Jill Boynton, an adviser at Cornerstone Financial Planning, took readers' questions about retirement investing, saving for college, and managing debt. Here's a transcript of the discussion.
Jill_Boynton: Good afternoon, I'm Jill Boynton. Welcome to our chat.
LeeW__Guest_: We're 64 and 66, no bills, about 1 mil in assets, still earn $80,000 a year - If our earnings go down, can we withdraw 4% of worth plus the interest accrued OR just 4% total withdrawals per year?
Jill_Boynton: In general it is safe to say that you can withdraw 4% of your assets per year, whether that is made up of earnings or earnings and principal. Studies have shown that there is a high probability of having your portfolio last at least 30 years under most market conditions if you limit withdrawals to about 4%.
ChrisinGarden__Guest_: Two years ago I joined the leading investment firm globally and due to the sensative nature of the area I worked in was required to transfer all assets (other than those in private banking) over to the company to manage. Because my investment figure reached a certain amount, I was given a personal portfolio advisor and my money professionally managed for free. I have sinced moved on and have left the financial industry. I still have my money being managed by this large investment firm but am now charged approximately $1,400 in fees to manage. My question is, should I move this money out of the "advisory fee" account and put into a regular IRA with no charge, or keep it professionaly managed especially with the uncertainty in the market they may do better moving it around for me.
Jill_Boynton: There are a few things to consider when deciding whether to pay a fee for investment management. If you feel capable of handling your own finances and enjoy doing so, then perhaps you don't need to pay a professional manager. However if you feel you need the guidance, then you may want to leave your assets with the money manager. However you should look at all the costs associated with your portfolio including management fees, trading costs, account fees and any other charges and add them up. In total you should pay no more than about 3% for everything.
South_Shore__Guest_: I am trying to save for a new home in the next year. Is it better to pay down my existing mortgage or put the additional money into Money Market account.
Jill_Boynton: Both strategies you've mentioned are good ways to save for your new home. With the first method, you'll be able to roll the equity in your existing home into a new home next year. If you choose to add to a money market fund instead, you can add this to your home equity next year. However you may earn some interest in the money market fund that you won't necessarily get by paying down your mortgage. Therefore I'd choose the money market option.
charl__Guest_: Should I get out of the market? Or is it too late? I am 64 working full time. my husband is 66 and retired. We have mutual funds in fidelity, vanguard and T. Rowe Price totalling about $35,000.00 now. My husband has about $30,000 with the federal government
Jill_Boynton: Although your husband is retired, and you may work several more years yourself, retirement does not mean an end to investing. In fact you could live another 30+ years, and during that time you need your retirement savings to keep pace with inflation at a minimum. By investing some of your money in stocks, over the long-term you should see a return that is better than inflation. However it is always wise to keep money that you will need for living expenses for the next 2 years in a money market or savings account. This will enable you to keep the rest of your money invested (in a mix of stocks and bonds) even when the markets are going down without having to tap into them. Market downturns are common and while they may be unpleasant they are inevitable. If you are uncomfortable with the losses in your portfolio, talk to your investment advisor about an allocation that makes you more comfortable.
Sadie__Guest_: Jill, I'm still working full-time but will have reached my "full" social security age of 65 and 10 months in August. I'm trying to figure out whether it makes sense to get my Social Security in August or whether it will simply kick me into a higher tax bracket so that the extra money will be moot. (I don't expect to work for much longer than another year.) Any advice?
Jill_Boynton: Without knowing your earnings I can't tell you whether your Social Security earnings will put you in a higher tax bracket (you may want to consult with an accountant.) In general if you are married and have earning above $32,000 your Social Security benefits will be taxed from 50% to 85% (the threshhold for single taxpayers is $25,000).
lyndey__Guest_: what about timing? one friend suggests contributing to my IRA in monthly increments for the benefit of dollar cost averaging, but i tend to max out my contribution early in the year so I get it out of the way. What would you suggest?
Jill_Boynton: Contributing to your IRA monthly gives you the opportunity to buy investments at a lower cost if the market goes down over the year. However you also risk buying at a higher price if the markets go up. Since we can't be sure which way the market will go in the future you just don't know whether dollar-cost averaging was the right thing to do until the end of the year. In addition the savings are probably not going to make a big difference in the long run to your portfolio. The overriding factor should be made on which method is easiest for you. In addition pay attention to transaction costs. If the mutual funds you are buying have transaction fees, or you are buying individual stocks, making 12 purchases will cost you more than one purchase at the beginning of the year.
Nancy__Guest_: Do you have any advice on income tax avoidance. We are in our mid-40s, we fully fund our retirement plans, and put some money in 529 plans for our 2 kids. We ended up with a really high income tax bill this year from Capital Gains Distributions & Dividends. At our age should we be looking for tax free investments or higher return and just live with the ridiculous taxes?
Jill_Boynton: While minimizing taxes is a wise strategy, don't let it be the overriding factor in making investment decisions. Paying some taxes is inevitable! However the capital gains distributions paid out in 2007 by many mutual funds were particularly high, and I don't expect that to be the case this year. Unless you are in the 28% or higher tax bracket, tax-free investments may not make sense for you.
Valorie__Guest_: Hi Jill. Where is the best place to keep our emergency savings today? Regular savings rates are so low!
Jill_Boynton: Interest rates are very low right now, but I still think the best place for emergency savings is a money market account. You want this money to be easily accessible without any penalties, and to be earning interest without any risk of loss. You may find good money market rates through on line accounts such as ING. Also go to www.bankrate.com to look for high-paying money market rates across the nation. Just be sure to put no more than $100,000 in one bank, as that is the limit of FDIC insurance.
Barbie__Guest_: What's best to do for a 65+ couple with $1 mil in assets, still earning $100,000 a year paying expenses plus having a travel account who have no bills but have $250,000 in Fidelity SEP cash reserves and $200,000 in TSAs and are risk adversive?
Jill_Boynton: That's a tough one to answer without knowing more information about you. If you are risk adverse, you need to consult with a financial advisor to determine an investment strategy that is comfortable for you. There are many factors to consider, including how much of your portfolio you need to withdraw per year now and when you stop working, other sources of income and of course your comfort with market losses. However you should be able to find a mix of stocks and bonds that will give you the growth you need for the future as well as some protection during market downturns.
John__Guest_: Hi Jill. I teach in a public school system here in Mass. For the past 12 years, I've been contributing to a 403(b). I recently stopped those contributions and began a Roth IRA instead. I did this to cover myself in case the tax structure changes from now until I retire (in about 20 years). Is this a good idea?
Jill_Boynton: There are a few things to consider here. If your employer is matching your 403(b) contributions then you should consider putting some of your retirement money into the 403(b), at least up to the maximum company match. Also consider the tax savings that you get through 403(b) contributions, which are lost with Roth IRA contributions. If you are in a low tax bracket now then you may not be saving much in taxes, in which case the tax-free money you will have in retirement with a Roth IRA makes it a better investment. In addition we can't know what the tax structure will be in 20 years so it is best to plan with today's tax structure in mind. Finally you should look at how much you were contributing to the 403(b). The contribution limit on Roth IRAs is $5,000, while the 403(b) limit is $15,500. If you are able to contribute more than $5,000 why not contribute to both accounts.
TRibs__Guest_: Hi Jill, Is there any difference in most of the 529 plans and given the fidelity one in MA doesn't get the highest marks is there a problem looking at those offered in other states
Jill_Boynton: There are so many 529 plans to choose from, comparing them is not easy. They all follow the same rules about qualified withdrawals, contributions, etc. But each plan is run by a different investment company, making the cost and performance vary greatly. I suggest you go to www.savingforcollege.com and compare the MA plan to some other states. The advantage to using the plan sponsored by your home state is the state tax deduction given for contributions. However I think you should look for a plan that is well run with low expenses, and weigh that against the MA plan.
Jeff__Guest_: Hi Jill: I was wondering if I should be paying my student loans off faster (thus saving a little less) or the other way around? Which option is more beneficial to me in the long run?
Jill_Boynton: That depends on the interest rate on your student loans. Considering that over a 10-year period you could earn 7-9% in mutual funds, or 4% in a money market, if your student loans are at a low rate you may want to keep paying them off as planned and put extra money into investments. If the rate is 6% or higher then I'd consider putting extra money towards paying them down faster. Maybe you can split extra money and do both!
MoneyWise__Guest_: Hi Jill. I'm a new lawyer who does not own a home and does not have any credit card debt. I do, however have a ton of educational debt (approximately 100K). Most of my salary I dump into my loans (which are consolidated), rent and I max out my 401K contribution. I would like to save even more, but what is the simplest, cheapest way to begin? Is a money manager the route to go?
Jill_Boynton: The simplest way to begin investing is to use mutual funds. You can open an account yourself at Vanguard.com and begin with as little as $50 (if you set up automatic contributions from your bank account.) Choose a balanced fund such as Vanguard STAR. This is a fund that invests in both stocks and bonds. Once you have $5,000 in that fund, consider branching out into other mutual funds that invest in other areas such as small-cap stocks or foreign stocks. A fee-only financial advisor can help you choose investments.
Spats__Guest_: Even with today's volatile, recessionary market, what should I expect for a rate of return (on average) from the management group investing/handling my money
Jill_Boynton: I would concentrate on their long-term results. Any money manager or investor can have a good or bad year, regardless of what the markets are doing. It's the 5 or 10 year results that you want to focus on. These returns, depending on the investment mix, should be in the 6-9% range.
Barbie__Guest_: What's the FDIC limit on money kept in cash reserves with a Fidelity SEP fund?
Jill_Boynton: Accounts at brokerage firms, such as Fidelity or Merrill Lynch, are protected by SIPC insurance instead of FDIC insurance. The SIPC insurance limit is much higher, as much as $5 million or more. Check with your account custodian.
sue__Guest_: i owe about $20K on a HELOC. The rates has gone down, but it is still a variable rate loan. I got a decent amount back in taxes since I bought a house last year. Should I put that money towards this loan (currently at 4.5%) my car loan (fixed for 4 more years at 6%) or keep it in cash since the economy seems so shaky now?
Jill_Boynton: First I'd suggest putting extra money aside and building up an emergency account of 3-6 months of living expenses. If you have done that, then pay down the loan with the highest interest rate first, which would be the car loan. Don't forget that the equity loan gives you a tax savings, effectively lowering that interest rate below the 4.5% you are paying.
charley__Guest_: helloi sold my company last year for 35mm and have been sitting in cash. i am willing to pay for advice..should i go with an independent planner or investment firm like CS, DB or GS which have all contacted me? thx
Jill_Boynton: I suggest consulting with a fee-only financial planner. You can find one through NAPFA (www.napfa.org). NAPFA planners do not accept commissions and will charge you a fee for their services. In this way their investment advice is not tied to commissions.
Jill_Boynton: We've run out of time today. Thank you all for your questions.
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