I’m always being asked whether or not to move a 401(k) or other employer-sponsored pension plans when leaving an employer.  Generally the answer is “move your pension money when you leave an employer”.  Here are some advantages of moving a 401(k) rather than leaving it:

1.  You get more investment choices and opportunity to better diversify.

2.  Expenses may be lowered.

3.  You can consolidate with other money which makes administration easier.

4.  It is oftentimes easier to get if you need for an emergency.

5.  Can covert to a Roth IRA if you qualify and if a Roth is appropriate.

6.  You no longer have to worry about the financial stability, urge to merge or sale of your ex-company … and this is very important if your plan contains their stock. If your plan contains company stock investigate the tax advantages of rolling the stock out of the plan, paying the taxes on your basis and holding the stock outside the plan OR selling it immediately to get capital gains treatment.  You’ll want to consult with a tax professional before acting. 

7.  Eliminates the chance of lump-sum distribution to beneficiaries in case of your death.

8.  Avoids spousal consent if you want to change beneficiaries — of course this could be a disadvantage if you’re the dependent spouse.

9.  Better manage the tax liability of your surviving spouse and/or heirs.

10.  Ability to convert your money into a lifetime income you can’t outlive.

Here are some disadvantages of moving your 401(k) from an ex-employer:

1.  Some states do not give the same creditor protection to IRAs that they do to 401(k)s.  If this is important, check your state statutes.

2.  If you have life insurance with your ex-employer as part of the 401(k) plan, you may lose it if you transfer the money. 

3.  If you plan to retire after age 55 but before age 59-1/2  you may have better lump-sum access to your 401(k) than to an IRA.

4.  If you have a loan outstanding from your 401(k), it will need to be repaid prior to rolling over into an IRA.

5.  You may have access to an investment inside your ex-employer’s 401(k) that will be lost if you roll over into an IRA, e.g., ex-employer stock that you think will continue to outperform other alternatives you could have.

6.  Loss of spousal consent to change a beneficiary.

The roll over of your 401(k) plan at an ex-employer to an IRA makes a great deal of sense in the majority of cases; however, there could be circumstances that might make it better to stay put.  Rolling over your pension money from an ex-employer should be undertaken with the advice and counsel of a financial professional that specializes in retirement planning.  The process of assessing your options is fairly straightforward and, if action is needed, rolling over is easy and painless.  If you are staying put because of loyalty to your lifelong employer, your sentiments are to be complemented; however, when it comes to your retirement savings, your first loyalty must be to you and your family.  Most retirement planning professional agree that “money in employer-sponsored plans should go with you when you the leave the company”.

As the year ends and your thoughts turn to resolutions and taxes, the mood to “clean out” the old and make those needed changes takes over.  Don’t forget your investments — not just the bad ones but all of them.  As you near retirement, your investment suitability changes and you need to review what you’ve got annually and make sure it was right to begin with and still right now.  Let me alert you about two big mistakes I see far too many retirement-minded boomers and seniors making.

Taking too much risk:  If you read the business section of your paper, review financial advice magazines, listen to the talking heads on the financial shows and listen to your broker you’ll hear about stocks, bonds, mutual funds, REITs, variable annuities, diversified portfolios, etc.  These all have one thing in common: RISK.  If you are forty-something, have a well-paying job and got a couple decades until retirement you can afford investment risk because you have time to recover from market setbacks, bad investments, inflation and higher taxes.  In fact, history shows that longer-term, risky investments like those named above generally do better than bank CDs, fixed annuities, savings accounts and other safe places.  But, what’s good for a forty-something is not necessarily good for a sixty-something knocking on the door of retirement.  There is no time to wait for the market to recovery and there is no steady income from a job. Instead there are 30 years waiting to be financed by the money you’ve already saved, Social Security that is inadequate to begin with and now being taxed to the hilt, and medical expenses are rising like a rocket at the very time your doctor is prescribing medicine to lessen the risk of heart attach and stroke.  You need less investment risk than you’ve probably got right now with your mutual funds, stocks and other investments.  As you review your investments, ask yourself the following question:  “What will I do if the worse case happens?”  If you’d like to review the worst case, go back to 2000-2002 when the market tanked and sent many retirees back to work and would-be retired to a revised retirement schedule.  The money you’ll need in the first half of your retirement should be placed in safe money places — bank CDs and fixed annuities are my favorite choices.  Use bank CDs (I know rates are low but the safety is absolute) for the first five years with tax-deferred fixed annuities holding your five to fifteen year money.  I know you’re worried about fixed annuities because they’re backed by insurance companies. Think about it: insurance companies protect your home, life, health, car, kids, business and you name it, but you don’t trust them with your money.  Is that logical?  By the way, a tax-deferred annuity rate of 5.25% (yes there is a fixed annuity guaranteeing this rate for five years) is equal to a CD rate of 7.0% if you’re in the 25% tax bracket.  Seen any 7% CD rate lately?   Review your risk and make changes if needed … and don’t be afraid to trust some of the world’s oldest, strongest and biggest financial establishments: insurance companies.

Holding only Short-Term Bank CDs: How many of you are holding all, or most, of your retirement money n short-term bank CDs?  Are you planning to spend all of it in the next few months or years?  If not, you’re paying a dear price because two things are happening that is not good.  First, you’re probably not much more than keeping up with inflation because CDs rate are very low now.  Second, you’re paying income taxes on every nickel you earn in interest even if you’re not withdrawing it for use.  How smart is that?  Plus, this higher taxable income from bank CD interest is probably causing more of your Social Security to be taxed.  CDs have a place in the retirement portfolio, but don’t put all your money in CDs unless you only have enough to last you for the next few years.  There are other safe money alternatives that you should learn about if you want to get the most mileage from your hard earned money … and have a safer retirement. 

To get you started on your risk review and learning more about safe money places,  check out this very enlightening web site:  http://www.safemoneyplaces.com/default.asp 

Have a great 2008 everyone.

You’ve worked hard during your lifetime to accumulate assets to pay for your retirement. You’ll soon be knocking on the door to retirement, or maybe you’ve already entered, and it’s time to check out the new environment. Here are some

Inflation: According to the Department of Labor, during the last 25 years, overall prices have risen 115%. The average annual increase has been 3.1% — meaning an item costing $1 on 12/31/1981 would have cost $2.15 on 12/31/2006. An individual living on a fixed income in retirement over the 25-year period would have only 47% of the purchasing power today that he/she had in 1982. Given the recent run-up in oil prices, the looming federal deficit and global political situation, there is little optimism future inflation will be lower. Inflation for retirees can be expected to worsen as the demand for health care escalates in response to four million baby boomers a year turning age 60 – that’s one every eight seconds. This will continue through 2024. Medical advances have made giant strides in increasing life spans which means even more pressure from an aging population. Over the same 25 years, the medical care component of the Consumer Price Index (“CPI”) shows that what cost $1 in 1982-84 now cost $3.36. Since health decreases with age, you’ll probably be spending a lot more on medicine, doctors and hospitals during retirement than during your working years. This will complicate things as you’ll probably be living on mostly a fixed income. With 61% of Americans believing they’ll need at least $500,000 in accumulated assets in order to retire (Source: Retirement Corporation of America, USA Today), there exist a huge gap for many retirees. Make sure your retirement plans include inflation of not less than 3.5% annually.

Taxes: There are so many taxes we seldom stop to add them all up. Consider the following partial list: federal, state and local income taxes; sales taxes; property taxes; gasoline; alcoholic beverages; tobacco; telephone; and if you work, add Social Security and Medicare. Make no mistake about it, taxes levied on businesses – FICA, unemployment, franchise, income, etc. – are passed to consumers as higher prices. All the various taxes were recently added up and amazingly the marginal tax rate exceeded 40% regardless of income level (Source: NBER, Kotlikoff & Rapson). In retirement you’ll even pay taxes on your Social Security unless you have a very low annual income or your money is in tax-deferred annuities. You can do something about the tax bite in retirement, and plans should be tax efficient. For example, investigate the use of tax-deferred fixed annuities so that earnings are not taxed until withdrawn for use; use qualified money first in retirement and postpone Social Security benefits as long as possible; consider the feasibility of putting money into a Roth IRA that grows tax free. Unsuitable Risks: Safety of principal should be your primary objective in retirement with growth a distant second. Over long periods you may earn more by putting your money at risk in the stock market, but you’ll need the discipline to ride the market cycles and postpone the use of your money until the long term. Of course, if you have more than needed for your retirement – don’t forget inflation and taxes – then you can afford to take risks with what you’ll not need. The fact is most retirementminded Americans consider growth their number one objective – that’s why the first question is always “how much will I make”. The first question should be “how safe is my money”. Will Rogers said it best: “I’m more interested in the return of my money than the return on my money”. If you have your retirement money in an investment whose value is determined by the market (stocks, bonds, diversified portfolio, commodities, hedge funds, etc.) you are taking risks and could lose all or some of your retirement nest egg. There are no exceptions: “higher potential earnings mean higher risks”. When you invest money in risky places, there are no guarantees you’ll get it back. When you put money in safe places, you are guaranteed that you’ll get it back with interest if held for the stated term. If preservation of principal is your prime objective, then a safe money place is your only option.

Going It Alone: Not working with a financial advisor is probably the biggest risk you’ll take with your retirement money. Retirement is the largest purchase you’ll ever make, and you can’t borrow money to pay for it. The money you’ve saved is all that is between a worry-free retirement and panic – so don’t attempt to navigate the hazardous world of investments without a financial advisor. Professional help doesn’t cost, it pays.

Get the details, read eReports and watch 10 to 30 min Retirement Video Seminars under the Retirement Planning section on The Retirement Pros website http://www.theretirementpros.com/retirement_planning.php

Taking too much risk with your investment:  We all want the highest interest rate possible and the lowest risk possible — unfortunately these are competing objectives.  High rates always spell high risk BUT high risk does not always spell high rates.  You should know that risk and reward are traveling companions: if you want low risk you’ve got to settle for low rates and if you want the chance of making high rates you’ve got to accept high risk. 

Most people work a lifetime to save enough so they can have a comfortable retirement — the last thing in the world they want is to lose their retirement nest egg in bad investments. So why is it that most retirees have all their money in mutual funds, stock, bonds, a diversified portfolio of securities, variable annuities, etc.?  All these things carry the risk of loss — yeah I know that “in the long run” you’ll do a lot better than with a safe money alternative.  BUT, in retirement you don’t have a long run.  A great economist once said, “in the long run we’re all dead”. 

In the closing years of the 1900’s and up until 2002 the stock market was roaring upward — would-be-retirees were making loads of paper profits and looking forward to retirement next year.  Out of the blue came the dot.com bust and a market meltdown — over the next two years the S&P lost half its value, the DJIA sank like a rock and the poor NASDAQ stocks lost 80% of their value (that’s where most of the dot.coms were traded).  Instead of retiring, or continuing to be retired, many “risk taker” had to change plans or go back to work as Walmart greeters, taxi drivers or whatever they could get in the depressed employment environment.  Can this ever happen again?  Look around you: sub-prime problems, foreclosures shore to shore, the dollar losing ground at an alarming rate, inflation picking up, real estate activity grinding to a halt, economic recession being mentioned often, bank stocks losing half their value, major corporation turning to China and the UAE for capital infusion to stay solvent, record federal deficits, commodity prices shooting upward and lots more of gloom and doom.  I don’t want to be negative…but there are storm clouds gathering and you don’t have an risk umbrella if you’ve put your retirement money in the market.  The first big mistake retirees (or would-be-retirees in the red zone before retirement) make is they have taken too much risk with them retirement money. What can you do?  Find a financial advisor quick if you don’t know how to lower your risk without one.  Examine every retirement investment you have and make sure the money you’ll be using in the next 10-15 years is in rock solid saving places like bank CDs (for use in years 1 - 5) or fixed annuities (for use in years 6 - 15).  If you don’t like either for-the-first-half-of-your-retirement money, you can continue to keep your money at risk and hope for the best.

Putting your money only in short-term bank CDs:  Many of you have all your retirement money in 6-months CDs because you want safety and are afraid you’ll need it all very soon.  The good news is that you’ve got safety and ready access…the bad news is that this is costing you a king’s ransom. 

Generally, the longer you commit you money the higher the rate of interest you’ll earn — that’s why 5-year CDs pay more than 3-months CDs.  You should space, or ladder, your money so that it comes due at about the same time you think you’ll need it.  Yes, you may guess wrong sometime but the penalty will be a lot less than if you always keep your money short and liquid. 

Let’s say you now have $150,000 in short-term bank CDs that you’ve earmarked for retirement.  You think you’ll need  about $15,000 a year of this money to cover expenses above your Social Security, pension (if you have one) and other income.  Here how a CD ladder could work.  Put $15,000 in a money market account (can get anytime you want without penalty), $15,000 in a one, two, three and four year bank CD.  You now set so that every year for the next five you’ll have access to $15,000 (plus interest which will keep you up with inflation) to cover your needs.

What do you do with the other $75,000? Why not look into a five year tax-deferred fixed annuity?  You’ll pay no taxes on the interest you earn in the annuity until you withdraw it (that means triple compounding: interest on principal, interest on interest and interest on money you would have paid in taxes) and you’ll have rock solid safety  because your principal and interest is guaranteed by a major insurance company.  The same insurance company that insures you home, life, health, business, car and everything else of value.  Oh yes, you’ll probably get a much better earnings rate than if you put the money in a bank CD.  Yes, you will lose the opportunity to hit it out of the park with a high flying stock your brother-in-law told you about but you’ll also avoid the risk that goes with that high flying stock.  When you annuity matures in five years you an annuitize (take an income) over the next five years or do another 5-year bank CD ladder.

Retirement is a time to keep what you’ve got rather than trying to double or triple your money in a short period of time.  But, you can err by being too safe and too liquid with everything in short-term bank CDs.  Retirement is also a time to reassess your risk and make sure you can afford the worse case outcome. That’s why money in the market don’t make sense unless you’ve got a lot more money than you’ll need for retirement.  If you think the market can’t turn around and bite you, check out the following links:

 http://www.fool.com/investing/dividends-income/2007/03/21/a-market-crash-is-coming.aspx

http://mutualfunds.about.com/cs/history/a/marketcrash.htm

http://finance.yahoo.com/expert/article/richricher/26878

One of the most important retirement decisions facing most Americans is: WHEN TO START SOCIAL SECURITY BENEFITS. Conventional wisdom has always been “take it as early as possible — age 62″. Why? Several reasons are given: (a) it might not be there if you wait; (b) you can take the benefits and invest them and have more money later; (c) I might die early and never get a dime.

About three-fourths of Americans have heeded this advice and for most it was, or will prove to be, a big mistake. Why? There are several reasons: spousal benefits, higher benefits for delaying, penalties for starting early, penalties if you work while drawing benefits and are less than normal retirement age, and Social Security benefits get favorable income tax treatment.

Spousal benefits: If you qualify for Social Security benefits they will last the rest of your life — what’s more, if you’re married and your spouse is entitled to a lower amount, she/he will “step up” to the higher amount at your death. The spousal benefits say a spouse gets at least 50% (even if they paid zero into their Social Security account) of what the other spouse qualifies for AND the larger amount when the first spouse passes on. So by delaying your benefits your surviving spouse could get a bigger Social Security check every month for the rest of her/his life. Since “break-even” is about age 80 and joint life expectancy is closer to 90 for a married couple age 62, the odds of getting more are overwhelming. In fact, if Las Vegas gave the same odds you’d be booking reservations today.

For every year you delay taking SS benefits beyond age 62, your benefits grow between 7.5% and 8.0% annually PLUS a cost of living adjustment (COLA) based on inflation. In the past 30 years inflation has averaged over 3% annually…so your SS benefits will grow by over 10% a year. Where else can you get an investment backed by the U.S. Government and pay you over 10% annually? Stop looking, they don’t exist unless you want to take loads of risks. So if you are healthy, married and can afford to wait, postponing Social Security until age 70 will pay great dividends. Social Security will be there because with 50 million current getting benefits and another 76 million (the boomers) coming of age, politicians who vote to do away with SS will be unemployed.

If you start benefits at age 62 (the earliest time possible) you get about 25% less than if you wait until your normal retirement age (age 66 for most 62-year olds). This 25% less is for the rest of your life AND COLA is applied to a lower amount to compound the injury. Again, postponing make a great deal of sense.

If you start Social Security before normal retirement age and continue to work, your benefits will be reduced $1 for every $2 you make over about $13,000 annually. Yes, you’ll get this back later but when you consider taxes and the time value of money you’ll be worse off.

The big reason to delay is because Social Security benefits are taxed differently than other income: it is never 100% taxed and it is easy to manage the taxes on your Social Security benefits. PLUS, if taxes rise you’ll want to have as much of your retirement money in tax advantaged places (like larger Social Security benefits) as possible. Which way to you think income taxes are headed? Let’s see: record federal deficits, fighting terrorism, rebuilding our highways, bridges & infrastructures, an aging population, cleaning up the environment, etc. which must be financed by the federal government with income taxes. No doubt in my mind…how about you?

If you’d like to make sure you get Social Security right — and also take your qualified money (IRA, 401(k), 403(b), TSP, etc.) at the right time and use your other savings & investments wisely, I invite you to read my “Guide to Social Security…and a Better Retirement“ by going to http://www.theretirementpros.com/eReport_Social_Security.php

You’ll have one chance to get Social Security right, so get all the info you can to make a good decision — most Americans haven’t and they’ll pay a lot more in taxes on their retirement money. Less money in retirement means less of a retirement.

http://online.wsj.com/public/article/SB119514459625294332.html

In a recent article in Schwab’s customer magazine (Charles Schwab on Investing, Winter 2007) how to develop tax strategies was the subject of “Fixed Income for Everyone” [page 29-32]. The curious thing was that in this discussion of “fixed income” not once was annuities mentioned — isn’t that curious since annuities are the only tax-deferred fixed income investment available outside of 401(k), IRA, etc. accounts. Why would Schwab not talk about annuities? I’m glad you asked…Schwab is a brokerage firm and brokerage firms sell securities — not life insurance products. Yes, they could have talked about the fee-loaded, under-performing variable annuity but it would have been impossible to talk about variable annuities without mentioned their super safe no-downside-possible-if-held-to-term fixed index annuities. Schwab didn’t mention fixed annuities because they don’t make their money selling annuities — think mutual funds, stocks, bonds, etc. This pinpoints the problem with brokerage firms, stockbrokers, financial columnist and others who make their living selling or touting securities — they never mention the super safe alternatives life Bank CD, U.S. Government Savings Bonds and Fixed Annuities. Unfortunately, this means that mainstream retirement-minded savers who are risk averse never hear about how to keep their money safe from loss — they only hear about mutual funds, stocks, bonds, diversified portfolios, etc. that all carry the risk of loss. And, what is the one thing a retirees — or near retiree in the red zone — can’t afford because they have no way to recover from: right, losing part of their retirement nest egg because the market tanks. I still have a vivid memory of the market meltdown in 2000-2002 that came with the dot.com bust — many would-be retirees had to postpone their plans or actually go back to work because they they lost substantial amounts of their retirement money. Ironically, on page 6 of the same Schwab magazine the following appeared:
“Many older workers saw their retirement portfolios balloon during the late 1990s bull market and opted to retire early. However
the bursting of the technology-fueled bubble and the resulting bear market between 2000 and 2002 dramatically devalued those new
retirees’ portfolio. Subsequently, some Americans who had taken early retirement found they had to return to work.”

When will this lesson be learned? There is only one question you need to answer before committing your money to the market: What will I do if the worse case outcome become reality? If you don’t like the answer, don’t put your money at risk.

Prices jump more than expected Higher gasoline prices bring big jump in overall prices, larger rise in core prices than forecast.

EW YORK (CNNMoney.com) — Prices paid by consumers rose faster in November, lifted by a spike in the price of gasoline, as the government’s key inflation measure came in higher than Wall Street forecasts.

The Consumer Price Index, the key measure of inflation on the retail level, rose 0.8 percent in the month, up from the 0.3 percent rise in October. Economists surveyed by Briefing.com had forecast a 0.6 percent rise in overall prices.

It was the biggest jump in prices since September 2005, when gasoline prices surged higher in the wake of Hurricane Katrina. There was a similar impact of higher gasoline prices this time.

The report showed overall energy prices up 5.7 percent, with gasoline up 9.3 percent. In addition food prices, another recent driver of inflation, were up 0.3 percent.

http://money.cnn.com/2007/12/14/news/economy/cpi/index.htm

Have questions about your retirement investments? Poor investment decisions could mean the difference in a happy and plentiful lifestyle and one where financial security is jeopardized, so get your answers from the experts.

You got one chance to get retirement right. Post a question anytime and we will try to answer your question within 48 hrs.

If you rather submit a private question (will not be shown below) you may do so here >> 

We just had a video internet seminar on 12/14/2007 and we talked about the topic “Managing Your Retirement Money”.

If your retirement nest egg is not big enough, or if you think it might not be, you can’t afford any speculation or gambling in hope of beating the odds. If you lose any of it, your retirement could be less enjoyable. If you don’t need to gamble, then don’t do it by putting your retirement at “risk”.

On the other hand, if you have more than enough and you like to take chances with investments, then enjoy the art of investing knowing there are risks. Also, you need to consider all your options and make sure you’re getting the best mileage for your money. Of course, if keeping your money any place except the bank is going to keep you from sleeping, then you have no decisions to make and you’ll need to be content with lower rates and sluggish growth without tax deferral. Remember, you’re responsible for your lifestyle in retirement and you need to manage your money wisely, look before you leap when committing your money to an investment, and take steps to stay healthy and happy.

“Managing Your Retirement Money” is a treasure trove of common sense for the retirement-minded.

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