We've received numerous special inquiries about investing for retirement. Here are some of the questions, along with the answers from our retirement experts.

The answers may provide some insight into your investment planning needs.

General categories are:

» Social Security Income
» Annuities
» General investing: 401ks, IRAs, ROTH
» Ready for Retirement?
» Medicaid

Social Security Income

Question:
What income level (from working) would a married couple, both on Social Security, need to reach before their SS is taxable?

Answer:
The maximum Social Security benefits subject to income taxes is 85 percent. Some SS recipients pay a lesser percentage, based on the following IRS rules:

"If you file a joint return, you may have to pay taxes on 50 percent of your benefits if you and your spouse have a combined income* that is between $32,000 and $44,000. If your combined income is more than $44,000, up to 85 percent of your Social Security benefits are subject to income tax."

*On your 1040 tax return, your "combined income" is the sum of your adjusted gross income, plus nontaxable interest, plus one-half of your Social Security benefits.

Question:
I am over 65 years of age. If I earn wages, does SS penalize me for working after retirement? I have discussed with family members who say that if I earn too much I'll lose my Social Security Benefits. Is that right?

Answer:
Here is the Rule: Individuals who have reached normal retirement age may have unlimited earnings with no reduction in retirement benefits (see 20 CFR 404, Subpart E). However, you should know that if your income exceeds a certain amount (lower level if you're single and higher for a married couple), you SS benefits will become taxable as ordinary income. The tax increases the more you make and will reach a maximum when 85% of your SS benefits will be taxable.

If you have investments that are paying you taxable income (bank CDs, investment real estate, etc.) or if you have Tax Free Municipal Bonds, you might be able to avoid partially or totally taxes on your SS benefits by moving these to other investments that defer taxes until you take the earnings. Whether or not this is appropriate for you cannot be determined by the information you provided; however, if you would like to explore this avenue further, please feel free to get in touch with us.

Get the details on Social Security, view Video/eReport >>

Back to Top

Annuities

Question:
I am 42 and the owner of my dad's annuity. He is 71 and is the annuitant. The 10% withdrawal option has been exercised, so does the 10% excise tax apply because the owner is not 59 1/2. Also please advise the tax consequences of the withdrawal as the check was issued in my name as the owner.

Answer:
If you are the owner of the annuity and your Social Security number is on the annuity policy, you will get the 1099 at year's end for earnings withdrawn. Since you are less than age 59½, the 10% excise penalty will apply. The withdrawal of an annuity is "last in, first out", so interest comes out first and, of course, interest is taxable at the ordinary income level. You might be better off (a) gifting the annuity to your father with you as the beneficiary unless there are reasons for not doing this, or (b) adding your father as a co-owner if permitted by the annuity issuer. To provide better advice, it might be beneficial for us to schedule a phone consultation. If interested, please provide us via e-mail your phone number and a good time to call you.

Question:
I am 64 retired from government and have TSP (40lk) of $80,000. Would an annuity be good thing or what advise can you give me?

Answer:
We'd have to know a lot more about your individual situation to say whether or not an annuity is appropriate. For example, what other income do you have, when will you be using the $80K, what is your tax bracket, etc. An annuity does offer you safety, a market rate of return, liquidity for emergencies and other advantages, but you may have other circumstances that out weight these advantages. It would probably be productive to schedule a phone consultation to discuss your particular circumstances. If interested, please provide us via e-mail your phone number and a good time to call.

Question:
Under what circumstances are variable annuities appropriate holdings in a municipal defined benefit plan?

Answer:
In order to give you an appropriate answer, we'd need to know a lot more about the circumstances. For example, are you talking about "your part" of the defined benefit plan or the plan holding the VA? What are the other assets? Can you afford the risk of principal loss? Generally, the assets underlying the VA are the same as mutual funds, but with a VA you get the tax deferral (which you already have), the ability to convert to a lifetime income, riders which may guarantee certain other benefits for extra fees and other pluses; however, the downside is that fees are generally higher and the risk of loss to principal ever-present. We must admit, holding VAs in a municipal defined benefit plan is strange - maybe there are circumstances that would justify it but we can't think of them.

Question:
Can you get you money right away from any annuity account, without being penalized for it?

Answer:
Generally an annuity has a penalty for early surrender. This penalty period runs for several years after the purchase date. During this period you can generally get a liberal amount of the annuity funds free of penalty, e.g., 10% per year of the balance or the accumulated interest, if greater. You'll want to look at your contract to determine the early surrender penalty as well as the liquidity features.

Question:
I have a regular variable annuity. Tell me the difference between a regular and a guaranteed annuity

Answer:
The primary difference between variable and fixed (guaranteed) annuities is: with a variable the owner takes all the risk of loss whereas with a fixed annuity the insurance company takes all the risk of loss. Thee is a Primer on Variable Annuities at www.theretirementpros.com - we think this will help you understand the difference and also whether or not the VA is an appropriate investment for you. If you have questions, please feel free to e-mail us.

Question:
Are fixed annuities a good investment and why on the statement are there the amount of the annuity and then a lower amount for cash value even though they have reached maturity?

Answer:
Fixed annuities do not have a commission, or load, when you buy them; however, if you surrender ("cash out") prior to the maturity date you pay a penalty. That is why you see the lower "cash surrender value" on your statement. This is nothing to worry about if you do not plan to surrender prior to maturity. Also, this penalty declines as you approach the maturity date.

Fixed annuities are a great way to save for retirement because they are safe, offer competitive fixed interest rates or the opportunity to link to the markets, give you tax deferral, protect you from loss if you hold until maturity, and provide triple compounding.

Question:
Why should I have any funds in Market when I have a whole array of Index Annuities available to me?

Answer:
Whether or not you should be in index annuities is based on many factors, e.g., your age, when you are going to need the money, the risk you can tolerate and more. If you are risk averse, can't afford to lose any of your principal, and want an opportunity to earn more than what fixed rate investments are currently paying, then index-linked annuities are fine. We would recommend that you learn as much as possible about index-linked annuities because they are not all the same, e.g., some have provisions that prevent you from ever getting your full value in a lump sum, the death benefits vary widely, different crediting options, issuers are rated differently and different index-link options are available. Look before you leap - learn all you can and then rely on the advice of a professional financial professional.

Back to Top

General investing: 401ks, IRAs, ROTH

Question:
I am 74 years old, retired with $227,000 in an IRA. I have non-qualifying funds of $20,000 in CD's, $5,000 in saving accounts. and $20,000 in a Variable Annuity. My annual income is about $40,000. I have no other debts. How do you suggest I invest the IRA and other funds?

Answer:
Here are some points to consider:

1. Your $40,000 income: is it adequate? Does it include Social Security? Are you paying taxes? How's your health? Do you have a spouse? What is your age? Your spouse's age? Does the $40K income include the annual required minimum distribution (RMD) from your IRA? To provide correct advice, we'd need to know these things. That said:

2. Is your #1 objective to make sure you don't outline your income?

3. The $20,000 in CDs and $5,000 in savings accounts is ultra safe, but you are probably not keeping up with inflation - so every year you're losing a little in purchasing power.

4. The $20,000 in the variable annuity is "at risk" because losses can invade the principal. While this is not a major part of your liquid assets, the reason you're keeping the VA may need to be addressed. Is there a penalty for withdrawal? If so, how much is it? How has it performed over the past 5 years? Are you worried about losing part of your principal?

5. The $227,000 in the IRA, where is it? If in a bank, the rate is probably killing you. If in an investment that could go down in value, you might want to re- think the risk of loss to your nest egg. This is the asset that need the most care in investing - safety, tax advantages, accessible in case of emergencies, diversified as to maturity, and more.

6. Certain other things we're not aware of:
A. Do you own your home? If so, you could use the reverse mortgage if needed. At least you need to know about this option.

B. Do you have life insurance? Does it have cash value? Do you want or need the policy?

C. Do you have children? Do you want to leave a legacy for them, or your church or favorite charity?

Our advice is that you could benefit substantially by discussing your "total situation" with a professional financial professional that would help you position your financial assets to match your objectives. Please know that we'd be happy to assist you further via a phone consultation - there is no cost and no obligation for our services.

Question:
With retirement just 9 years out, is it a good move to open a Roth? Presently I hold a 401-K through my employment.

Answer:
If you're lucky, retirement will last 30-40 years and during this long period you'll face inflation, taxes, and risks of all sorts - health, legal, investment, etc. It is always better to be over prepared than under prepared; thus, if you can afford to shelter money in a Roth IRA, then by all means do it. As you know, the Roth will be funded with "after tax" dollars but they will grow tax deferred. When you start taking money out of your Roth, there will be no tax on the earnings; therefore, you'll get the most mileage from tax-deferral the longer it works. Accordingly, try to tap your ROTH IRA as the last pool of money you need. Fortunately, the Roth IRA does not require you to start taking distribution when you reach 70½. The reasonable question is not whether or not to open a Roth IRA, but what to invest in! You have lots of choices and a continuum of risks - what you choose will depend on your risk tolerance. If you're risk averse, stay with those options that guarantee no loss of principal.

Question:
Hello, I'm a graduating college student. I'm set to work on Wall Street next year with a 60k annual salary + performance bonus. I have approximately 35k in school loans but I want to start aggressively utilizing company 401(k), IRAs. How should I begin to manage my money in aggressively investing while paying off loans?

Answer:
Congratulation on your college success! Working on Wall Street will leave you with no shortage of "aggressive investment opportunities" as that is a hazard of your new profession. The advice we usually give young investors is to "speculate", and that is what you mean by "aggressive", with only that portion of your income that you can afford - realize that this activity can become "addictive". We would advise you to earmark a given percentage of your "take home" pay and "performance bonus" for a safe money haven - you choose the percent you want to "set aside" but 10% has a nice ring. This will be your "just in case, rainy day or ultra safe" money earmarked for a home, retirement, kids college tuition, etc. To see the power of this approach, take $10,000 per year, earn 6% (not aggressive) and notice that in 20 years you'll have accumulated $370,000. Make sure this money is tax deferred because otherwise you have a 20% to 30% leakage every year to taxes. Relative to the school loans: compare the rate you're paying on them and compare it to the earnings you can realize with your investment. If you're earning less than the loan cost, pay off the loans; otherwise, don't pay the school loans off early.

Question:
What is the difference between an IRA and a Roth IRA? What is the maximum I'm able to deposit annually in an IRA...and/or a Roth IRA. Can you have both?

Answer:
The Roth IRA provides no deduction for contributions, but instead provides a benefit that isn't available for any other form of retirement savings: if you meet certain requirements, all earnings are tax free when you or your beneficiary withdraws them. Other benefits include avoiding the early distribution penalty on certain withdrawals, and avoiding the need to take minimum distributions after age 70½.

You're eligible to make a regular contribution to a Roth IRA even if you participate in a retirement plan maintained by your employer. These contributions can be as much as $4,000 for 2005 through 2006. (If you're 50 or older by the end of the year, add another $500 for 2005 and $1,000 beginning in 2006). There are just two requirements: first, you or your spouse must have compensation or alimony income equal to the amount contributed; second, your modified adjusted gross income can't exceed certain limits. For the maximum contribution, the limits are $95,000 for single individuals and $150,000 for married individuals filing joint returns. The amount you can contribute is reduced gradually and then completely eliminated when your modified adjusted gross income exceeds $110,000 (single) or $160,000 (married filing jointly).

Regular IRAs are made in before tax dollars, contribution are limited, distribution must occur at age 70½ and withdrawals are fully taxed when taken out.

Question:
Which savings account yields the most interest rate currently? I have little knowledge about shares, how do I enlighten myself. What kind of investment can I make with less than $15,000? Is Real estate still a good investment with the current downward trend in price of houses? Is this a good time to buy or should I wait more?

Answer:
There are several conservative savings accounts available - bank CD, Government savings bonds, and annuities. Which one is best for you will depend on the amount of time you want to lock up you funds, the liquidity you need should an emergency arise and your preference on "taxable" versus "tax-deferred" - in order to help you we'd need more info, e.g., age, income, amount of savings, years to retirement, etc.

If you have little knowledge about "shares" (we assume you mean the stock market), it would be our advice to steer clear of this investment. Any money placed in the "stock market" can be lost if the stock(s) chosen fall in price. To learn more about investing in stock, visit our site often as we intend to offer free tele-workshops in the very near future. These tele-workshops will be totally free to you.

There are numerous investment options for less than $15,000 - which one suits you the best will depend on your circumstances and whether or not you intend to add to this amount in the future.

Real estate can be a great investment, but it is illiquid - meaning if you need your money in a hurry, you may not be able to get it because the "selling cycle" for real estate can be long. Also, real estate can go up or down in value and you could lose money. Additionally, improved real estate will have taxes, must be insured and may require upkeep - plus, constantly attracting tenants to rent can be time consuming.

Question:
I am 50 years old, and have about $40,000 to invest. I am willing to invest in medium to high risk items. Can you help? Is the stock market the best idea?

Answer:
Whether or not your $40,000 is best invested in the stock market cannot be answered from the info you provided. You should know that $40,000 will not allow you to diversify risk by buying several different high quality companies; thus, a $40,000 "guess" on one stock, or a few stock, could be highly risky because prices can drop for many reasons, e.g., earnings decline, legal proceedings, product liability, change in management, economic cycles, etc. We would recommend for you the following:

1. 1. Invest money in a mutual fund - check Schwab or similar firms that offer "no load" funds. You'll do better if you can systematically add to your mutual funds by making additional deposits. This allows you to be buying "shares" when the market is doing good and not so good - this is called dollar cost averaging and works only if you are constantly adding to your investment.
2. 2. We also suggest you learn about other types of investments by reading about them on-line or from our web site, e.g., annuities are excellent at deferring taxes and giving you triple compounding.

Question:
I'm 80 years old and have money invested in mutual funds, the stock market, CDs, EE-bonds, money market, IRA, and annuities. What should my ratio look like?

Answer:
Without knowing lots of other details, we cannot advise you on how your financial assets should be allocated. Unless you have substantially more than you need for your retirement and don't care about passing your assets to heirs, charity or others, you may want to think about moving several of your investment that are exposed to risk of loss. For example, the stocks and mutual funds can go down in value as easily as they can go up - we wonder if at age 80 you should be in these investments. The CD is totally taxable each year even if you don't use the interest - this may be causing you to pay more taxes on your Social Security. The Money Market account should be your reserve of "short-term emergency" funds. You didn't say what the IRA was invested in. The annuity may be fine unless it is a variable annuity - essentially the same as a mutual fund from a risk standpoint. We'd be happy to explore your situation further on a phone consultation - no cost and no obligation. If this is desirable, please send us via e-mail your phone and a good time to contact you.

Back to Top

Ready for Retirement?

Question:
I am 64 years old and have savings of $100K. I am still working and my only source of income at retirement will be Social Security. What is the best way can I use my savings to secure a fix income till I am 85 year of age after retirement?

Answer:
If you are interested in converting your $100K savings into a guaranteed income that will last you the remainder of your life or until you are age 85, whichever comes later, you will probably want to look at a Single Premium Deferred Annuity (SPIA). However, we would recommend that you convert your $100K to a SPIA no more than one year before you want to start taking periodic payments. Since you'll be relying on Social Security and your $100,000 only, you need to be super cautious about risk of loss and also take advantage of tax-deferring the earnings until you start using. You may want to purchase a fixed annuity now and then annuitizing it when you want to start taking income from it. You can annuitize for a period certain (until you reach age 85), your lifetime, or a combination.

Question:
I am 55 years old with a wife who is 53 and two children ages 16 and 14. Our gross income is $235,000 and our retirement savings include approximately $1,000,000 in retirement accounts (plus an additional $45,000 per year contributed into these accounts between my employer and myself) and approximately $1,000,000 in net worth in real estate holdings (personal home and two rental properties). Another $100,000 is also in the 529 program for the kids' education. In addition, we also have $150,000 in variable life insurance cash value, some stocks and cash in a credit union account. Now the question: Can we retire by the age of 60 (my age) and still have 50 to 60% of our present income adjusted for inflation until we reach 90 years minimum?

Answer:
You've asked an involved question that will take some in-depth analyses. A simple approach would be to ask the following question: To receive $141,000/year for 30 years assuming a very modest 3% annual rate of return on the part not used, how much would you need presently? The answer is $2,763,662. Since you currently have close to this amount (and you'll have earnings for the next ten years plus the $45K annual contribution), I would say you are dangerously close to your goal of being able to retire ten years hence at 50% to 60%. That said here's what can go wrong:

1. Health problems for you or your dependents
2. Loss of your current job and difficulty replacing it
3. A failed marriage
4. You did not say where your $1MM retirement account was invested - don't forget that market go up and down, to wit 2000-2003.
5. If your children opt for an Ivy League school, the $100K in 529 is not sufficient - and what about graduate school.
6. You did not say anything about debt or other future obligations.
7. The investment real estate can be illiquid when you decide to sell, and in the meantime it can go down in value but taxes/insurance/upkeep are still needed.

What should you do? Since you are currently near your goal, without knowing more we suggest you start hedging the downside against loss. Also, you should pay some attention to estate planning if you haven't already. None of the above may come, but you should hope for the best and plan for the worst.

Question:
I have just retired after 24 years of state service to Florida. I have about $102,000 I can take out in three months, but will have a 20 percent early withdrawal penalty. What can I do to minimize taxes? I am 49 years old.

Answer:
Without knowing the specific of your retirement plan, we cannot render a firm opinion. However, you should be able to take your lump-sum benefits and roll them over into a self directed IRA or similar plan without incurring the 20% tax bite. We recommend you contact the plan administrator where you worked and ask them the rollover options that are available.

Question:
I would like to retire at 62. I am 55 now and downsizing to a new home with no mortgage. I have $150K in my 401(k). How much do I need to retire?

Answer:
The answer to your question of "how much" is "how well" do you want to live in retirement? I suggest you return to www.theretirementpros.com and run some "what ifs" with the calculators: here's the link, http://www.theretirementpros.com/calculators.php . This will tell you how much you'll need in retirement. As you'll see, how much you need depends on several variables that you'll be able to "play with".

Question:
I have about 7½ years until I can think about retiring. My 401(k) is not doing what I had hoped it would do. It is pretty much balanced like the "experts" say it should be. I have a 9% yielding annuity with over $95,000 balance. I contribute much more to it than my 401(k). Should I keep doing what I'm doing, or is there some other means that I can increase my yield and be ready to retire when I want to?

Answer:
You didn't tell us much about your 401(k) Plan, e.g., is it still active (we assume it is), how much is vested (100% of your part but how much of your employer's?), and does you employer contribute? You'll want to keep your 401(k) because it grows tax-deferred, takes before-tax contributions and your employer (hopefully) matches some of your contributions. You may want to consider one or more of the following:

1. Review the options you have selected inside your 401(k) - maybe you can choose better investments options.
2. If you "roll over" the vested part of your 401(k), then you can get that directly under your control and manage it separately - it will still be tax-deferred until you retire but could be re-deployed into something that performs better. You'll want to discuss this with an advisor rather than do on your own. Also, check with the Plan Administrator to find out your rollover options.

The annuity you mentioned has a great yield and seems to be working fine for you - don't know if it is fixed rate (probably not), variable (we hope not unless you want the risk) or an index-linked (could be). Don't shortchange your 401(k) to contribute to the annuity because with the annuity you are putting in after-tax dollars whereas it is before-tax dollars (plus matching?) going into the 401(k).

Back to Top

Medicaid

Question:
I have two grandparents whose health is fading quickly. They will likely have to go into a nursing home soon. They have very little money. A nursing home administrator mentioned that if the money was annuitized the nursing home would not, and could not, go after it. Is there truth to this on a federal and state (MN) level?

Answer:
Each state has different requirement regarding what is exempt when Medicaid is provided - and we assume your grandparents are attempting to qualify for Medicaid. You can sometimes shield certain moneys from Medicaid but this generally take pre-planning several years in advance. I'm sorry we can't be more specific but Medicaid is a federal program that is administered, and partially funded, by the states and each has different rules. You may want to research MN Medicaid here: http://www.cms.hhs.gov/medicaid/state.asp?state=MN

Question:
If a retiree should be placed in a nursing home in the near future and have assets, are there legal options of what one can do with their assets prior to the nursing home "taking" one's assets?

Answer:
Most states exempt certain assets from Medicaid attachment. Generally, the planning for shielding such assets from capture by the state to pay for Medicaid must commence well in advance of admittance to the nursing home. The time varies, but three years is a general guideline. You will want to speak with the Arkansas Medicaid Administrator about the options and exemptions that are available. You will find additional information at: http://www.medicaid.state.ar.us/InternetSolution/General/dmscon.aspx

Back to Top