Retirement planning.
05-03-2006, 04:56 PM
#1
Thread Starter
Retirement planning.
This is the third thread in the series of financial planning threads. We've talked about taxes, we talked about estate planning, now we need to talk about retirement planning.
If tax is the hated topic, and estate planning is the feared topic, retirement planning is the "put off" or ignored topic. Everybody feels that it is something that needs to be done, but many people put it off until someday. Today is someday and it's time to think about it.
Retirement planning need not be as complicated as the books and magazines like to make it sound. You don't need to know exactly how much you'll need in the future in order to get started, you just need to know that you will need to have funds available to pay for your needs and wants when you are no longer working. And, you need to get started on accumulating the funds.
A very good way to start is to simply catelogue all of those accounts that you have specifically reserved for old age. Consider your IRAs, your 401ks and the pension plans that you have at work. Evaluate how the funds in those accounts are invested, and make changes to better suit your current situation. As is the case in estate planning, life is dynamic, everything changes. Those apportionments that you set up 20 years ago in your pension funds may no longer be suitable. You should evaluate and make the changes that better suit you every few years. Don't forget to consider who you've made the beneficiaries of your accounts as well. Again, all things change and you need to make sure that your appointed beneficiaries are the people you really want to receive the funds in the case of your death.
Next, consider how best to get more money into your retirement funds. Are you, for example, making the maximum contribution? If not, you should. Are you a member of the pension plan at work? If your employer is contributing matching funds and you are not taking advantage of this you are walking away from money.
As always, it makes a great deal of sense to talk to your financial advisor and/or your CPA about this. Proper planning and guidence now can make a very big difference in the quality of your life in your retirement years.
This is a very important topic, and I'd like to throw the discussion open for any comments, suggestions, ideas and questions.
If tax is the hated topic, and estate planning is the feared topic, retirement planning is the "put off" or ignored topic. Everybody feels that it is something that needs to be done, but many people put it off until someday. Today is someday and it's time to think about it.
Retirement planning need not be as complicated as the books and magazines like to make it sound. You don't need to know exactly how much you'll need in the future in order to get started, you just need to know that you will need to have funds available to pay for your needs and wants when you are no longer working. And, you need to get started on accumulating the funds.
A very good way to start is to simply catelogue all of those accounts that you have specifically reserved for old age. Consider your IRAs, your 401ks and the pension plans that you have at work. Evaluate how the funds in those accounts are invested, and make changes to better suit your current situation. As is the case in estate planning, life is dynamic, everything changes. Those apportionments that you set up 20 years ago in your pension funds may no longer be suitable. You should evaluate and make the changes that better suit you every few years. Don't forget to consider who you've made the beneficiaries of your accounts as well. Again, all things change and you need to make sure that your appointed beneficiaries are the people you really want to receive the funds in the case of your death.
Next, consider how best to get more money into your retirement funds. Are you, for example, making the maximum contribution? If not, you should. Are you a member of the pension plan at work? If your employer is contributing matching funds and you are not taking advantage of this you are walking away from money.
As always, it makes a great deal of sense to talk to your financial advisor and/or your CPA about this. Proper planning and guidence now can make a very big difference in the quality of your life in your retirement years.
This is a very important topic, and I'd like to throw the discussion open for any comments, suggestions, ideas and questions.
05-04-2006, 07:44 AM
#2
Excellent advice and timely one!
05-04-2006, 02:39 PM
#3
Registered User
I have made sure I put in the maximum for my 401K, but that is about it. I had a 24% return on my current investments with this employer last year. I have yet to figure that out on my primary account, which is the larger one. For 2004, it returned 32%, but my investment guy said that was a fluke and never to expect that again. It pretty much made up my losses from 2001-2.
I would like to retire before 59 1/2 though, so I am interested in anyone's advice on investments you can draw on before the 401K.
I would like to retire before 59 1/2 though, so I am interested in anyone's advice on investments you can draw on before the 401K.
05-06-2006, 08:49 AM
#4
This is the first year I've had with a financial planner. She recommended that I restructure my investments from basically an all-401K plus a few rollover IRAs plus life insurance, to a smaller 401K (4% that the company matches), a little more life insurance, and a Roth IRA. I wasn't fully clear on the rationale behind reducing the 401K, since it has been doing pretty well last few years, but this article sums it up pretty well:
Retirement Planning
The final paragraph seems to sum up the strategy:
"If you meet the income requirements for a Roth IRA, consider contributing to your company retirement plans up to the point where you get the maximum company matching contribution. Then direct your excess contributions into Roths until you max them out. When you hit that point, start adding to your 401(k)s again."
Within the next month, I'm due for another checkup meeting, where she tells me we will reallocate a bit due to my current contribution rate maxing out the Roth before I hit the end of the year.
I would guess your opinion of this strategy (tax diversification, I guess you'd call it) depends on your feelings towards future tax rates. However, it seems to make sense to me that paying taxes on $1000, then investing the rest tax-free, and withdrawing, say $20,000 tax-free many years later, is preferable to investing the whole $1000, then paying taxes on the $20K at withdrawal, pretty much no matter what the tax rates do (within reason).
Thoughts?
JonasM
Retirement Planning
The final paragraph seems to sum up the strategy:
"If you meet the income requirements for a Roth IRA, consider contributing to your company retirement plans up to the point where you get the maximum company matching contribution. Then direct your excess contributions into Roths until you max them out. When you hit that point, start adding to your 401(k)s again."
Within the next month, I'm due for another checkup meeting, where she tells me we will reallocate a bit due to my current contribution rate maxing out the Roth before I hit the end of the year.
I would guess your opinion of this strategy (tax diversification, I guess you'd call it) depends on your feelings towards future tax rates. However, it seems to make sense to me that paying taxes on $1000, then investing the rest tax-free, and withdrawing, say $20,000 tax-free many years later, is preferable to investing the whole $1000, then paying taxes on the $20K at withdrawal, pretty much no matter what the tax rates do (within reason).
Thoughts?
JonasM
05-06-2006, 12:46 PM
#5
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JonasM: I agree with the strategy, but only to the point of a person having to make a choice because they cannot fund both plans fully. Though I have no doubt that "earned" income rates will be higher in the future, I also have no doubts about future inflation. It's the trade-off between money saved in takes now versus the purchasing power of inflated dollars later. As it may apply to you, I would suggest one thing. One, fill out a mock joint 1040 reflecting your anticipated unearned income at time of retirement. You might be surprised at how little taxes a couple pays on let's say 50k of well-invested, unearned income, at this time. I might think differently if it were more than 100k of inflation-indexed unearned income annually with only a standard deduction. I pay pitifully little taxes, considering the services I use and enjoy. I'm not sure I would make my investment decisions today, based on potential tax rates in the future. IMHO
05-06-2006, 06:59 PM
#6
Thread Starter
Jonas,
Its not a bad strategy but again the best answer is, "It depends". There are many things to consider. For example, the future value of the employer match, the future value of the current tax deduction (or pretax contribution), your post retirement income, the post retirement tax rate, and your own beliefs concerning the direction of the tax rates and future income.
I think that its a very good and smart thing to consult with a planner, and if you are comfortable with the strategy, there is nothing wrong with it. I think you should revisit it every two or three years and make sure that things haven't changed to the degree that your strategy needs to be updated.
Its not a bad strategy but again the best answer is, "It depends". There are many things to consider. For example, the future value of the employer match, the future value of the current tax deduction (or pretax contribution), your post retirement income, the post retirement tax rate, and your own beliefs concerning the direction of the tax rates and future income.
I think that its a very good and smart thing to consult with a planner, and if you are comfortable with the strategy, there is nothing wrong with it. I think you should revisit it every two or three years and make sure that things haven't changed to the degree that your strategy needs to be updated.
05-06-2006, 07:08 PM
#7
Thread Starter
RC
I think part of the income and resulting tax that the planner is concerned with is not the interest and dividend income but rather the income and tax that it gives rise to resulting from withdrawls from tax deferred pension plans.
Remember all monies withdrawn from tax deferred plans are taxable at the time of withdrawl. In addition, at the age of 70 1/2 you have to start withdrawing fund. The key consideration, I think, is will the tax be greater than the future value of the current tax deductions and the employer match. Traditionally, the employer match was something that you never gave up. Ofcourse, the Roth changes everything.
There are other advantages to the Roth as well. Many have to do with estate planning, and there are no mandatory withdrawls at any age. Contributions can be made at any age, and an inheritied Roth can be kept alive for a very long time.
I think part of the income and resulting tax that the planner is concerned with is not the interest and dividend income but rather the income and tax that it gives rise to resulting from withdrawls from tax deferred pension plans.
Remember all monies withdrawn from tax deferred plans are taxable at the time of withdrawl. In addition, at the age of 70 1/2 you have to start withdrawing fund. The key consideration, I think, is will the tax be greater than the future value of the current tax deductions and the employer match. Traditionally, the employer match was something that you never gave up. Ofcourse, the Roth changes everything.
There are other advantages to the Roth as well. Many have to do with estate planning, and there are no mandatory withdrawls at any age. Contributions can be made at any age, and an inheritied Roth can be kept alive for a very long time.
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05-07-2006, 05:50 AM
#8
Registered User
I find that there's damned little really useful information available, because useful information would require knowledge of the future:
1. Future rates of return
2. Life expectancy
3. Solvency or insolvency of Social Security
4 Future inflation rates
5. Life expectancy
6. Age at retirement
7. Future tax rates - state and local as well as Federal
Change a single number and it's a whole different ball game.
1. Future rates of return
2. Life expectancy
3. Solvency or insolvency of Social Security
4 Future inflation rates
5. Life expectancy
6. Age at retirement
7. Future tax rates - state and local as well as Federal
Change a single number and it's a whole different ball game.
05-07-2006, 05:57 AM
#9
I guess that's why diversification - in all its forms - is a smart strategy overall.
That's also why any advice you get on a forum like this, and online articles, should only be taken as a starting point. Current economic/tax realities change the calculations, as do your own situations & goals.
JonasM
That's also why any advice you get on a forum like this, and online articles, should only be taken as a starting point. Current economic/tax realities change the calculations, as do your own situations & goals.
JonasM
