Marketplace

Retiring in Europe

Question: My wife and I are 60 and plan to retire at 62. My question is this: We're considering selling our home upon retirement and basically pocketing that tax-free money to finance the first five or six years of retirement. We plan to rent during that period, perhaps in a European nation. We would not touch our 401K savings during that period, which currently total about $550,000 and would hopefully continue to grow at a healthy rate. We would both draw Social Security at 62 and I would also receive a pension of about $1.000 per month from my current employer. We would also be covered by a health insurance plan provided by my employer. Does this sound like a reasonable plan? Thank you. David

Answer: It's a great idea, assuming the numbers work. This kind of adventure has always made a lot of sense to me. You're still young. You'll have fun.

A couple of years ago a certified financial planner I know told me that a number of his clients had moved to France for the first 5 to 10 years of their retirement. (This was before the Euro soared and the dollar tanked). Although they lived comfortably, these weren't wealthy folks, either. They loved their time living and traveling abroad.

On a practical level, my one piece of advice would be to hire a certified financial planner (CFP) to runs some numbers and scenarios for you. This way you can be sure that you're comfortable with the financial side of the equation. Have fun.

01/07/08 by Chris Farrell

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Early Retirement and Health Insurance

Question: My husband and I are planning on retiring at age 50 (we have approx 13 years left)...meaning we hope to quit our 8-5 corporate jobs and find something more fun perhaps working part time at the local greenhouse or golf course. Many articles in magazines or stories on talk shows focus on how much to save but no one ever discusses healthcare options for those of us who want to retire early and will be without Medicare until age 65. We suspect healthcare will take a chunk of change but don't know how much or even where to find individual coverage. Can you please provide some guidance. Peggy, Minneapolis, MN.

Answer: You're right that the deal-breaker to early retirement is usually health insurance. It's expensive. Early retirement is probably out of the question for two groups of people: those who can't afford to absorb expensive annual health-insurance costs until Medicare kicks in at age 65 and anyone with a serious medical condition, such as diabetes or heart disease, that makes it next-to-impossible to get decent coverage.

Assuming you don't fall into those two categories, you should shop around and learn everything you can about deductibles, co-pays, networks, out-of-network costs, and other nuances of health-insurance policies.

I'd look into high-deductible plans. Basically, the higher the deductible, the lower the premium. The most popular high-deductible plans are those with preferred provider organizations that give price breaks for staying within a network. Still, coverage can range from bare-bones (read cheaper) to reasonably comprehensive (read expensive).

Better yet, consider a health savings account. You use these tax-advantaged savings plans in conjunction with a high-deductible policy. For a family in 2008, the catastrophic insurance policy has a minimum deductible of $2,200 and an out-of-pocket limit of $11,200. The maximum a family can contribute into the tax-sheltered account is $5,800. HSA contributions are made with pretax dollars, and any unused money in the savings account is rolled over for future use. Withdrawals are tax-free so long as the money goes toward qualified medical expenses.

You could also check out professional associations, trade groups, and even chambers of commerce offer group health plans to members, but they will probably be more expensive than an HSA or a high-deductible plan.

05/07/08 by Chris Farrell

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Immediate Annuity

Question: I am turning 70 in June and retiring as of July 1. I will be taking monthly disbursements from my IRA. I still have a balanced portfolio ranging from income producing to growth and income. My financial planner is recommending that I convert some of my IRA into annuities to protect my investment and to have a steady monthly income. Is this a wise move? Margaret, Fargo ND

Answer: I don't know the specifics, but in general I am a fan of buying a measure of financial safety and financial comfort with an immediate annuity. You get a predictable monthly income (or quarterly or annual depending on the chosen payout option) on the investment for the rest of your life. An immediate annuity can offer financial security and piece of mind. It's good advice.

There are a number of factors to consider. You should only do business with a highly rated insurance company, or an immediate annuity sold through a well-known mutual fund company. You want to work with a company with a blue chip balance sheet. You'll need to shop around since your stream of income depends on how much you invest, your age, the interest rate, and other factors.

Inflation is another critical factor. After all, what's one of the biggest risks you face with your savings? It's inflation. If you want another source of information, you could check out the website www.analyzenow.com. It offers a number of home-brewed financial planning programs that I like. One of them helps you tell whether it makes sense to buy an immediate annuity or keep managing your investment yourself.

05/16/08 by Chris Farrell

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Retirement and Taxes

Question: Contributing to my 401 now is lowering my tax bracket, but I will have to pay taxes on this $ later. Is there a standard tax bracket in retirement, or does it depend on how much you take from your investments? THANX! Sharon. Henderson, NC

Answer: There's no standard tax bracket when it comes to retirement. The traditional assumption has been that your tax bracket goes down. After all, you're no longer working and pulling down a regular pay check.

However, it turns out that some people earn more in retirement than they did while on a payroll. For instance, several years ago I was talking with a group of teachers and their taxes went up during retirement. The reason is that they had saved the maximum for 30-plus years in a retirement savings plan. They had good pensions. A few also made money on the side just to stay engaged and active.

This is the kind of planning question that becomes increasingly real the closer you are to retirement. You'll also be able to make an educated guess at that point whether your tax bracket will change, or stay the same.

07/11/08 by Chris Farrell

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Rent--Or Buy?

Question: My husband is 52 and I am 51. He works and I retired in 07 taking my pension in a lump sum which I now take small amount from each month. Husband earns $73,000/yr and stows away 20% in his 401k. He has a chronic degenerative disease which will necessitate him going on disability within the next 5-7 years. A substantial amount of his income goes toward his medical copays, Dr, visits and massive amounts of prescriptions. We sold our SoCal home in December 07 and feel fortunate to have lost just $1,000 on it. With prices continuing to slide, we now rent a home, but rent costs us much more each month than what our former mortgage payment was. I put the $154,000 equity from the sale of the home into CD's and savings for the short term. We can easily find a nice home for $250,000. by putting down our $154,000, we would then have money left each month to spend on other things like traveling, which my husband won't be able to do in the future after he can no longer work. When he does quit working, we will move back closer to family in the upper midwest. What is your opinion on buying in a SoCal market which is still falling; or should we find a more affordable apartment and pay to store our furniture and save some money? Even the nicer apartments rent for higher rates than what a mortgage payment would be. We have no debt of any kind and excellent credit scores. M. Yucaipa, CA.

Answer: Bloomberg recently ran an article suggesting that California could be the first state to hit bottom. "California led the U.S. into the worst housing recession since the 1930s," write reporters Dan Levy and Daniel Taub. "Now the most populous state may be the first to find the bottom." Sales are picking up, with about 40% of sales foreclosed homes. In the article, Mark Zandi, chief economist at Moody's Economy.com, estimates that nearly $1.3 trillion of homeowner equity was lost in California since home prices peaked in December, 2005. ``California is having a wrenching decline in wealth, but this is a cathartic event that will lay the foundation for a recovery,'' says Zandi. ``This signals the beginning of the end.''

It's a good article and Zandi is smart. He knows real estate and credit markets. Still, the downward pressure on home prices doesn't seem to be letting up, and it could still get a lot worse, especially when option ARMs come due later this year and next in California. Even the Bloomberg article expects home price discounts of up to 50% will extend into 2010.

Rather than trying to predict the direction of the real estate market, what struck me in your note was that your husband won't be able to travel in the future. He faces a disability. I say "buy" if owning a home frees up cash flow to travel and do things together while you can. So what if you buy too early and miss bottom? You'll be accumulating experiences and memories while you can. Assuming you're right on the finances and quality of life, I think you already know the answer to your question.

When you look to buy I'd focus on homes that are designed for ease of use when your husband is disabled. In other words, everything should probably be on one floor, with wide doorways (in case he needs a wheelchair), a shower without a lip (again in of a wheelchair or walker), and other so-called "universal design" features that are geared toward making it easier to age in place and deal with a disability.

08/08/08 by Chris Farrell

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Sell the Farm?

Question: My mother, (who is in a nursing home in ND with dementia) and I own as a life estate/remainder, approx 150 tillable acres of North Dakota Red River valley farmland--The farm building site, which includes a house in severe disrepair, is an additional 9+ acres. I had the tillable land appraised and it came back at $367,000 which is just over $2400 per acre. Mother will soon exhaust assets and be eligible for medicaid (In ND, owning farmland is not a disqualifying asset). She has no long term care insurance. I am wondering if it would be the right time to sell--prices at an alltime high. Some friends say I should play it for a year and then sell. Another factor, our tenants have farmed it for over 25 years and I would give them right of first refusal. They are interested in buying, but they are my age (50+) with no children to pass farm onto--right now they are interested, they may not be in a year due to being older. Of course, it is as much an investment for them also. I looked at IRS tables a couple of years ago and mother's share would be approx. 41%. She is now 82 years old. I came late to my current position and don't have a lot allocated for retirement. I rent an apartment and am single. I have not paid to have the building site appraised yet. The tenants would be interested in buying it also, but only for the grain storage bins and storage shed. The advantage of selling it as part of the farm is that I lower risk of inadvertantly missing something in disclosing about condition of house--I can think of at least 9 things, four of which are severe basement water leakage, needs new roof, and needs new windows and furnace.

The alternative would be to continue to rent it to tenants, but when mother goes on medicaid, no land income can be used to pay taxes and utilities. Approximate tax and utilities Tax: $1600, utilities about $50 per month. I either find a way to come up with that amount or I enter into a "net lease" with renters who would at least pay taxes. I could find the money to probably keep utility payments up. The big question, take the chance that grain commodities go up and land prices go up for another year and put it up for bids--or sell to tenants this year? Remember tenants are interested buyers. I grew up on farm and it is very hard to think about selling it because, I feel I am letting my late father and mother down, by not holding onto it. When they built house and married in 1948, I am sure they did not forsee the change in agriculture that would see family farms get bigger and fewer. K, St. Paul, MN

Answer: I can imagine how hard it is for you to sell. But I'm glad for you and your Mom that farm prices have soared in recent years. My own sense is that farmland has made a step up in value with the growing wealth and better food consumption in China, India and the rest of the emerging markets. That doesn't mean there won't be violent changes in prices

To be clear, you need more expertise on the farm value side than I can offer. It reads as if you are up on the Medicaid rules, but if not that's another complicated area to invest in getting some expert help.

However, since you're in the market for gathering information I had a couple of reactions.

When it comes to investing, buying and selling, we can't pierce the fog of the future. As Peter Bernstein, the dean of finance economists likes to put it, it's in the nature of the beast. Still, one way to grapple with a question like this involves regret. Let's say you sell now to the tenants, and a year later prices are up another 10% to 20%. You'll regret selling to early. Now imagine you don't sell but hold on. Prices for farmland fall by 10% to 20%. You'll regret not selling. Question is, which regret would you--and your Mom-- rather live with?

Even more important is your aging mother and her dementia. You have a very specific reason for contemplating a sale now: To help her out financially. If you sell today, you essentially know what you'll get. Will this money make a difference for her once you've taken taxes and Medicaid into account? Assuming the answer is yes, if it were me her condition would push me toward cashing in my known chips rather than gamble on an unknown future.

I lean on the conservative side with financial matters, and I'd rather sell early at a profit and into a strong market (missing the market's peak) than wait and take the chance of selling into a weak or falling market even if I still end up with a profit. One reason is that the seller has negotiating power in a strong market, while its the buyer that wields more influence in a weak market.

The condition of the house makes me nervous.

By the way, in 1948 your Mom got married and your parents built a home. Now, 60 years later, what they built and nurtured will go toward making sure she gets the kind of care she needs in old age. That's a moving arc to a life story.

After gathering more information and thinking it through, let us know what you decide.

08/29/08 by Chris Farrell

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Buying a retirement home

Question: My girlfriend and I are both in our mid 50s and thinking ahead to where we want to live when we retire. Here's a summary of our current financial situation. We each own our own homes and don't have any mortgages, car loans, or credit card debt. Her house has a tax appraised value of about $150K and mine is $390K..... She plans to retire in 5 years, receiving a pension from the state. But I will probably wait till full retirement age.

We'd like to buy a house about an hour North of us in a small New England resort town. The property taxes are low, and it will be an interesting place to live. I enjoy doing remodeling work, so we'd like to get something that is older that we'll be able to rehab to our liking, in particular making the property as energy efficient as possible, as well as completely handicap accessible. (We're able bodied now, but...) We're looking for properties in the range of $150K to $250K, although our hope is to keep it at the lower end to keep our future property taxes lower. (NH has no sales or earned income taxes, but property taxes can be a problem for retired folks.)

What I can't decide is how to finance the new property and budget for the renovations. Would it be better to finance the bulk of the new property, reserving my cash for the renovations. Or would it make more sense to use the bulk of my cash to buy the property, and then get a mortgage on the remainder and use a home equity loan to pay for renovations. For that matter, could we mortgage one of our existing homes to help pay for the new property, thereby owning it free and clear, and then pay off the remainder of the mortgage when we sell that house? Do you have any general advice on what would make the most sense in terms of making the most of our resources? First Name: Bill, Barnstead, NH

Answer: First of all, before getting to your financial question, I want to highlight your idea of making improvements now that will make it easier to stay in your home as you and your woman friend age. It's something homeowners should take into consideration with remodeling projects.

For instance, if the home has more than one story, you might consider putting in a bedroom and full bath on the first floor in case the day comes when stairs are too difficult to climb. Bathrooms can be made safer with high-quality non-slip tile, and showers installed with no lip for easy wheelchair access. Kitchen counters can be designed at different heights to accommodate sitting as well as standing. For people in the 50s and 60s, if they're doing a major remodeling, it's the ideal time to make changes that will let them remain independent.

That said, let's look at the finances. You and your woman friend have solid finances. I would not put the new home on to your existing homes. Let's not put the value of those assets at risk.

It reads as if the remodeling, fixer-upper project will take a considerable period of time. If that's the case, your best bet will be a home equity line of credit. It's ideal for home improvements done over a period of time, a project here, a project there. A home equity loan is better when there is a major renovation to be done within a certain time frame.

So, a conservative plan would be to put more money down and take on a smaller mortgage. I would worry less about reserving the cash for home renovations. You can do some smaller, more sweat equity-type projects at first, get to know the place well, really figure out what you'd really like to do it, and then get more aggressive--and have more fun--once you've sold your places and moved into your new house up north.

It's clear that you two have carefully thought through this move. Still, I'd emphasize that you're investing in this property together. I would have a lawyer draw up a legal document that spells out and protects both you and your friends investment and lays out the financial responsibilities.

09/12/08 by Chris Farrell

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The end of indexing?

Question: Chris, My wife and I have been following your advice (and the advice of many others) for retirement investing for years. We have about 15 years until we hope to retire (of course, hope is the operative word there, since the gallows humor going around these days is that "80 is the new 65"). Basically, we buy broadly diversified index funds on a monthly, dollar-cost averaged basis, and we hold (about 65% equities and 35% bonds). I'm watching the beginning of yet another bloodbath day for the stock market this morning (October 24) and I've recently started to question this buy and hold strategy. It really hasn't work for the S & P over the last decade or so. With pundits throwing around opinions like "there won't be another secular bull market for a long time, but there will be cyclical bull markets in the coming years," isn't an active buy and sell approach a better one, and, if so, how does the average investor participate in that approach? Richard, Bozeman, MT

Answer: Another gallows joke I've heard is that a "walker" is the new corporate benefit.

On to your question: One personal finance lesson not to take away from recent experience is that indexing is a mistake. Yes, I imagine you're hearing talk about how professional money managers can avoid the investment carnage by trading adroitly. That's reminiscent, at least to me, of comedian Will Rogers famous quip, "Buy stocks that are going up. After they have done that, sell them. If they ain't going to go up, don't have bought them." Or, as Rex Sinquefield, chairman and chief investment officer at Dimensional Fund Advisors, once said: "There are three classes of people who do not believe that markets work: the Cubans, the North Koreans, and active managers."

There's no reason to believe that actively managed mutual funds will systematically do better after fees in this market--or any other market for that matter. (And a lot of hedge funds--managed by the best and brightest--are getting wiped out these days. It's one reason the stock market is so volatile.) In a sense, Wall Street takes its cut everytime an actively traded mutual fund or managed account makes a bet, and their take slices into returns. "Meanwhile, Wall Street's Pied Pipers of Performance will have encouraged the futile hopes of the family. ... will be assured that they all can achieve above-average investment performance - but only by paying ever-higher fees. Call this promise the adult version of Lake Woebegon."

Who wrote that? Ralph Nader? No, it was Warren Buffett, the greatest stock picker in modern times. He's spot on.

The expense ratios on index funds are razor thin--ranging between, say, 0.10% and 0.20% for a broad-based equity index fund vs. 1.0% to 1.5% for a comparable actively managed funds. Over the years, that fee advantage adds up. Then there is the cost of time. You have to ferret out good mutual fund money managers, or pick out stocks on your own, and then monitor them closely. That's tough to do. In a letter to shareholders Buffett made a strong case for the kind of value oriented stock picking approach that he practices--which is knowledgeably poring over balance sheets and studying management. But if truly understanding a company isn't your passion, then use index funds, he advised. "By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals," Buffett wrote. "Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb."

10/31/08 by Chris Farrell

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Military benefits and Social Security?

Question: I will be receiving my Navy Reserve retirement pay when I turn age 60. I also paid into the Social Security system the entire time. Will I receive full Social Security benefits when I retire at age 65, or will that amount be reduced by the amount I am receiving from the military retirement? Bob, Lodi, CA

Answer: According to the Social Security Administration, there are 9.4 million military veterans receiving Social Security benefits. That means that almost one out of every four adult Social Security beneficiaries has served in the United States military. Veterans and their families make up almost 40% of the adult Social Security beneficiary population.

Your military pension should not reduce your Social Security payments. "You can get both Social Security benefits and military retirement," says Social Security on its website. "Generally, there is no reduction of Social Security benefits because of your military retirement benefits. You'll get your full Social Security benefit based on your earnings."

02/19/09 by Chris Farrell

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A target date fund or CD?

Question: I retired from teaching in Michigan in 2005 and immediately took a job teaching in China. I'm now 62 and currently receive my teaching pension of $30,000. I'm fortunate to still have approx. $350,000 in high-fee mutual funds, 403(b), and IRA.

I'm also fortunate to be able to save approx. $20,000/year from my job in China. I want to invest this money and would like to hear your opinion about CDs versus a target retirement fund. Is it "too late" for me to do a target retirement fund? I don't think I will need this money for several years and I plan to teach for another two years. What are the advantages and disadvantages of each - other than the obvious one that the CD will hold its value and the target fund might not? Should I be considering something else instead of these two investments? Thank you. Janet, Kalamazoo, MI

Answer: Teaching in China must be a fascinating job. On the financial side, target date funds and a CD are two very different investments. You've hit on the key distinction: Risk.

There are target date funds for people at or near retirement. Yet it's apparent the risks of these funds are greater than the marketing of their conservative reputation suggests. A number of target date funds dropped 25% or so in value during the bear market thanks to a hefty exposure to stocks. The fund companies justify the large stock portion by emphasizing that most retirees live another 20 years or so, a fairly long time horizon. The observation about longevity is right. That doesn't mean the "conservative" target fund portfolio should hold much in the way of stocks. Remember, this is supposed to be the retiree's conservative investment option. As one money manager put it to me, maybe the mutual fund companies should market target date funds as death funds instead. Somehow, I don't think savers would embrace them as readily.

The advantage of the CD in an FDIC insured institution is that the safety of those savings is guaranteed. The drawback: You'll make a pittance in interest on your money.

The question of "how to invest the money" is actually quite complicated, depending on how your going to spend money when you get back to the States. You have a pension, savings, you'll eventually start taking Social Security, and so on.

That said, one thought is to take the savings from teaching in China and decide how much of it you want to be safe for when you come home and how much you'd like to put at risk to the stock market. The "safe" money could go into Treasury bills (no default risk; will hold its value against inflation if it rises), short-term CDs (no default risk; can reinvest at higher interest rates if inflation surges) and teh U.S. Treasuries I-bonds (no commission costs; no inflation risk; compunds tax deferred but should be held for at least 5 years to get the full interest benefit). Then, with the remaining portion you're comfortable with putting at risk to the vagaries of the stock market, invest it in a very low cost broad-based stock equity index fund. This way you can tailor a low-fee portfolio to what you'll need over the next several years.

04/27/09 by Chris Farrell

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"Claim and suspend" Social Security

Question: Is it worthwhile for me to defer receiving Social Security benefits for a few years until I actually need them? I am started receiving benefits at age 62 and am now 66. I would like to defer the payments until the age of 71 or longer, if possible. I have heard that the payments can be stopped and restarted at a later date, but I have been unable to locate any information on this on the Social Security website. Do you have any suggestions or comments? I am a faithful listener. Thank you for the informative and entertaining programs you present each Sunday night! Nancy, Mountain View, CA.

Answer: The tactic is commonly known as "claim and suspend." If you voluntarily suspend your Social Security payments you will earn retirement credits that will permanent increase your future monthly benefits. It can be a smart strategy if you earn enough to support yourself without the Social Security money. If the numbers work in your favor, suspending will increase the amount of future monthly Social Security benefits you'll receive. Those benefits are valuable since they're default free, payable for life and protected against increases in the consumer price index.

You can elect to suspend if you are at your full retirement age, which is age 66 for those born between 1943 and 1954. You must be 70 and under to do it. So, you can't defer to 71. You should be able to go to any Social Security office and make the request and the form. You can also call 1-800-772-1213. Anne Tergesen, a terrific reporter at the Wall Street Journal (and former colleague) did a nice piece on this.

For those interested in going into much more detail, the Center for Retirement Research at Boston College looked into claim -and-suspend. The information is good but the article is dense and scholarly.

06/30/09 by Chris Farrell

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Variable annuity

Question: Hi, I know from searching Chris' articles in the past that he's said variable annuities are a bad idea. I recently found out that my dad is 20 years into a variable life annuity. My dad is retired, living off of social security and savings. Should he keep paying into his VLA at this point? I think he only has a few years left before payout. Or is a VLA so bad that he should just get out now? Thanks for your help! Bonnie, Fremont, CA

Answer: No, unless there is some other problem that isn't in your note I would not get out of the variable annuity. You dad has saved for more than two decades and he's about to enjoy the benefits of that savings in retirement. That's good, and he should enjoy the income. .

A variable annuity is essentially a mutual fund wrapped in a tax-deferred insurance firm account. You buy variable annuities with after-tax dollars, but earnings compound tax-deferred until retirement, when any gains are taxed as ordinary income. Variable annuities come with a death benefit. It's part of their appeal. When the owner of an annuity dies, the estate or beneficiary gets back the original investment, plus some guaranteed minimum return.

A variable annuity can be a good niche product, especially for those with lots of savings. For instance, Henry "Bud" Hebeler of Analyzenow.com says he bought low-cost very simple variable annuities for his children. He had maxxed out on other tax-deferred alternatives and he wanted another place to save tax deferred.

My problem with variable annuities comes when it is sold as a primary retirement savings vehicle, especially to younger and middle-aged folks. In too many cases the product comes with a number of drawbacks, including steep fees and limited financial flexibility. Most studies I have looked at emphasize that stocks are probably the best investment for a variable annuity. The fees eat up too much of the return on cash and bonds. The savings are taxed at ordinary income tax rates at withdrawal.

Many financial planners suggest consumers would be better off investing for retirement in a 401(k) and a Roth IRA. I agree wholeheartedly.

I would also consider putting any leftover cash into a broad-based equity index mutual fund. For one thing, withdrawals from a variable annuity are treated as ordinary income, while some of any returns from the mutual fund may be taxed at the lower capital-gains rate. For another, it's a good idea to have some long-term savings in taxable accounts that can be tapped with paying a penalty to the government or a financial institution. Several years ago, Ross Levin, president of Accredited Investors, an Edina (Minn.) financial-planning firm, told me that they "are the fifth-best option for retirement planning, behind everything else." That seems about right to me.

The variable annuity market has improved, however. The competition for customers has increased and that means consumers can get a better deal on fees, surrender charges and the like. So, if your financial circumstances say that a variable annuity makes sense, it pays to shop around. Keep the product simple. Avoid the bells and whistles. They're too expensive.

But for your dad, he should take advantage of the additional income in his Golden Years.

07/16/09 by Chris Farrell

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Saving for retirement

Question: I am a 55 year old divorced female who owns my own fledging consulting business. I have no retirement savings except Social Security. As part of my divorce many years ago I will be shortly be receiving my portion of my ex-husband's retirement fund as determined by a QDRO. [A Qualified Domestic Relations Order allows for the division of retirement plan assets in a divorce.CF]

I must roll it into a 401K to avoid any penalties of course but wonder what is best to do with it once it is in a fund. What is the best kind of 401K? Should I invest in some medium risk stocks as long as I can do something to guarantee the principal?

I am very much a novice at this and as you can probably understand by the fact that I have virtually no retirement savings -- have not been especially good about savings in the past. Lucy, Baltimore, MD

Answer: Congratulations on getting your consulting business off the ground. You're already taking on a lot of financial risk by being an entrepreneur. That fact alone suggests your savings should lean toward the secure and cautious. What's more, you say you're a novice at investing. That, too, suggests investing conservatively in a retirement savings plan. Last, you want to avoid the temptation of rolling the stock market dice to make up for lost time. Stocks are simply too risky for that kind of bet.

In thinking about your question maybe the best advice I can give is for you to pick up a copy of "Worry-Free Investing" by Zvi Bodie and Michael J. Clowes. Bodie is a leading finance professor at Boston University. Michael Clowes is editor at large at Pensions & Investments, a trade publication. The book was published back in 2003 in the wake of an earlier bear market in stocks and it remains a book for the times. Instead of asking, "How much money will I make?" they're wondering about the more fundamental financial question, "How much can I afford to lose?" Their basic message fits in with your question.

What's the answer? Their preferred investment for long-term retirement savings is U.S. government inflation protected securities. These securities preserve the purchasing power of a dollar against the ravages of inflation. Inflation is the enemy of long-term savers. Think about it: One hundred dollars loses half its value in 20 years with a 3.5% average annual rate of inflation. The same sum falls by about a third over two decades even at a modest 2% inflation rate. Of course, you'll take a lower payout on your savings in exchange for the inflation protection, but it's worth it. The authors deal with other conservative investments. They aren't stock-phobic, they'd just prefer that individuals roll the stock market dice only after looking after their baseline financial goals. I think a book like this might give you some needed guidance.

08/31/09 by Chris Farrell

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What to do with an annuity

Question: I retired in 2007 from a university. My retirement funds are with TIAA-CREF, split roughly in half in 2 annuities. One is a fixed annuity and the other is a variable annuity, balanced 50/50 between bond and stock funds. I probably lost 20-25% on that fund in the crash last year. The 2 annuities together provide about 40% of my monthly retirement income.

I have resisted freezing the variable annuity and making it fixed because that would provide NO chance to recoup some of my loss. When I set these up in the first place, the fixed annuity was my hedge against the kind of crash we suffered in the past year. I'm not feeling the pinch although my income dropped a little this year but income tax adjustments offset the loss--and I do a little consulting for "egg money." I also have a savings account equal to 1/3 my annual income. I rent, so as not to have house expenses.

Am I crazy to hold firm? If I look at a 20 year time horizon, isn't it likely that my annuity will slowly come back over time (and maybe I could fix it then)? I would be interested in Chris Farrell's opinion about this. Thank you. Elaine, New Berlin, WI

Answer: One reason why I'm posting your question is that I admire your retirement strategy. We can all learn from how you have thought through your finances and what you have done. You set up a smart hedge against a bad market environment. You have savings. You still have some earnings coming in. Your expenses are under control. As far as I am concerned, you've really come up with a sensible strategy for all seasons.

As to your question, I still like the idea of you keeping the hedge with the floating annuity. It allows you to participate in the good times. But your other savings buffer you against the bad times when they come again.

One other thought: I would hold off freezing the variable annuity until you had an answer to this question: How much of your portfolio do you want exposed to stocks, if any? Right now, it seems to me that you're mostly fixed income between the savings, the fixed annuity, Social Security and the 50% of the variable annuity that is in bonds. So, one issue for you is how much of your portfolio would you like exposed to stocks? More? Less? The same?

What do other people think?

09/18/09 by Chris Farrell

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Required minimum distribution

Question: What exactly is involved in "distributing" your IRA'a by / at age 70 ½? Beverly, Flagstaff, AZ

Answer: In the calendar year following the year you turn 70½ you must start withdrawing a minimum sum of money from your tax-sheltered regular IRA. (You don't have to with a Roth-IRA; it doesn't require minimum distributions.) The jargon term is "RMD" for required minimum distribution. Of course, you can take out more money than the RMD if you want to or need to.

The basic formula is composed of two parts: The adjusted market value of your IRA as of December 31 of the prior year divided by your life expectancy taken from the Uniform Lifetime Table published by the IRS. But most major financial institutions that are in the IRA business offer calculators to figure out your RMD. If your IRA provider doesn't offer one you can turn to calculators at websites such as dinkytown.net.

The exact amount of your RMD does change from year to year.

10/13/09 by Chris Farrell

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Take Social Security now or later

Question: I am still employed and am almost 67 years young. Is better to wait till I am 70 1/2 to collect Social Security benefits or take them now? Barbara, Palos Hills, IL

Answer: Yes, you are young. By the way, question is whether you take it now or by age 70. The age 70 ½ date comes from when you have to start taking money out of a traditional IRA or 401(k). But there is no benefit to waiting past age 70 to start drawing on Social Security. That's when you reach the maximum payout.

I can't give you a definitive answer. A lot of factors play a role in dealing with your question, from earnings to taxes. But I can do one better. I can send you to the website with the best online Social Security calculator. It's analyzenow.com. It offers several simple but comprehensive Social Scurity calculators.

The website was created by Henry "Bud" Hebeler. He's quite a character. In 1956, he left Boston with a graduate degree in engineering from MIT for a job at Boeing in Seattle. Some three decades after he made that trip in a Volkswagen Beetle, he retired as president of the company's giant aerospace unit. It wasn't long before Hebeler started a new career dispensing conservative financial advice on his web site. And he has thought carefully about the trade-offs between taking Social Security at different retirement ages, ranging from early (age 62) to late (age 70).

11/04/09 by Chris Farrell

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