Are funds in my 401(k) plan protected from creditors if I file personal bankruptcy?

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (a.k.a. the Bankruptcy Reform Act) tax-exempt retirement plan accounts (including qualified plans, traditional IRAs, Roth IRAs, 403(b) plans, 457(b) plans, SEPs, and SIMPLE plans), are protected from an employee's creditors in the event of bankruptcy. With the exception of the Traditional IRA and Roth IRA assets, all of these tax-exempt retirement assets are protected without a dollar limit.

Traditional IRAs and Roth IRAs are protected up to $1 million dollars under the federal law. However, some states may provide additional protection beyond the federal limits. Additionally, the language in the federal law seems to suggest that any funds rolled over from an employer retirement plan are fully protected even if the amount exceeds the $1 million dollar limit.

Keep in mind that there are exceptions to the protection provided under the Bankruptcy Reform Act. Certain liens and debts are not discharged or fully discharged under this law. These include:

• Tax liens,
• Debts for luxury goods/services,
• Cash advances,
• Judgments against you for death or injury caused while intoxicated,
• Domestic support obligations,
• Educational loans,
• Debts incurred to pay taxes, fines and penalties,
• Debts from divorce or separation,
• Homeowner association, condominium, and cooperative fees,
• Fees on prisoners,
• Pension or profit sharing debts, and
• Debts or liens incurred from interference with lawful provision of services.

As expected for some time now, the Social Security Administration (SSA) recently confirmed on their web site that there will not be an automatic cost-of-living-adjustment (COLA) for those who receive monthly Social Security and Supplemental Security Income benefits in 2010.

Under current social security laws, Social Security and Supplemental Security Income benefits increase automatically each year based on the inflation measure known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Each prospective year’s COLA is determined based on the change in the CPI-W from the third quarter of the prior year to the current year’s third quarter. Therefore, the COLA for 2010 is based on the change in the CPI-W from the third quarter of 2008 to the third quarter of 2009. Since there was no increase in the CPI-W for that period, there would be no COLA increase for 2010.

According to the SSA, this would be the first time since 1975 (when COLAs went into effect) that an automatic COLA will not be made. To make for the lack of the COLA increase for next year, some including the commissioner of the SSA, Michael Asture, are calling for the Obama Administration to make an additional $250 recovery payment to people who receive Social Security and Social Security Income benefits.

In addition to holding Social Security and Social Security Income benefits flat for 2010, the lack of an automatic COLA increase also prevents other amounts from increasing. For example, the maximum amount of earnings that are subject to Social Security taxes for 2010 will remain at the current 2009 amount of $106,800 dollars. Also, the retirement earnings test exempt amounts for 2010 remain unchanged. If you will not reach your Normal Retirement Age (NRA) anytime during 2010, you can year $14,160 dollars before your Social Security benefits are reduced. If you will reach your NRA during 2010, you can earn $37, 680 dollars for the months in 2010 prior to reaching your NRA, before your Social Security benefits are reduced.

For more information, visit the SSA’s web site at http://www.ssa.gov/.

At the end of last year, President Bush signed a law waiving the required minimum distributions (RMDs) for 2009 from IRAs and employer sponsored defined contribution plans such as 401(k) plans, 403(b) plans, 457(b) plans and profit sharing plans. Despite the passage of the law before the end of the year, many IRA owners and plan participants ended up receiving their 2009 RMD because IRA custodians and plan administrators did not have enough information on how to comply with the new law.

Although RMDs are not generally eligible to be rolled over, the new law provides individuals (who received their 2009 RMD) with the ability to roll their 2009 RMD over into an IRA or other eligible retirement plan. Rollovers usually need to be accomplished within 60 days. However, many individuals failed to meet this deadline because of the confusion and lack of information surrounding the new law.

Recently, the IRS has issued a notice (IRS Notice 2009-82) providing additional time for individuals who received their 2009 RMD and failed to complete the rollover within the 60-day period. Under the notice, IRA owners, plan participants, and spouse beneficiaries have until November 30, 2009 to complete the rollover.

Keep in mind that this waiver does not apply to RMDs received in 2009 for 2008. In addition, the waiver does not change the one-rollover-per-year rule which only allows an IRA account owner one (non-direct) rollover per year from each IRA account.

For more information about this IRS notice, visit the IRS web site at http://www.irs.gov/pub/irs-drop/n-09-82.pdf

A spousal IRA is a traditional IRA or Roth IRA that a working spouse can establish and make contributions to for his or her spouse. It is usually set up in situations where one spouse earns the majority of or all of a couple’s income. (For purposes of this discussion, I’ll refer to the spouse who has little or no taxable income as the “non-working spouse” even if he or she does have an income.) Keep in mind that a “spousal IRA” is not a special type of IRA. The term “spousal IRA” is just a description of the way contributions are made to a non-working spouse’s IRA.

In order to make contributions to a non-working spouse’s IRA, the working and non-working spouse needs to satisfy the following criteria:
• They need to be married as of the end of the tax year;
• They need to file a joint federal income tax return for the tax year in which the contribution is being made;
• The working spouse must have taxable compensation for the year in which the contribution is being made; and
• If the “non-working” spouse has taxable income, it must be less than the income earned by the “working” spouse.

For a Roth IRA, the couple also needs to have a Modified Adjusted Gross Income (MAGI) of less than $176,000 (in 2009) to be eligible to contribute to a Roth.

Ninety percent of the 21 million US businesses are family owned. Yet only thirty percent of family run companies today succeed into the second generation, and only 15 percent survive into the third (Source SBA.gov). The reason for this significant failure is obvious; these businesses lack an orderly succession plan.

According to a list published by the Pension Rights Center, almost 200 companies have eliminated or reduced the employer match on 401(k) plans since December of 2008. Many of the companies on the list like Chrysler, Ford and GM are in dire financial condition but some of the others are big names and may surprise you -- NCR, UPS, Hewlett Packard, Morningstar, Paychex, Xerox, Forbes, NPR and AARP.

The loss of the employer match can have a noticeable impact on how much you are able to save for retirement. If you earn $80,000 a year and your employer matches 50 cents on the dollar for your contributions up to 6 percent of pay, a single year of missed matching will cost you $2,400. If the matching is suspended for several years, and you "miss" several decades of growth of the money, the impact is pretty dramatic. To mitigate the impact, you should consider increasing your own contributions and contributing to other savings vehicles like traditional and Roth IRAs.

Is this happening to you? Has it caused you to stop participating in your company's plan? Write in and tell us about how you are dealing with the change.

I turn 63 on July 1st. I am looking at drawing my Social Security but continue to work. I make $28,000 dollars a year. What would I receive in payments? Also, if I work until I'm 70, how much would my Social Security benefits be at age 70.

The dollar amount of Social Security retirement benefits that you are entitled to is calculated based on your earnings history. Specifically, it is based on your highest 35 years of "indexed" earnings. Indexed earnings are your actual earnings each year that have been adjusted to make them comparable to wages earned today. Also, the retirement benefits you are entitled to increase if you wait until you reach your Full Retirement Age (FRA) to start receiving your benefits. If you wait until after your FRA to start receiving retirement benefits, you will earn Delayed Retirement Credits which will increase your benefits. Without knowing your specific earnings history, it would not be possible to estimate your Social Security benefits.

That said, I can tell you that based on the information in your question, if you begin receiving your benefits before your FRA (which is age 66) and you are earning $28,000 dollars per year, those benefits will be reduced and potentially taxed.

Receiving Social Security retirement benefits before your FRA (i.e., early retirement) permanently reduces the benefits that you receive. The actual reduction is based on how soon before your FRA you start receiving benefits. If you start your benefits at age 63 and your FRA is age 66, your benefits will be approximately 20 percent less than the amount you would have receive at your FRA.

In addition, to the "early retirement" reduction, your benefits may be further reduced because your earnings exceed the Social Security Administration's retirement earnings limit. Those who receive early retirement benefits and earn more than $14,160 dollars in 2009, will have their benefits reduced by $1 dollar for every $2 dollars of earning above the $14,160 limit. Therefore. your 2009 early retirement benefits will be reduced by about $6,920 dollars ([$28,000 - $14,160] / 2). This reduction will change each year depending on the amount you earn and the retirement earnings limit imposed by the SSA.

Another potential disadvantage of taking early retirement benefits and having non-social security earnings is that your social security benefits may be taxable. Depending on your tax filing status (e.g., single, married filing jointly, married filing separately) and your adjusted gross income, you may need to include up to 85% of your social security retirement benefits as income for federal tax purposes. Taxation of your social security benefits will change each year depending on your earnings.

Generally, I would suggest against taking social security benefits before your FRA if you have earnings above the retirement earnings limit unless you need the money for current living expenses.

After reaching full retirement age is there a limit on how much you earn at a job to receive a benefit from social security?

Once you reach full retirement age (FRA) there is no reduction in benefits due to earnings. However if you collect benefits before you reach FRA, and you work, your benefits may be reduced. Here is how it works:

I get a statement every year regarding my future social security benefits. It now says I should be entitled to $1,500 dollars per month at age 65 (I'm now 40). Will this amount be increased for inflation? (e.g., compounded at 3 percent over 25 years it will be about $3,100 per month). Thanks.

Yes, based on the current social security system, your social security benefits are adjusted for inflation each year. This inflation adjustment is referred to the Cost-Of-Living-Adjustment (COLA). In October of last year, the Social Security Administration (SSA) announced that benefits paid in 2009 would include a COLA of 5.9 percent. This COLA is based on a variation of the Consumer Price Index known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The 2009 COLA of 5.9 percent is the largest in 26 years and should increase the average retiree’s benefits by about $60 dollars per month, according the SSA. During the past 15 years, the social security COLA has averaged about 3 percent per year.

The estimated benefits shown on the social security statement mailed to you each year is in today’s dollars. You can calculate your estimated future benefit by inflating the current benefit by an average inflation rate for each year until retirement. The SSA also has an online benefits calculator that you can use to estimate your benefits in today’s dollars and in future dollars (http://www.ssa.gov/retire2/AnypiaApplet.html).

To learn more about your estimated social security benefits and the statement you receive each year, visit the SSA web site at www.ssa.gov.

Can I borrow from my 401(k) plan for a down payment on a vacation home?

Generally, the IRS allows loans to be taken from 401(k) plans. However, your employer may not allow it in their particular plan. If your employer does allow you to borrow from your 401(k) balance, there may be further restrictions. Loans from your 401(k) cannot exceed the lesser of 50 percent of your vested balance or $50,000 dollars and they usually need to be repaid within 5 years. In addition, employers may impose restrictions on the purpose of the loan. For example, some employers will only allow loans for unreimbursed medical expenses, educational expenses, first-time home buyers, and financial hardships. You should check with your company or your company’s 401(k) plan administrator to confirm if you can borrow from your 401(k) for a vacation home down payment. Aside from these restrictions, you should keep in mind that there are advantages and disadvantages to borrowing from a 401(k) plan.

The main advantages of borrowing from your 401(k) plan include:
- No credit check (If your company allows the loan, it is usually easy to qualify for it without having to go through a credit check.);
- Lower interest rates (The interest rates you repay the loans with are usually more favorable than commercial loan rates.);
- The repayment of interest goes back to your account (You are paying yourself for the loan as opposed to paying a bank or credit union.);
- Loan proceeds received are not taxable (The loan you receive is not considered taxable income unless you default on the repayment of the loan.);
- No early withdrawal penalty (As long as you do not default on the repayment of the loan, you are not subject to the 10 percent early withdrawal penalty if you take out a loan before age 59.5).

The main disadvantages of borrowing from your 401(k) plan include:
- The loan needs to be repaid (If you lose your job or leave voluntarily, you will usually need to repay the loan in full, right away, or be subject to income taxes on the outstanding balance and a 10 percent premature distribution penalty);
- Repayment is made with after-tax dollars (Each dollar you earn to repay the loan will have income taxes taken from it. That same dollar will be taxed again when you retire and withdraw your money from the 401(k). For example, if you are in the 25 percent tax bracket and you earn $100 dollars. After income taxes are taken from that $100 dollars, you will be left with $75 dollars to repay your loan. That same $75 dollars will be taxed again when you retire and withdraw the funds as a distribution.
- Opportunity loss (By reducing your 401(k) balance you are losing the potential for that money to grow and earn interest over the long-term.).

In general, taking a loan from your 401(k) may not be the best idea for most people. However, in certain circumstances it may be the only feasible option available. Keep in mind that your 401(k) is intended for retirement years.

“I’ve always contributed to my 401(k), but I want to retire in 10 years and I’m so upset about the losses in this account over the last year that I’ve stopped contributing. Was that the right thing to do?”

This is a question I’ve heard from many investors who have seen their retirement account values shrink drastically in the past year. I’m sure you are worried that you are throwing good money after bad by continuing to add to your company retirement plan.

However there are several reasons why you should not stop contributing even if you don’t want to put money into the stock market. First of all if you don’t contribute you won’t get a tax deduction, which for most workers is anywhere from 15 percent to 33 percent of the contribution. In addition if your company matches contributions you are giving up some free money. So by all means please restart your contributions. Depending on how many pay periods you’ve missed you’ll need to increase the amount you contribute per period so that you reach the maximum of $16,500 ($22,000 for those age 50 or older) by year-end.

If you don’t want to put your contributions into equities, direct your money into a money market fund or stable value fund. Then when you feel more comfortable you can transfer this money into mutual funds that buy stocks.

Whether you are one year, ten years or twenty years from retirement you should continue to add to your retirement accounts. Tax deferral is a powerful contributor to wealth.

I have a company sponsored 401K with 80+% in my company stock through Fidelity. The plan is "frozen", no contributions and no match because my company was sold to another company. I am about 3 years away from retirement. How can I diversify? Within the plan, I have about 8 Fidelity choices. If I make an "in-service withdrawal" and open another Fidelity account I will have many more choices. How can I get unbiased advice?

While I don’t know how much of your total assets are represented by your 401(k) account, in general, having 80+ percent of your 401(k) account in one company’s stock seems very high. Given that, I think you are definitely doing the right thing to try to further diversify your portfolio.

It is difficult is say how well diversified your 401(k) account can be with only 8 mutual funds to choose from without knowing which funds they are but again, generally, the more funds you have to choose from the better. I usually like to be able to choose from a pool of 20 to 40 funds from a broad selection of asset classes. Opening an IRA account at a large mutual fund custodian that offers thousands of funds from all asset classes is a good start towards diversification. However, you will want to make sure that you are able to rollover your 401(k) account rather than withdrawing it. If done properly, rolling it over to an IRA should be a non-taxable event. Withdrawing your 401(k) balance, on the other hand, will likely be considered a taxable distribution. You should talk to your employer/plan administrator to fully understand how the funds will come out of your 401(k) and the taxability of those funds.

It's difficult to comprehend how Bernie Madoff could have executed a $50 billion pyramid scheme that lasted over 30 years. However, like all pyramid schemes, it had to come to an end because there were not enough new investors to fund redemptions.

If it is true that all pyramid schemes are terminal, can we honestly expect Social Security to last indefinitely? It's not likely, especially considering that the Social Security Administration (SSA) itself has called the system unsustainable in the long run. One can expect significant changes to the system in coming years. By the time Generation X and Y reach retirement age, the system will be considerably different.

To support the notion that Social Security resembles a pyramid scheme, I compared the SSA and the Madoff fraud case. Here's where they share common ground:

Why are fees associated with 401k plans so difficult to determine?

In short, it is because of flexibility and the array of financial products available to invest in. As more and more employers shift away from offering defined benefit plans to defined contribution plans (such as 401(k) and 403(b) plans), employers are trying to provide employees with a wide menu of products to choose from. In part, this is to ensure that employees with various personal financial situations have the ability to select investments that best fit their particular situation. While this flexibility is generally a good thing, it does come with a price. In addition to understanding the fees associated with the administration of the overall plan; employees must also understand the fees and expenses for the individual investment products. To further complicate matters, each plan administrator and investment product may have different fees and different ways of charging those fees.

Under the Employee Retirement Income Security Act (ERISA), employers are required to follow certain rules about the administration of 401(k) plans including the plan’s fees and expenses. However, those rules do not specifically dictate what those fees are or how they are charged. The responsibility for determining the fees paid are left to the employer and the employee (through the investments he/she chooses).

The IRS recently announced the contribution limits for various retirement plans for 2009. The table below outlines the limits for the most popular types of retirement plans.

IRA: Contribution limit: $5,000 Catch-up limit: $1,000
Roth IRA: Contribution limit: $5,000 Catch-up limit: $1,000
401(k), 403(b): Contribution limit: $16,500 Catch-up limit: $5,500
SIMPLE IRA: Contribution limit: $11,500 Catch-up limit $2,500

Some individuals like to “front-end load” their retirement plans by contributing enough during the first 9-10 months of the year to reach the maximum, then stopping contributions during November and December to increase their income for Christmas. If your company matches contributions, you will likely miss out on some free money if you adopt this strategy. Here’s why:

My wife and I have a monthly mortgage payment of $3,200 per month and our combined income is $180,000. We each made the maximum contribution to our 401(k) accounts of $15,500. I calculated that for the past 3 years, if we had redirected our 401(k) contributions to pay down our mortgage we would have done much better. Do you think it is wise to pay off our mortgage as opposed to contribute to our 401(k) account?

Wealth management, like life, has many risk and reward opportunities. Over the Thanksgiving holiday, my wife, daughter and I piled into our car and drove to New Jersey to visit relatives. We were fortunate to hit little traffic and for much of the way I set the cruise control at 72 miles per hour. I wanted to get to New Jersey as quickly as possible, but did not want the risk of getting a speeding ticket. I felt that at 72 miles an hour, I was unlikely to get a ticket in a 65 mile per hour zone. This was the maximum speed I could drive without significant risk of being pulled over. Unlike Burt Reynolds in “Smokey and the Bandit”, my appetite for risk of receiving a ticket was pretty low and I did not want to encounter Sheriff Buford T. Justice (Jackie Gleason).

During the past couple of months there have been a lot of discussion about the possibility that Congress or the Treasury will waive the required minimum distribution (RMD) rules on employer-sponsored retirement plans and traditional IRAs for 2008. However, with less than a month to go before the end of the year and still no changes to the current rules, time is running out to take your distribution.

The current RMD rules generally require those who are at least age 70½ to take annual distributions from their traditional IRA accounts. If you are retired and at least age 70½, you are also required to take RMDs from your employer-sponsored retirement plan. Required minimum distributions are mandated by the federal government so that tax deferred balances in those accounts do not accumulate indefinitely. The minimum amount that you are required to take each year is calculated by taking the previous year’s account balance as of Dec. 31 and dividing it by the appropriate life expectancy factor given by the IRS. Therefore, RMDs for 2008 would be calculated using the account balances for Dec. 31, 2007. Failure to take some or all of your RMD comes with a stiff, 50 percent tax penalty of any shortfall.

I will probably make $200,000 dollars plus this year. I am 51 yrs old and I would like to convert my 401K which totals $80,000 to a Roth. How would that affect me tax wise?

The good news is that beginning in 2008, direct conversions from your 401(k) plan to a Roth IRA are permitted. Prior to 2008, individuals who wanted to convert their 401(k) or parts of their 401(k) accounts to a Roth IRA were required to follow a two step process. They would need to convert their 401(k) to a traditional IRA and then convert the traditional IRA to a Roth IRA. While the Pension Protection Act of 2006 eliminated this two step process, you will still need to meet certain criteria to qualify for a Roth IRA conversion. In addition, you will need to be sure that your employer’s 401(k) plan allows in-service distributions to withdraw funds to convert. Although the law allows the direct conversion, your 401(k) may not allow the withdrawal/distribution of your 401(k) assets (without a penalty) until you reach a certain age or until you discontinue working for that employer.

I have $15,000 in credit card debt. I have $40,000 in a Rollover IRA. I have a 1 year old and a 3 year old that are both in daycare so my weekly expenses are high. I charge on my credit card monthly about what I pay for my minimum payment. I was thinking that if I took out $20,000 out of my IRA and paid off my credit card that the money I am spending on my minimum payment I could use for my monthly expenses. I know it is bad to take money out of an IRA but what I am paying in interest on credit cards is going to cost more than taking a hit on taxes by taking out the money out of my IRA. What are your thoughts?

In difficult economic times, one of the more common places that people want to turn to in order to make ends meet is their IRA account. While this may look like an attractive option to get cash, making a non-qualified withdrawal from your IRA before age 59½ can be costly. The federal government and some state governments discourage non-qualified, early withdrawals by imposing steep penalties on these transactions.

I have a small portfolio of mutual funds that have lost a good 33 percent during this crisis. If I have my broker sell $5,000 dollars of that portfolio and contribute it to my Roth IRA, would I be able to claim a loss for my 2008 taxes? Then, when the market gains, would those gains be taxable in the Roth?

Roth IRAs are great retirement vehicles but they can be confusing. Your question does not specifically mention if your portfolio of mutual funds is in a taxable account or in a retirement account so I am reading into your question a little and assuming that it is in a taxable account.

Generally, if you sell your mutual funds at a loss, you will be able to use that loss to reduce any taxable gains realized in that same year. If you do not have any gains during that year or if your losses exceed your gains, which may be more likely given the state of the financial markets this year, you can claim up to $3,000 dollars of net capital losses on your tax return. Any net losses above $3,000 dollars can be carried forward to your 2009 tax return.

My husband has Alzheimer's Disease. He's been living in a Memory Care facility for three months. He is 82 while I am 64 and just retired. Between us, our portfolios have dropped in value over 25 percent. We do not have many years ahead of us to recoup our losses. I think we should contact our broker and sell everything and put our money in CD's. Should we close out our accounts?

A big market downturn is scary for everyone and it is especially scary for new retirees. I totally understand your wanting to move to the safety of cash but I urge you to not do anything in haste. As many advisers say: "panic is not an investment strategy."

Your husband is 82 but you are only 64. You can reasonably expect your retirement to last for 25 to 30 years. In order for your retirement assets to keep up with the effect of inflation, you will likely need some allocation to equities (stocks). I can't say what allocation is appropriate for you because I don't know enough about your particular situation. But the odds are good that you need at least a small allocation.

Selling everything now and moving to cash will simply lock in your losses and, once you are in cash,how much can you earn? Very little over the long term. And, to add insult to injury, you would likely be falling behind once you account for the effects of inflation.

Furthermore, once you are in cash, you need to be able to tell when to get back into the market. If you are scared of the market, there is a good chance that you will wait too long and miss most of the run-up in the market when it does eventually happen.

All this being said, if you find yourself unable to sleep at night and consumed with anxiety about what is going on in the market, you may be more risk averse than you thought and maybe it is appropriate to ratchet down your allocation to equities. If this is the case, I would consider lowering your stock allocation over time. Consider selling a certain percentage each month until you are at a level that you feel better about.

"Switching to Cash May Feel Safe but Risks Remain" is a great article. Check it out.

Good news! The limits on several retirement plans are due to increase in 2009. Be sure you visit your payroll/benefits office to sign up for the maximum contribution permitted.

In 2009, you can contribute $16,500 to your 401(k). That is $1,000 higher than in 2008. If you are age 50 or higher, you will be able to contribute $22,000 - an increase of $1,500. These increased limits also apply to 403(b) plans and 457 plans.

Unfortunately, there are no increases in the amounts you are able to contribute to traditional and Roth IRAs. Those limits remain at $5,000 and $6,000 if you are age 50 or older.

While these increased limits are good news, there is also some bad "tax news" to throw into the mix. That bad news comes in the form of a higher Social Security wage base in 2009. In 2009, wages up to $106,800 will be subject to 6.2 percent in FICA taxes and 1.45 percent in Medicare taxes. In 2008, the limit was $102,000 so this increased limit causes an extra $298 tax bill for employees.

Many about-to-be retired people are surprised to learn that the benefits they receive from Social Security can be subject to taxes. Years ago, very few people saw their Social Security benefits taxed. However, today, a full third of all Social Security recipients are taxed and that number will grow to 43 percent in just 10 years.

The reason is that the income limits for taxation of benefits were established years ago and, like the alternative minimum tax (AMT) that so many of us get hit with, the limits were not indexed for inflation.

These days, if you are single and half of your Social Security benefit plus all the other income you have exceeds $25,000, up to half of the benefits are taxable. If half your Social Security benefit plus all other income exceeds $34,000, 85 percent of your benefits are taxable.

If you are married and half your Social Security benefit plus all other income is between $32,000 and $44,000, up to 50 percent of the benefits is taxable. If your income exceeds $44,000, 85 percent of your benefits are taxable.

A recent study by the Employee Benefit Research Institute (EBRI) found that the average 65 year old man would need to have $122,000 in current savings available to have a 90% chance of being able to cover his health care costs in retirement. And, if that figure isn't high enough for you, that amount is required for people who are fortunate to have a previous employer subsidizing the premiums. If that same man does not have any coverage from a previous employer, he must set aside $196,000 to cover his health care costs in retirement.

And the news is even worse for women. A 65 year old woman with some employer subsidized assistance would need to set aside $140,000. Without employer subsidized premiums, that amount jumps to $224,000. Nearly a quarter of a million dollars just to cover health care expenses.

Dare you ask about the expenses for a married couple? I hope you are sitting down. The figures are $235,000 for a couple with some employer provided assistance and $376,000 for those paying their own way.

And these projections could actually turn out to be on the low side because these figures do not include the savings necessary to cover long term care expenses. Also, if you retire before age 65, as many people do, you can expect to pay even more.

EBRI is a private, non-profit research institute based in Washington DC that focuses on health, savings, retirement and economic security issues. I have found a lot of great information on their website: www.ebri.org

I just turned 70 years old and I am still working full time. I have been told by the administrator of my 401(k) that within the next six months I will need to pull my money or begin withdrawing from my 401(k). What would be my best option?

I'm not sure what you or your administrator mean by "pull your money" but I would ask the administrator to double-check their information. Generally speaking, if you are still working at 70½, you can postpone withdrawals from your 401(k) until April 1 of the year following the year you retire.

Different plans have different rules so it is technically possible that your plan requires distributions but generally that is not the case. One exception occurs if you own at least 5% of the company. In that situation, you generally can’t postpone taking distribution and you must begin withdrawals on the regular schedule.

An important point to note: you can only postpone distributions past age 70 1/2 for the plan in place at the company you work at now. If you have old 401(k)s from previous employers, you must begin taking withdrawals from those accounts.

The American Association of Retired Persons (AARP) conducted a survey last month of over 1,600 baby boomers (defined to be those age 45 and older) and found that 34 percent of the participants are considering a delay in their retirement age and a full 20 percent have stopped contributing to their 401(k) plans over the past year.

That's unfortunate because with the market hitting new lows on what seems to be an everyday basis, now is very definitely the time to keep buying and, if at all possible, increase your contributions. I know that that is easy to say but sometimes hard to do as it does take some faith and a belief in the capital markets.

It also requires some confidence in your personal financial situation. The AARP study further revealed that 27 percent of those surveyed were having difficulty making their rent or mortgage payments and that 13 percent had taken a premature withdrawal from their IRA or 401(k). If your situation is that dire, it probably does make sense to turn off the 401(k) contributions for a while to get yourself back on more solid financial footing. The taxes and penalties associated with a premature withdrawal make it a last ditch option. However, if you are simply worried about the market because it keeps dropping and you have an adequate emergency fund and a well diversified portfolio, the thing to do is keep contributing. Two or three years from now, you will look back on all this market turmoil and wish you had bought more.

For more information about the AARP study, check out this article in the Wall Street Journal.

The markets are down and new retirees are looking for the most tax efficient places to live because, all else being equal, living in a lower tax state can make your retirement assets last longer. According to the retirementliving.com website, the nation as a whole will pay 9.7 percent of its income in state and local taxes in 2008. However, in some states, you can expect to pay significantly more and in others, significantly less.

What are the most expensive states? New Jersey tops the list with its residents paying 11.8 percent of their income in state and local taxes. New York is right behind New Jersey at 11.7 percent and Connecticut wraps up the top 3 most expensive states at 11.1 percent.

If you really want to stretch your retirement dollar, you might want to consider a move to Alaska, where residents pay just 6.4 percent of their income in state and local taxes. Nevada is in second place at 6.6 percent. Wyoming residents pay 7.0 percent, Florida residents pay 7.4 percent, New Hampshire residents pay 7.6 percent and the other top ten states include South Dakota at 7.9 percent, Tennessee at 8.3 percent, Texas at 8.4 percent, Louisiana at 8.4 percent and Arizona at 8.5 percent.

The retirementliving.com website is a source of a lot of great information. Their state by state guide tells you the specifics of nearly every tax imaginable including: sales tax, gasoline tax, cigarette taxes, and personal income taxes. The site also includes information about the Homestead Exemptions available in each state. For paid subscribers, you can get reports on the top retirement cities and the newest and best active adult communities and senior living facilities.

I'm 23 years old and fortunate enough to be gainfully employed with very modest debt. My parents shouldered a lot of my tuition payments, but now I realize they should have been saving for their own retirement.

What do I need to know? Should I set it up in their names? What's the best place to put the money, knowing that they'll probably be drawing on it in 5-10 years? Could this count as a gift and therefore be a tax deduction for me?

First, I think it is great that you realize (and so obviously appreciate) the sacrifices that your parents made to get you through college. It is unfortunate that it now appears that their own retirement is in jeopardy. However, the good news is that there are several ways you can help them out.

Assuming your Dad had at least $6,000 in earned income this year, he is able to open a traditional or Roth IRA in the amount of $6,000. You could gift him this money and he could use it to open the IRA in his name. (Unfortunately, you won't be able to take a tax deduction for this gift.) Your Mom could also open a traditional or Roth IRA if she has earned income in 2008 of at least $6,000 (I am assuming she is at least 50 years old). If your Mom does not work, she could open a Spousal IRA assuming your Dad earned at least $12,000 this year. There are many factors to consider when deciding between a Roth and a Traditional IRA and it would take many paragraphs to explain all of them. Which option is better for your parents depends on their personal circumstances, but I'd urge you to look closely at a Roth assuming your parents met the income limits ($159,000 to $169,000 for joint filers).

There are a few rules about gifting that you should be aware of. In 2008, anyone can make a gift to anyone else without the need to file a gift tax return if that gift is $12,000 or less. So, you could give your Dad $12,000 and your Mom another $12,000. This gifting "limit" is based on the calendar year so you can gift again in January, 2009. Plus, in 2009, the amount you can gift increases to $13,000. So you can give each of your parents $12,000 this year for a total of $24,000 and $13,000 each in January for a grand total of $50,000.

Another way you could help your parents would be to volunteer to pay any medical expenses they may be incurring. If you pay the amounts owed directly to the hospital or medical provider, the amount paid does not count against your annual gift tax exclusion. Eligible medical expenses would include any medical expense that would be deductible for income tax purposes. It is critical, though, that the payment be made by you and directly to the provider.

As far as how you should invest the money, I really can't say without knowing more about your parent's personal situation and their tolerance for risk. You, however, might want to do some research on target date funds. Fidelity, Vanguard and T Rowe Price all offer target date funds and picking them is pretty easy because you would simply choose the fund that has a "target date" closest to the year your parents expect to retire and/or need to access the money. A fund with a target date of 2010, for example, could be appropriate for people expecting to retire between 2008 and 2012. It is important to note that these funds can lose money, so if you want to to be absolutely sure that you would never lose a penny, these funds are not for you.

"I don't even have one K, let alone 401 Ks" said 23 year old Zack Teibloom in a recent New York Times article.

I had to laugh when I read that quote but what wasn't so funny was the rest of the article that said that only 49 percent of eligible workers in their 20s participate in the 401(k) plans offered by their employers. Less than half! That is pretty discouraging, especially when you consider that most employer's plans provide some form of matching. That means that many workers in their 20s are turning down totally free money.

This is an incredible shame because, as a financial adviser, I know that the people who are well on their way to a secure and fulfilling retirement are almost always the people who started saving even a small percentage of their income as soon as they started their first professional position. It is amazing what saving even 5 or 10 percent of your income can amount to if you start when you are 22. We are talking about four to five DECADES of compounding growth. People who don't start early and wait until they are in their late 30s and early 40s can usually never catch up. The amount they need to save is just too great.

And now is an incredible time to start saving for retirement. When we see a market downturn like we are seeing today, everything you buy is at a reduced price.

My advice to young investors:

Absolutely sign up for your employers 401(k) plan as soon as you are able.

Contribute as much as your budget will allow, ideally enough to capture the full employer match.

You will be saving for 40 years, so a high allocation to equity mutual funds is appropriate.

Whatever you do, don't cash out your balances when you change jobs. Forty percent of workers in their 20s do and that is a huge mistake even when it doesn't seem like a lot of money is involved.

The volatility in the markets recently has forced many investors to delay their retirement dates. People who hoped to leave the workforce in their early 60s are now seriously considering working until age 70.

A recent Wall Street Journal article says that only 23 percent of workers age 55 and older have savings and investments of $250,000 or more. When you consider that a "safe" withdrawal rate in retirement is approximately 4 percent, even a $250,000 retirement account would only support $10,000 per year in inflation adjusted withdrawals. And we know that only one in four workers age 55 and older have that amount saved -- what about the other 77 percent? They had significantly lower account balances:

-18 percent had savings between $100,0000 and $249,999,
-16 percent had savings between $50,000 and $99,999,
- 7 percent had savings between $25,000 and $49,999,
- 8 percent had savings between $10,000 and $24,999, and
-28 percent had less than $10,000 saved.

So, a startling 60 percent had less than $100,000 saved for retirement. Using the same 4 percent safe withdrawal rate, investors with $100,000 in savings would have to limit withdrawals to $4,000 per year.

And, these days, investors can't even rely on their home values to supplement their retirement. So, what other options remain? The only real alternative appears to be working longer. Delaying retirement by even two or three years can greatly improve anyone's retirement picture. First, accounts can grow longer, and second, there will be fewer years of withdrawals. The Journal article quotes a study by T Rowe Price that determined that a 62 year old man earning $100,000 per year who had $500,000 in retirement savings could see his retirement income increase 6 percent for every additional year worked. That's a very noticeable difference.

I am 60 years old and only have a small amount in my 401k - approximately $90,000 (in a Fidelity Freedom 2015 account). I know I will never be able to retire on what I have but I don't want to lose the little bit I do have. I want to know, given how the market is going down, should I continue to contribute 15 percent of my salary to my 401k or contribute less and put some after tax money in a savings account?

I would urge you to consider continuing your 401(k) contributions. I know that it can be scary when the newspapers are splashed with headlines about one crisis after another, but you need to stick to your long term plan. If you continue to contribute to your 401(k), the shares you are buying on the days that the market is down 450 or 500 points are incredible bargains. Literally, everything you buy is on sale.

The only real way to "win" the investment game is develop a well diversified portfolio and make a promise to yourself that you will stick with the plan in good times and bad. You have to suffer through the bad in order to capture the good. You can't just have the benefit of equity market returns without also accepting the volatility that comes along with it.

The Fidelity Freedom 2015 is probably a good choice for you if you will be retiring in your mid to late 60s. It gradually becomes more and more conservative so you don't have to think or worry about changing your investment mix.

I am very concerned about my in-laws' financial situation. They are in their mid- and late-60s, still working, and to my knowledge, have no retirement money saved. The only thing that I see as an asset is their house, which is probably worth over $1 million, though I'm certain they have a number of loans against it.

What financial issues should we anticipate as they get older? In cases like this, will the responsibility of paying for their medical treatment (should it be necessary) or debts fall on us?

This is certainly a very tough situation. It seems to me that your in-laws will almost certainly have to continue working well into their 70s and possibly longer. You (and they) have to hope that their health is good enough to permit that.

I would suggest approaching your parents with your concerns. It is possible that they have some retirement savings that you are not aware of. Tell them that you are concerned about their future financial security and ask them if they think they might need some professional assistance. There are many financial planners who do financial "check-ups" and maybe you could arrange one for your in-laws. Cost for these kinds of meetings would be approximately $500. You won't get a full plan with this type of consulation but the planner can make the "tough calls" about what kind of retirement your in-laws will face if they can't change their habits.

If your in-laws started aggressively saving right away, they could still build a retirement nest egg. They should also probably delay taking Social Security until age 70 so they can receive the largest possible benefit. It might also be necessary for them to sell their home, pay off their loans and move to a less expensive property when they retire. They may even have to relocate to a less expensive area of the country.

You would generally not be legally responsible for any of your parents expenses or debts but you might feel an emotional obligation to help them out if their situation becomes particulary dire. If you think this will be the case, you should adjust your financial plans accordingly.

This is one of the big reasons that financial planners always tell clients to save for their own retirement first. It doesn't do anyone any good if parents direct all of their excess savings to their children's college tuition at the expense of their own retirement.

My husband wants me to resign and relocate so we can be together, but I'm not sure how I can retain the same security my employer provides. How can I began to assess this difficult decision?

There are certainly a lot of factors to consider in this situation. Here are my thoughts from the "financial front":

Does your employer provide the health insurance for the family?

If yes, you need to confirm that your husband can get coverage for you and any other family members at a reasonable cost or plan to arrange for COBRA coverage (which will likely cost more than what you are currently paying.)

Does your employer provide you with life insurance benefits?

You don't want to find yourself without life insurance because you have left your job. If you rely on employer-provided coverage, get a private policy instead. But apply now so you won't be without coverage for any period of time.

Does your employer provide you with disability insurance?

If you leave your job, you would lose this very important coverage and the odds of suffering a disability are much higher than most people think. Most people would never think about going without life insurance but disability insurance is actually more important because you are much more likely to be disabled than to die. In fact the average person has a one in five chance of being disabled for a period of time before age 65.

Does your employer offer a retirement plan with a company match or, even better, a pension?

If your employer offers a great retirement plan which would be difficult to find elsewhere, you might want to think hard about leaving this benefit behind.

Have you prepared a realistic budget?

This is essential. If you don't have a firm grasp on your expenses, how do you know that you can afford to live on just one income even for a couple of weeks? It could take several months for you to find a suitable job in your new location. Do you have a sufficient "supplemental income" fund available to tide you over?

Do you have an adequate emergency fund and income reserve?

Assuming that you don't have a job waiting for you somewhere else, do you have an emergency fund equal to three to six months of your typical expenses? If your finances are shaky now, leaving a job voluntarily is probably not a smart move.

How does your credit look?

If your credit isn't in the best of shape, it might be wise to postpone a move and work on improving your credit. A poor credit history can impact your ability to get a new job.

Obviously, money and finances shouldn't be the only factors considered, but they certainly are important. Good luck.

Approximately one year ago, Vanguard instituted a controversial beneficiary designation policy. Under the new policy, which took effect in September 2007, customers must have identical beneficiary designations for all IRAs of the same type. There is no issue if you have only one IRA at Vanguard. However, if you had multiple IRAs and each IRA had a different beneficiary designated, it is time to re-check your beneficiaries.

Here is an example: let's say you had four contributory IRAs at Vanguard because you wanted to leave one IRA to each of your four children. Previously, you could have designated each child as the sole beneficiary on each of the IRAs. (Among other reasons, you might have wanted to arrange things this way if there was a significant age difference between the four children.) Under the new policy, the only beneficiary recognized by Vanguard would be the individual listed on the last beneficiary designation form that Vanguard processed. In this example, the fourth child might have been the last beneficiary added and that child would receive the proceeds from all four IRAs.

Vanguard says that it sent letters to the 170,000 account holders who would be impacted by this change but some Vanguard investors complain that the communication was not clear enough. Also, if Vanguard did not hear back from account holders, it changed the beneficiary designations for them -- a pretty bold step.

To learn more about this peculiar arrangement, read this article in Forbes. In the meantime, remember that the beneficiary designations must only be the same for each "type" of IRA. The three recognized IRA types are rollover IRAs, contributory IRAs, and Roth IRAs. So you can specify one beneficiary for a contributory IRA and another for your Roth, but you can no longer specify three different beneficiaries for each of your three Roth IRAs. The workaround to this problem is to name all three individuals as beneficiaries on a single Roth IRA or consider moving your accounts away from Vanguard. If you are not certain who your beneficiaries are, it never hurts to double check. This is true no matter where you keep your accounts.

I have my retirement fund in a CD which comes due next month. With CD rates being low, I was looking into rolling it over into a mutual fund where you pick the date closest to your retirement date. What do you think of these funds?

You are talking about target date funds. Target date funds have names like:

Fidelity Freedom 2015
Vanguard Target Retirement 2035
T Rowe Price Retirement 2040

Target date funds consist of a diversified portfolio of stocks, bonds and cash. As the fund gets close to its target date, it decreases the allocation to stocks and adds more bonds and more cash. The end result is a portfolio that gets more conservative over time.

The idea is to invest in the fund that most closely matches your planned retirement date. So, for example, if you are 49 now, you will be 65 in 2024. You would probably invest in a fund that has 2025 in its name if you wanted to retire at age 65. Alternatively, if you consider yourself more aggressive than most, you could also invest in a 2030 fund because that fund would have a higher allocation to stocks for a longer period of time. Similarly, if you are exceedingly conservative, you can invest in a target date fund with an earlier "due date".

My opinion of these funds is mixed. If you know that you are the type of person to select funds once and then never re-visit the choice, target date funds might be a good option because it puts your retirement savings on "auto-pilot". In essence, all the future investment choices get made for you.

However, this auto-pilot feature is also what bothers me about target date funds. These funds basically treat all investors the same -- with the only differentiating factor being age. And all investors of the same age shouldn't be treated the same. For example, I am the same age as Melinda Gates. Melinda and I might share a similar investment philosophy and tolerance for risk, but that doesn't mean that our assets should be invested in exactly the same manner. I am stretching this popular analogy a little here, but you get the picture.

As is the case with all funds, beware of expenses because they can vary widely across fund families. You should also look at the composition of several funds with the same target date. You will find that even funds with the same target date can have noticeably different allocations to stocks, bonds and cash. Pick the fund that most closely matches your risk tolerance.

Finally, you need to know that target date funds are not guaranteed in any way like your CD. You could lose money.

I am a federal government retiree and 68 years old. I currently have $122,500 in my Thrift Savings Plan. I did not yet roll it into an IRA. What is a good company to roll the TSP into -- Vanguard? T Rowe Price? Fidelity? Which company might have the lowest fees?

All three of the companies you mentioned would be solid choices. However, I would probably put in a plug for keeping your money where it is. The government's Thrift Savings Plan (TSP) is as close to perfect a plan as you will likely find.

There are only five fund choices available but those five include a government securities fund, a fixed income fund, a common stock fund, a small cap fund and an International stock fund. All five are index funds and all of them have a rock-bottom expense ratio of .015 percent or 1.5 basis points. That means the fees are only 15 cents for every $1,000 invested! You would be hard pressed to find lower expenses in many other places.

The plan also now offers 5 lifecycle plans, so if you are retired and want to put your retirement savings on "autopilot", you could choose one of the 5 target retirement funds. If you have an average risk tolerance, you would choose the lifecycle fund that most closely matches your year of retirement. If you wanted to be more aggressive, you could choose a lifecycle fund with a date later than your retirement date. This is a wonderful plan and you probably shouldn't be in a rush to leave it.

A lot of the people writing in to this blog want to know how much they need to be saving for retirement. There are a lot of calculators out there that will help you answer that question and I wanted to call your attention to one that I really like. It is called a "Ballpark E$timate" and you can complete it on line or in paper format.

There are a couple of things that I like about this calculator. First, it is very simple to use. Second, it gives you helpful pointers about how to use the calculator. For example, one question asks how much annual income you want in retirement as a percentage of what you currently earn. The instructions suggest you use:

70 to 80 percent if you want to cover all the basics and you will have employer-paid retiree health insurance,

80 to 90 percent if you will be paying Medicare Part B and D premiums and expect to do some traveling while retired, and

100 to 120 percent if you will need to cover all Medicare and health care costs, want a very comfortable retirement lifestyle and need to cover the possibility of long term care.

You can also fine-tune the calculator to account for an average life expectancy or a longer life expectancy. By answering less than 20 questions, you can get a pretty accurate projection of how much you need to be saving. The "answer" is quoted as an annual dollar amount to be saved and as a percentage of your current income. The calculator will also tell you how much of your current income you can replace in retirement if you do not save any additional money.

This calculator has a special version for federal government employees covered by the Civil Service Retirement System (CSRS) and there is also a Spanish version available as well.

Previously in this blog, I have talked about the 4 percent safe withdrawal. Four percent of the original account balance, adjusted in future years for inflation, is the amount that most retirees can safely withdraw from their portfolio without being too worried about running out of money in retirement. As I've mentioned, the 4 percent rate has a high probability of success, but it is not a guarantee.

Many factors influence how long a retirement portfolio will last. It makes sense to most of us that overall return is an important factor, but perhaps what is not as clear is the importance of the TIMING of the returns. Studies have shown that a few years of poor returns right at the beginning of retirement can have a big impact on the overall sustainability of the portfolio.

A recent New York Times article does a great job of explaining how a retirement portfolio can be affected by a string of "bad" years at the beginning of retirement. Specifically, it shows that if a person retires at the start of a bear market and they make no changes to their spending habits, a 4 percent withdrawal rate could fail them a third of the time or more.

Fortunately, most retirees are willing to make adjustments when the market takes a turn for the worse. The best option involves returning to employment. If you can turn off your withdrawals by earning income instead, that is the optimal solution. However, that is probably not a option for most people. And, fortunately, it also probably not necessary. Less drastic changes, like temporarily reducing your withdrawals, improves your chances quite a bit. Even keeping the withdrawals constant for a few years and simply not taking an inflation adjustment can go a long way.

So what's the take-away here? If you retire at a time when the market is performing poorly, it is not the end of the world, but you have to be more careful than someone who retires at the beginning of a tremendous bull market. If you are newly retired, you don't have to start living on macaroni and cheese but you do need to keep an eye on expenses. If you can possibly return to work, even on a part time basis, you will probably be just fine. If you can't or don't want to return to the working world, consider reducing your withdrawals for a couple of years. Whatever you do, don't panic and move to an all cash or all bond portfolio. You really need to keep a healthy allocation to equity mutual funds if you want your portfolio to keep up with inflation and last for 20 or 30 years. Finally, remember that 4 percent is a general guideline. Higher or lower withdrawal rates are definitely possible/necessary depending on your personal circumstances.

TJ writes:

I am 28 years old. I started working 3 years ago and I am saving 2 percent of my pay in my 401(k). My employer does not match my contributions at all. What are my options for maximizing my retirement savings? Would I be better off with IRA accounts?

TJ, it is wonderful that you are looking at how you can maximize your retirement savings. Even though your employer does not offer a match, the 401(k) is probably your best opportunity to sock away the largest amount of money. At your age, you are able to contribute up to $15,500 to your 401(k). IRAs are also a great option, but the contribution limits on those accounts are $5,000. Keep in mind that you can contribute the max to both the 401(k) AND the IRA, so it is possible to be saving as much as $20,500. If you can save at least 10% of your salary now and throughout your working career, you will be in great shape for retirement when the time comes.