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Naming a beneficiary

Question: I listened with interest about your story of the military man who is investing in the Thrift Savings Plan and was happy to hear your high review of the plan. My husband is a rural letter carrier and has been investing in TSP since he became eligible. When it became available he transferred all funds to the life cycle fund and is very pleased with the performance so far. Every quarter we download and print the statement; we noticed that he has NO BENEFICIARY DESIGNATED. Would that lack of specific designation cause problems for me (as his wife of 34 years) and/or our adult children in the event of his death? Or should that designation be changed as soon as possible? Thank you if you are able to respond to this question. Gail, Springville, Pennsylvania

Answer: As his spouse, the lack of a beneficiary designation shouldn't cause you any trouble. Federal law says that the spouse is automatically the beneficiary of a pension plan, including a thrift savings plan.

However, in general you should still fill it out, especially if you want to include your children as beneficiaries. It's simply a good habit to fill out the beneficiary form which, by the way, overrides what's in your will. (And if you don't have a will, please get one.).

The insurance company USAA recently listed in its newslatter three mistakes to avoid when it come to naming a beneficiary. They are worth keeping in mind.

1) Name an individual rather than an estate as beneficiary. The tax code provides named beneficiaries with more tax-friendly choices than when they receive an IRA through probate.

2) Failing to keep your designation current. It pays to review and update your beneficiaries whenever there is a major life event, from divorce to the birth of a child to retirement.

3) Don't name minor children as beneficiaries without appointing a custodian. Minors can't own investments outright, so they need an adult to act as custodian until they reach the age of majority.

12/17/07 by Chris Farrell

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Savings for a Stay-At-Home Mom

Question: I'm currently not in the paying workforce while I take care of my infant son. Besides the obvious large loss of income, I'm concerned about my curtailed ability to contribute to my retirement funds. Are there avenues to move money into retirement funds beyond a $4000 IRA contribution?

Answer: This is a pet peeve of mine, and I don't understand why Congress and the White House don't combine forces to dramatically simplify the pension system and make it more equitable. The current private retirement savings system is capricious. It includes 401(k)s, 403(b)s, 457s, SIMPLEs, SEP-IRAs, IRAs, and Roth IRAs to name only the best-known plans. The rules, income limits, and restrictions vary significantly among most of these tax-advantaged savings programs.

For instance, if you were working at a company with a 401(k) you could set aside $15,500 in pre-tax dollars in 2007. An employee at a small company with a SIMPLE plan has $10,500 limit. A stay-at-home spouse running the family household can save at most $4,000 in an IRA. If you are over 50, the plan limits are somewhat higher in each case. But the overall disparity remains.

Why not attach the retirement-savings plan to the individual and have just one rule for everyone--say, 15% of income, or $30,000? The figure could be less or more. The key point is that the rules should be uniform. And the retirement plan system should include parity for working and "nonworking" spouses (an oxymoron if there ever was one).

All right, I'll clamber off my soap box. But unless you bring in an income through freelance projects or a consulting business or some other income generating sideline that you run out of the house, you're out of luck when it comes to the pension system.

But all is not lost. Here are a couple of suggestions. First, you could buy I-bonds from the Treasury. You buy them with after-tax dollars. You pay no commission costs. Your money compounds free of taxes until you cash them in (you'll then pay your ordinary income tax rate on the gain). These bonds are specifically designed to protect your portfolio from the ravages of inflation. The dollar you put in to today will be worth a dollar plus interest 10 years, 20 years, or 30 years from now.

Another strategy is to set up an automatic payment account with a major mutual fund company and buy a broad-based equity index fund. You'll outperform most professional money managers year-in and year-out by matching the underlying index, you'll pay very little in fees, and your tax bite is limited compared to an actively managed mutual fund since there isn't a portfolio manager constantly buying and selling stocks.

An alternative to an index fund is a tax'managed mutual fund--one that is run by the a pro with an eye toward minimizing Uncle Sam's tax take. An added benefit to investing regularly in an index fund or a tax managed fund is that if you need the money before age 59 1/2 you can cash it in without paying the 10% surcharge attached to defined contribution savings plans like 401(k)s and 403(b)s.

In other words, you can make some long-term savings on your own that offer their own advantages even though the money isn't in a pension plan.

01/03/08 by Chris Farrell

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IRA or Vacation?

Question: Ten years ago, I left my previous employer with a 401K worth $2,500 and invested the money in an IRA. Its value at the time of this e-mail is around $3,100. In my opinion, that's a very low return. In your view, should I just take the money, pay the penalty and take a vacation? Or should I leave it alone? Mr. Angel, Milford, NH

Answer: I'd rather you leave it alone. Sure, it hasn't grown much. But thanks to the power of compound interest it will add up if you leave it alone. For instance, $3,100 earning a return of 5% annually over 20 years is worth $8,225. The same figures compounded over 30 years equal almost $13,400. Those aren't huge sums, but a little bit here and a little bit there eventually add up.

Still, the main reason it doesn't pay to withdraw the money to pay for a vacation is that you'll owe Uncle Sam income taxes, plus a 10% penalty. Ouch.

01/10/08 by Chris Farrell

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Market turmoil and 403(B) Contributions

Question: I am thinking of increasing my 403(b) contributions to lessen my tax obligations. However, I am concerned about increasing my contributions while the market is heading downward. I am 29, so I am not planning to retire anytime soon. My employer offers a flat rate towards my retirement fund regardless of my contributions so that wouldn't be a factor. Should I wait till the market heads up before increasing my contributions? Thanks, David

Answer: At your age, you have little to nothing to fear from a down stock market in your retirement savings plan. Indeed, there is even reason for cheer since you have three decades before you tap into the money. You're buying good companies on the cheap.

Look at it this way. Every time you put money into the stock market out of your retirement savings plan you are "dollar cost averaging" your portfolio. Technically, dollar cost averaging means putting the same amount of money into an investment on a regular basis. So you purchased fewer shares when the market was up, say a year ago, and more equity now that when stocks values. So, let's say you're putting $1000 a month into your 403(b) stock mutual fund choice. When the market is strong, maybe you could buy only 100 shares. But now that the market is taking a nosedive, perhaps you can pick up 150 or 200 shares. Since stock prices rise over time, this technique allows you to build up a stock portfolio worth more than the price you paid for it.

Another benefit of dollar cost averaging is psychological. The time-tested stock buying method takes emotion--fear, greed, and panic--out of investing. You are regularly socking money away in all markets, bull and bear alike.

If it were me, I would hike my 403(b) contributions.

01/22/08 by Chris Farrell

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The Market Fall-Out

Question: Help! I retired a couple years ago and the market was going up. Now it's going down, down, and more down. How do I stabilize my savings and IRA money that I'm living on? I'm not on Social Security just yet (I'm 61). Do I need to go back to work for awhile? Ickkkk, I hope not! Kojis

Answer: You're far from alone in your concerns. It's frightening right now with the stock market wildly plunging one day, recovering the next, only to lose even more ground in following days. The housing market continues to tank. The consumer credit default wave is spreading from subprime mortgages to home equity loans, credit cards, auto loans, and other types of consumer credit. A recession is likely.

Truth is, while we're in the midst of turmoil, it's usually a mistake to make any dramatic moves. That doesn't mean you shouldn't go more conservative. But I would use this as a wake-up call to reassess your whole portfolio. You should always pay attention to the downside--what could go wrong. And if you lock in the essentials by investing safely you can sleep at night.

So, as you know, one way to protect yourself is to diversify. Right now, while the stock market is down about 16% from its October 2007 high, the U.S. government bond market has strongly rallied.

It can also mean putting money into cash (by cash I mean U.S. Treasury bills, conservative money market mutual funds, and other creditworthy short-term securities). To be sure, the investment price you pay for credit quality is a lower yield. But cash will hold its value.

My next thought has to do with this question: What is the biggest risk confronting savers? Recessions? Bubbles? Bear market? Yes, all these traumatic events batter savings and undermine confidence. But inflation, a sustained rise in the overall price level, tops the list. The purchasing power of a dollar declines year after year when inflation drives up the costs of goods and services. 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.

That's why I'd put money into Treasury inflation protected securities, or Tips. For practical purposes, it's a completely safe asset that adjusts to changes in the consumer price index. The CPI might not exactly match your basket of spending, but its pretty close. Tips can protect your money from inflation for 20 years.

Now, a well-known drawback to TIPS for individual investors is that taxes are paid on the unrealized annual inflation-adjusted gains. Yet there are plenty of ways to avoid the tax on phantom income, such as owning TIPS in a tax-sheltered account like an IRA. Another alternative is the inflation-protected U.S. savings bond, the so-called I-bond. The investment compounds tax deferred until the bonds are cashed in.

Certified financial planners (CFPs) are expensive. There's no way around it. But one of the best investments someone can make in your circumstances is to spend the time finding a fee-only certified financial planer that can go over your portfolio, assets, goals, dreams, and give you a true sense of the trade-offs you face.

And, yes, going back to work may be one of those options.

01/24/08 by Chris Farrell

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Fellowships and IRAs

Question: My husband and I are currently on National Research Council fellowships, working at a government lab. The nature of the fellowship is such that we are neither employed by NRC, nor by the lab we work in, yet we are not required to pay self-employment taxes. Someone told me that in that case, we cannot contribute to our Roth IRA accounts either. Is this true? I'm concerned because it's the only retirement saving vehicle we have right now, since we don't qualify for a 401(k). If we can't contribute to our Roth IRAs, do you think getting Treasury I-saving bonds are our best alternatives? Thanks! Nandita

Answer: As I understand it, IRS rules prevent scholars on fellowships like yours from technically counting the money as "earned" income. So, you can't contribute to your Roth if the fellowships are your only source of income. However, if you have any part-time work (I realize that's probably unlikely given your schedules) then you can use that money to fund the Roth-IRAs.

If that's not the case, I do like the idea of investing money in I-bonds, the inflation protected savings bond. You don't pay any commissions buying and selling them. Your money compounds tax free until you cash them in. And the dollar you put in today is worth a dolla--plus interest 10, 20 or 30 years from now. The other thing you can do is also direct some money into a broad-based equity index fund, like the S&P 500, the Russell 3000, or the Wilshire 5000. That will give you an exposure to the equity market in an investment that keeps fees razor thin and your annual tax liability low.

One advantage of this home-brewed retirement savings approach--bonds plus equity index fund--is that it's easier to pull money out early. Yes, you'll have to fork over capital gains tax and income taxes, but you won't have to pay Uncle Sam the 10% penalty imposed on early withdrawals from retirement savings plans like IRAs or 401(k)s.

01/30/08 by Chris Farrell

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Have Fun

Question: My husband and I are in our mid 30's, no kids, both have good incomes and we're putting money away towards our retirement through our employers (so pretax) as well as other sources (Roth). My husband has about maxed the amount he can contribute. I have not, but my employer puts in a substantial amount as long as I put in the minimum required. My husband thinks I should try and max mine out as well, but I want us to put some in shorter term investments so we can enjoy some of the money now to travel, etc. We have a decent amount in savings for emergencies. First, as long as both of us are putting away at least 15% of our income, is it fine to stockpile our savings so we can enjoy some of it now? And second, is there something else besides savings/CD that have a better return rate, but that we can access (within a few months to a year like CD). Thanks. Heather

Answer: My standard advice is to max out your retirement savings plans, and you clearly can afford to do it. However, you and your husband are saving a good chunk of your income every year. You're money smart with a good financial safety net. In this case, I'm on your side. Take that trip (or trips). Go out to dinner. Have fun.

Where to put this money? I would take two very different approaches with the money. First, I'd put the bulk of it into a conservative money market mutual fund with brandname national or international financial institution. (These big companies have a reputation to protect, so the odds are good they'll do whatever it takes to preserve the value of the fund, even if it faces financial difficulties).

I would also consider putting a sliver of the money into a broadbased equity index fund or a tax-managed fund. Your annual tax burden on the savings is low with either product. The money should compound over the years. When you do tap into it, you'll pay low capital gains taxes on the gain.

02/06/08 by Chris Farrell

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Savings and Health

Question: I just finished graduate school and started my first real, full time job. I want to begin contributing towards retirement. My situation isn't as simple as many people my age, as I'm a 30-year old with several chronic health conditions. I'm currently able to work, but a downturn in any of my conditions could change that ability. I have two main concerns:

1) Contributing to a retirement account and then needing the money due to a reduced income due to my disability and having to pay an early withdrawal penalty.

2) I have no idea how much to contribute for retirement health insurance costs, or such costs if I have to retire prior to 65 (before I qualify for Medicare). I'm currently in such a high risk insurance category that it would be several thousand dollars per month IF any insurance company would insure me.

I'm unable to find any information on the web and doubt many retirement advisors deal with this type of concern. Thank you! Dawn

Answer: A lot depends on the income you're earning, of course. But let's start with retirement savings. Take full advantage of a 401(k), 403(b), or similar retirement savings plan at work if it offers a company match. When you look at the performance of a retirement savings plan at work, much of the gain comes from the company match. (And you can draw on that money after age 59 ½ without penalty if you need to pay for medical expenses before Medicare kicks in at age 65.)

You could use the rest of your savings money to open a Roth-IRA. Roth contributions are paid with after-tax dollars, so there's an upfront tax hit, but any gain from your investments is tax free. Contributions to a Roth can be a maximum of $4,000 a year; $5,000 if you're over 50.

But the real advantage for someone with your circumstances is that the Roth is both a retirement savings plan and a store of emergency savings. In an emergency, you can take out money from your Roth contributions without paying or taxes on it. You leave the investment gain in the portfolio alone.

Here's a hypothetical example: Let's say in 2005 you put $2,000 into a Roth, and in 2008 you need $1,000 to pay medical bills--and there is no other pot of savings. You could take out $1,000 from your Roth and not pay a 10% penalty or taxes to Uncle Sam on the withdrawal. Of course, the main drawback to this strategy is that you will earn less on your Roth savings. But sometimes that's a price worth paying.

Two quick thoughts on the healthcare front. If I were you, I would focus my job search and employment goals on employers who offer a good healthcare plan. In most cases, that means finding a government job, or working for a large national or multinational corporation. I don't how much you'll need to set aside for healthcare when you get older. By then, we could have universal health insurance--or not. My main message is that you have to save more than the average person to build up a financial cushion. And A Roth is one way to accomplish that goal.

02/12/08 by Chris Farrell

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Saving for Retirement

Question: I'm a 30 year old who works at a public university. I think I'm eligible to deposit $15,500 at my 403b and another $15,500 at 457b. I plan to deposit $31,000 every year for 30 years and start to withdraw when I get 60. My job is very stable. Our current tax rate is about 28%. Should I do that? Thanks, Qin

Answer: Yes, you can do that. It isn't well known, but through a quirk in the law anyone with a 401(k) or a 403(b) can double the amount they put into their retirement savings if their employer also offers a 457 (which is just another retirement plan). I applaud your discipline and aggressiveness when it comes to savings.

Because you want to retire at 60, I'd like to toss out an alternative idea: Put some of your planned savings into a taxable account. Don't put it all into a pension plan. The reason is that then you'll have a pool of long-term money that you can tap until you're 59 1/2 without paying the 10% penalty imposed by the government on early withdrawals from a pension.

You'll still want to keep your annual tax burden low, say, by investing the money in tax-managed account, broad-based equity index funds, inflation protected savings bonds (the I-bond), and the like. Good savers should always consider a balance of tax-sheltered and taxable accounts.

02/28/08 by Chris Farrell

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A Cautious Investor

Question: I'm 44, working at a university. My position is not secure nor stable. I have $40,000 in CD. How do I make my money grow? I would like to have a short term investment. Where should I put my money? I hate to think about retirement... saw many people try to save money for their retirement but it turns out they die before they can use their money. Sorry if my idea is strange. Thanks. Lekas

Answer: Your idea isn't strange. You've focused on a risk all of us take when we set aside money for the long-haul. However, your question also highlights how limited your choices are when you want to stick to short-term investments. There is a trade-off between risk and return. And by limiting the risk you're willing to take in the market, you're also limiting your potential return.

That said, the way for your money to grow is to add to savings. You can then preserve the value of your savings by investing in certificates of deposit (as you're doing), Treasury bills, money market mutual funds, and the like. And, of course, this money is available to you if you lose your job.

Still, how about putting a small slice of money into your university's retirement savings plan? Most universities offer their employees a good pension plan made up of low cost mutual funds.

03/10/08 by Chris Farrell

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Market Turmoil and a Retirement Portfolio

Question: My husband and I both put the maximum into our 401ks, which we now see dwindling (9% loss this year already). Money is tight; our daughter is making the decision about what college to attend; and we do not have a lot in savings ($200k in our 401ks; $50k in stocks). Should we continue to put the max into our 401ks or decrease the contribution during this economic downturn? We both turn 50 this year. Thank you so much for your help. Kary.

Answer: With the drop in the market, I'm getting many variations of your question. The feeling about retreating from the market is understandable. But here's my cautionary note: You're both still young. Taking into account your average life expectancy, you're still investing for another 30-plus years. That's why the main lesson I would take from this volatility and turmoil in the market is to review your portfolio. Are you comfortable with how much you have in stocks, bonds, and other securities? Do you need to get more conservative?

That said, you have a big expense coming up: Your daughter's college education. It's a big deal, and if you want to slightly cut your contributions to your retirement savings in order to help pay for college expenses, that's fine (with me, that is).

Nevertheless, I do believe you should take care of your retirement needs first and your daughter's college expenses second. She can always borrow. The reason for establishing this priority is that you and your husband are nearing the end of your earnings years to save for retirement, and she has a lifetime ahead of her.

03/12/08 by Chris Farrell

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Market Turmoil

Question: I have some money in 401K but it's all vanishing because of the stock market drop. Is it a good idea to ride it out,or transfer the money out of stocks (investment optons) and put it in a safe stable fund? Frank, Satellite Beach, FL

Answer: A bear is mauling the stock market, and the worst may be yet to come. The S&P 500 is down some 17% from its October high, still in so-called correction territory but not all that distant from the 20% decline that traditionally defines a bear market. The desire to get away from the carnage is understandable. (My answer to your question assumes that you're still in the "accumulation" stage of life, working and adding to your retirement portfolio.)

Still, for many investors the first rule of managing money in a downturn seems to be "do no harm." When people try to time the market, the result is usually disastrous. The average saver who sits tight with their retirement money during a bear market typically does much better than the person that gets in and out of the market.

That said, my mantra is to take advantage of this time by figuring out whether you're comfortable with your portfolio. Are you too much in stocks? Bonds? International? How do you wish your portfolio was constructed? Once you've figured that out, then I would create that portfolio over time.

03/14/08 by Chris Farrell

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The Social Security Do-over

Question: I began receiving Social Security payments at age 62. Now I'm 66, and I've read that I can pay this money back to the government and get significantly larger checks. Bad idea? Peter, Ashland, OR

Answer: It all depends on how the numbers work out. But in many cases it can be a savvy financial move. I recently did a brief story for Business Week on the basics of taking the Social Security two-step.

How to Retire Early, Then Change Your Mind

Call it the Social Security do-over. If you retire early and take a reduced monthly benefit, you can change your mind, reapply, and get the bigger payments that go to those who wait to collect benefits.

The catch? After filling out Form 521, you must send the government a check covering the benefits you've been paid (without interest or adjusting for inflation). "Everyone is free to do this," says Laurence J. Kotlikoff, economics professor at Boston University and head of financial-planning software company ESPlanner.

He ran numbers for a couple who retire at 62, have $300,000 in savings, and an additional $100,000 each in retirement assets. They want their money to last until they're 100. If they apply for benefits at 62, each gets $17,921 a year.

Fast-forward eight years. Had they waited until age 70 to file, they would get $31,005 each, for a total of $62,010 a year. To get those higher payouts at this point, the formula requires them to pay $118,957 each. Yes, that's a big check. But to get that same payout by buying the cheapest commercial annuity would cost 40% more. When you include earnings from the couple's other assets and factor in their 30-year time horizon, Kotlikoff calculates that their annual aftertax spending can go from $58,765 to $70,420.

Professor Kotlikoff has written a more detailed explanation of the financial maneuver. You can find it at www.esplanner.com/illustrations.php, and click on "Double Dip on Social Security."

04/01/08 by Chris Farrell

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A Rollover IRA

Question: I was recently hired for a job in the public sector, working for the state of New York. My previous job was in the private sector. My 401(k) from my previous job is still being administered by my former employer, and it's now worth about $108,000.

The benefits administrator of my present employer has told me that I am not allowed to roll my 401(k) into any pension or savings plans that my employer offers. What are my options for doing something productive with my 401(k), instead of just letting it sit there? Tim, NY, NY

Answer: A rollover IRA (Individual retirement Account) is designed for circumstances just like yours. It's a routine transaction. First, figure out what financial institution offers the mutual fund options and services you'd like. They'll have the forms online for making a rollover IRA, but I always recommend calling the 1-800 number and ask for a human being to walk you through the process. The reason is that you want to make sure that your retirement savings are transferred institution to institution. In other words, you don't touch the money. It goes from your 401(k) to the financial institution you've picked for your IRA. This way you preserve the pension's tax shelter.

04/16/08 by Chris Farrell

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Spousal IRA

Question: I am a 30 yr old man with a 9 month old son and a stay at home mom to take care of. I have started contributing to a Roth IRA this year. I maxed out for 2007 and have contributed $3000 towards 2008. I plan to invest in low fee index funds and have invested in the Vanguard Emerging Market Index Fund and the Vanguard Balanced Index Fund. This should cover the whole world!

I have played it safe with my Roth IRA even though I consider myself more aggressive than others. I would like to trade stocks, hopefully keep them for more than a yr to escape the high taxes but in the current market situation there are times I feel like selling stocks that are not doing too well.

My question is: Can I open a Roth IRA for my wife even if she doesn't work. If I can, can I actively trade stocks in that account but opening a Roth-IRA with TDAmeritrade or any other discount broker. Will it all be tax free? Wouldn't it be a good strategy to avoid taxes if you want to actively trade? Pradeep, Chicago, IL.

Answer: Yes, assuming you file a joint tax return, your wife can open up a Roth-IRA in her name. She funds it with after-tax dollars for up to $5,000 in 2008 (the limit is $6,000 for those age 50 and above). The so-called "spousal" Roth IRA and traditional IRA is the one exception to the rule that you need earned income to contribute to an Individual Retirement Account. (Technically, there is no such thing as a spousal IRA, but the phrase is used as descriptive shorthand in the financial services business.) By the way, all the other Roth rules still apply, such as the compensation phase-outs. It doesn't read as if that's a problem for you and your wife this year. But for any couple that doesn't qualify for a Roth, a traditional IRA funded with pre-tax dollars is always an option. There are no restrictions except the amount that can be contributed with a traditional spousal IRA. It's a smart move for your wife to open a retirement account..

But we are going to part ways on trading stocks in the Roth IRA (or any IRA). To be sure, trading in the retirement account won't trigger any tax consequences. But when saving for retirement the savvy strategy is to invest in a well-diversified portfolio with minimal trading and razor-thin fees. This approach substantially increases the odds of doing well over time. That's why I like the portfolio you have in your Roth.

Now, if you want to test your stock-picking wits in the market by trading stocks, I'd do it in a taxable account not a retirement account. Yes, you'll end up paying taxes on gains, but you'll also minimize any tax hit with your losses since Uncle Sam underwrites your bets that go bad.

I would also strongly encourage your wife to manage her retirement account on her own. It's a good idea for everyone to understand how to invest money in the markets.

04/25/08 by Chris Farrell

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Retirement Savings vs. Life Insurance

Question: I'm 56 and my wife and I together make around $80k and both contribute to our company matched 401Ks. I plan to retire at age 70. My insurance agent is suggesting I stop contributing to my 401K and instead buy a "Permanent Life" policy of $250k which he says will pay out better than if I stayed in the 401K (the company matches 50 cents on the dollar up to 6%)by spending down what I already have and spending down the dividends in the insurance policy. Is this possible? Is buying Permanent Life Insurance considered a good investment? Dennis, Silverthorne, CO.

Answer: I have a very simple point of view toward questions like this: When a company matches half of your contribution into a retirement savings plan you are outperforming over the long-haul Warren Buffett, George Soros, William Gross, and any other legendary investor of the past half-century. Why would you give up such a superior investment track record?

Financial planners disagree on many things, such as the cost and benefits of actively managed investment funds versus passively managed index funds. But most if not all would agree with me that everyone should take full advantage of their retirement savings plan at work--as well as IRA, Roth-IRA, SEP-IRA, or comparable products if you qualify--before even considering putting money into a cash-value life insurance product. Cash value life insurance, such as whole life, universal life, and variable life is not a retirement plan.

I'd stick with your 401(k).

That said, you should evaluate your need for permanent life insurance as a distinct financial planning question. For instance, at your age do you still need life insurance? If so, how much? Does your company offer a group policy? Is it enough, and if it isn't, how much more insurance do you need? Compared to permament life insurance, would it be better for you to invest the potential life insurance premiums in a low-cost tax-efficient taxable account, such as in the S&P 500--or not? These are the kinds of questions I'd pursue before buying a policy.

05/21/08 by Chris Farrell

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Move Retirement Money?

Question: I just changed jobs so am trying to figure out what to do with the 403b account that was left behind. It is with an Insurance company (New York Life) so the account fees are higher (generally 2 times as high) than my Vanguard accounts where I would prefer to move it. There is a 7% surrender charge which falls to 6% year 4, and so on. Not until it's hit year 9 (7 years from now) will it be zero% penalty. They charge $30 a year in general fees, plus 1.3% for various annual fees. The account balance is approx $7800 so there is an added fee for being below $10,000. I think it would be worth it to simplify my life for the $500 or so they will charge me vs. letting the account sit there for the next 7 years where they nickel and dime me with fees that would approach that same $500. What do you think?

Thanks for your help. I love the podcasts and enjoy learning so much from you guys there at Marketplace and Marketplace Money. Keep up the good work. Regards, Kevin, San Clemente, CA

Answer: I don't understand why management locks their employees into high cost retirement accounts like this. Worse yet, a major reason behind a defined contribution savings account--like a 401(k) or a 403(B)--is that you take more risk but in return the pension is portable--it can go with you. Pension plans like this don't violate the letter of the law but I do believe they go against the spirit of the law. .

If it were me, I would pay the price and put my money where I want it. Over the long haul, I believe you'd come out ahead.

06/04/08 by Chris Farrell

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How Much Is Enough?

Question: I've yet to find a book or article that can answer this question: How do you know if you're financially okay?

I'm 38. I make $80k a year. I have $250k divided between a Roth IRA, 401k, and a single account. I put 20% down on a condo and the mortgage is the only debt I have. I also have long-term care insurance. Can I stop worrying? C. Houston, TX

Answer: Why is it that dire jeremiads about getting old resonate with so many of us? Why is it that conversations about retirement at work and the neighborhood barbeque so often turn into a litany of woe and dark humor?

Certainly, some segments of society are extremely vulnerable in their old age, such as poorly educated, low skill workers. But for many others, from the worker on the factory floor to the professional with an office--to someone like you--the apprehension largely stems from the realization that there is no way of knowing how much is enough to fund a lifestyle--let alone medical bills.

Yet most people will find themselves in decent financial circumstances with room for maneuver late in life by following some basic savings strategies and taking a broad perspective on investment. And that includes you from what you've told us. Keep doing what you are doing.

As important, take the time to carefully thinking through "What really matters to me?" That way you'll continue to come up with devise sensible answers to the question "How much is enough?"

One book that I like for thinking about a question like yours is Ralph Warner's Get A Life: You Don't Need a Million to Retire Well. Another one is The Number by Lee Eisenberg.

06/10/08 by Chris Farrell

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Questions answered on air for June 7-8

In this edition of Getting Personal, Chris and Tess talk about private mortgage insurance, 457s vs. 403(b)s, removing a co-signer and borrowing from a 401(k).

Listen to this week's segment

Continue reading "Questions answered on air for June 7-8" »

06/07/08 by Richard Core

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Terminal Illness and Retirement Savings

Question: This is in regards to a questioner on a recent program (last weekend, I think). She was terminally ill and wanted to know the requirements for early withdrawal from her 401k. My sister is in a similar but slightly different situation, and I wanted to pose the same question for her. Her circumstances are as follows: She is over 59 and a half (just). She has cancer that is expected to be terminal in less than two years, although she is undergoing chemotherapy. She... continues to work at a limited level. She has had to quit her primary income source.... Her income is about 1/5th what it was, and her other financial resources are now all but gone. She has something like $5,000 or so scattered among a few retirement-type accounts -- 401k mostly, but I believe a SEP-IRA as well. Can she withdraw this money without penalty in a lump sum? It would sure help matters. Anonymous. Alexandria, VA.

Answer: I'm sorry that your sister is so sick. On the financial front, since she is over 59 ½ she can withdraw the retirement money at any time without penalty. She'll pay ordinary income taxes on the sums she takes out of the retirement plans, but since her earnings are down the tax hit should be relatively small.

Here's the link to the question and answer on terminal illness from an earlier show: marketplace.publicradio.org/display/web/2008/06/27/getting_personal/

07/03/08 by Chris Farrell

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