conservatively. Adding the $50,000 pension to that amount brings your initial potential retirement income to $110,000 per year. And none of this considers your home equity. The question for you to consider is whether $110,000 will be sufficient. That is going to depend on the lifestyle that you and your wife choose following retirement. You need to try to nail down what you will need and then we can see if your current assets and income will allow you to achieve that goal. Also, the longer you continue working, the more your assets may grow based on savings.
mistermiser__Guest_: I'm lucky enough to have about $250,000 in cash [CDs, money market savings]. Is there a better way to invest this given how low interest rates are?
Dan_Galli: Mr. Miser, congratulations on having saved this money. There are several questions you need to consider to figure out how to invest this money. If you're not comfortable with market risk, you may have to bite the bullet and look for highest interest rate guarantees that you can get with CD's or high interest money market accounts. If you're looking for higher returns, you will have to accept market risks and invest in stocks and bonds. You can mitigate risk somewhat through diversification and finding good management but there's no way to eliminate it. I don't know your investment experience, but you may want to consider looking a good balance fund for a portion of the money. A balanced fund will invest in stocks, bond and cash with managers who know that their investors are looking for above average returns with below average risk. All the large fund families offer this type of funds. Good luck.
JSM: What are the max income limits for traditional and roth IRA's for married filing jointly? If my wife and I are over this limit and I am maxing out my 401(k), is there any other additional retirement options I should be considering?
Dan_Galli: OK...this can be a bit tricky so let's take this one step at a time. First, there are no income limits for contributing to an IRA account. You just have to have earned income (or be married to someone with earned income)and not be age 70 1/2 or older. However, the next question is can you deduct your contribution? If you are an active participant in an employer plan, like a 401(k), now you have to look at income. For married filing jointly, in 2008, if your combined Adjust Gross Income is below $85,000 you can deduct your IRA contribution. If your AGI is over $105,000, you can't deduct. If your AGI is between the two numbers, you can deduct some of it (pro-rata). If you spouse isn't in a empoloyer plan, he or she can deduct their contribution unless your combined AGI is greater than $150,000-$160,000. At that income level, if one of you is an active particpant (and subject to the income limit for deduction) then both of you are. Still there??? In short, you and your spouse can contribute to an IRA, but you may or may not be able to deduct the contributions. Now for the Roth-IRA, your income does play a role in whether you can contribute or not. For a couple filing Married Filing Jointly, if your AGI is below $159,000, you can each contribute the maximum to a Roth-IRA. If your combined AGI is above $169,000 neither of you can contribute to a Roth-IRA. If you AGI falls in between those numbers, you can contribute a pro-rata portion of the maximum contribution amount. For 2008, the maximum contribution for IRA's and Roth's is $5,000. For anyone age 50 or older, an additional $1,000 can be contributed as a catch up contribution. It's a bit tricky but those are the basics. If you're maxing out your 401(k) plan and want to save more, you should definately contribute to IRA accounts, even if you can't deduct the contribuitons. They will grow tax sheltered and you can convert them to Roth-IRA account in 2010.
Mr__Pibb__Guest_: Hi Dan - I have some student loan debt that I'd love to dispense with. Should concentrate paying down the dept or increasing my 401k dollars? I'm trying to find a balance between the two that will serve me best. I put about $7,000 a year in my 401k and get about that much matched from my employer as well. I'm 33 so there's a lot of work/saving ahead of me.
Dan_Galli: You're correct in looking for a balance between saving and paying down debt. I would suggest that your first priority should be to get all of the matching dollars that your employer is offering. Put as much in your 401(k) as is needed to get the matching dollars. At that point, direct additional money to paying off the student debts. Good luck.
single_mom__Guest_: I am a single mom. I took a lump of cash when I bought my house from my ex-husband as an emergency fund. Is their a way to protect it from negatively affecting my daughter's financial aid package? Forcing me to use this $35K for college and then having no emergency fund?
Dan_Galli: If your income allows, you can put $5,000 into a Roth-IRA each year. This money can be taken back at any time without tax or federal penalty. The interest or gains need to stay in the Roth until retirement. On this basis, the money in the Roth is considered retirement savings and is usually not counted. However,I don't think this emergency fund money is going to hurt your financial aid package as much as you may fear. Generally, the formula for financial aid takes into account income, assets in the child's name and parental assets. Only a portion of the parental assets (like this emergency fund) factors in.
fbot__Guest_: Hi Dan, quick question. My husband and I have about $3k that we can either throw in savings or use to pay off the last of our credit card bills. Is it better to build wealth or pay off debt? Or both?
Dan_Galli: I love the easy questions. Pay off the credit cards. High interest rates, not deductible, potential increases in the rates in the future. Get rid of the credit card debt and keep it away.
Jeff__Guest_: In layman's terms, what are annuities, how do they work, and who uses them?
Dan_Galli: Annuities are products that come from life insurance companies. In their simplest form, they are a contract that allows you to deposit a lump sum of money and in return to get a check every month for the rest of your life. However, deferred annuities allow you to make the deposit (and even continue adding money) and hold off on the decision to take the lifetime income until some future date. In the meantime, you have the option to cancel (surrrender) the annuity contract and get all your money plus the untaxed growth back. All growth and income that occurs within the annuity isn't taxed until it comes out. However, since these are commission based products (the person who sells you the annuity gets paid a percentage of what you put in) you may have to pay a surrender charge if you're cashing the annuity out within the first 3-10 years. Annuities are designed to allow tax sheltered build up of cash and to provide for lifetime payouts of benefit. However, they are often used just to accumulate money on a tax sheltered basis which is then withdrawn later. They are a specialized and complicated product and you should make it a point to understand all the features including expenses. Hope that helped, although we could write a book just on this subject.
BFDCAP4__Guest_: I'm 45 and looking to retire in 10 years. My deferred comp is divivded 9% Specialty, 17% International, 16% Small Cap and 57% Large Cap. Should I be looking at shifting the percentages around now or am I better off waiting till I get closer to retirement?
Dan_Galli: The key to your question lies not in when you are retiring but when you anticipate withdrawing money from this account. There are no hard and fast rules but generally, I like to begin creating a cash portion of retirement accounts equal to three years of anticipated income. I like to do this about three years before we may need the money. That gets put aside within the account. Three years later, when the need for income is there, depending on market conditions, you can withdraw from the cash account (if the market is down) or from the stock based accounts (if the market is up). The rest of the account is invested for long term, often on a 60/40 basis of stocks versus bonds. Your account appears to aggressively invested with a diversified mix of equity positions but with 100% in stocks. You may be OK with this mix thorugh the next market cycle but I would suggest considering adding some fixed income to the mix at least within 5 years of retirement. It may not increase returns, but it will dampen volatility.
JO__Guest_: My husband (retired Navy) receives military pension and works part time. I work full time. We each pay our separate bills. He pays household expenses and I pay the mortgage. I have significant savings while he hasn't saved any. We are married only 2 years. He will not open a joint account. How can I get him to save for a rainy day?
Dan_Galli: These are issues that couples have to wrestle with. I would suggest that you try to explain how important it is to you to have the piece of mind of knowing that there is something saved for contingencies. He may see his pension as a guarantee of future peace but if it doesn't increase in value each year to keep up with inflation, he may see the value of saving now to provide the extra money that will be needed.
LateBloomer__Guest_: I'm 40, just emerged from Ch. 13 bankruptcy, and make $45K. I joined a deferred comp plan, started a Roth IRA and online savings plan. How can I make the best use of my money to plan for retirement?
Dan_Galli: It sounds like you're doing all the right things. It can be tough to recover right away from bankruptcy but it's done all the time. Contributing to the Deferred Compensation plan and the Roth-IRA are exactly the right things to be doing to save for retirement. Disciplined savings and tax advantages make them the way to go. Invest them wtih an eye towards long term gains and potential. Keep contributing regardless of what the market does. Take a look at the ten tips that we published today. Good luck.
Jeff__Guest_: My girlfriend and I are looking to get married soon, and I was wondering if it makes sense (or if it is even possible) for me to contribute a percentage of my paycheck to her 401(k) at harvard university? I work for a company that does not have a retirement savings plan...
Dan_Galli: Jeff, You can't directly contribute to her 401(k), all contributions must come from her paycheck. You can have her increase her contributions and you can give her the money to make up for her lower paycheck. That works from a practical perspective. Your only risk is if the marriage doesn't happen, she has all the money in an account that isn't accessible. Good luck.
happy_camper__Guest_: I am starting a new job and the retirement is as follows: 6% of gross salary, plus 1% match/employee contributes 1% (employees with 1 year of service plus 1,000 hours worked). What does this mean in english?
Dan_Galli: Happy, I can't be sure but it sounds like there may be a dollar for dollar empoloyer match for your contribiutions up to 6% of pay, only after you have worked full time (more than 1000 hours) for one year. If that's the case, after you have a year under your belt, you should try to put at least 6% of your pay into the plan. However...check with your Human Resources dept before doing anything just to make sure that what I'm guessing at is correct.
Boston_com_Moderator: Well, we have run out of time. I am sorry that we didn't get to all of the questions but we hit quite a few during the hour. I had fun and hope that this information was helpful to all of you. Best of Luck.