Ask The Money Coach

Archive for the ‘Retirement Planning’ Category

No, I don’t recommend taking $14,000 from your retirement accounts in order to pay off that business credit card. I would be wary of doing so for three reasons. First, you are medically retired, so you will not likely have any source of earned income for the rest of your life. Frankly, $90,000 is not a lot of retirement income to live on until death. You could live another 30 or 40 years. Also, if you sell some of those retirement assets, you’ll have to be capital gains taxes on them. Sure that’s just 15% (and possibly as low as 5% for people in the two lowest income tax brackets). But I want you to realize that your money will be taxed, meaning you may have to give over to Uncle Sam as much as $2,100 of the $14,000 you’re considering cashing in. Lastly, I’m not convinced that you can’t pay off this debt over time by making some adjustments to your budget. I know that $24,000 a year is not a lot to live on. But have you considered if you can cut any of your existing expenses (namely any luxuries you may be spending money on) and using that money instead to knock out the business credit card debt? I just don’t want you to tap into an already modest retirement nest egg and later regret not having that money to fall back on if times get even tougher or if you need the money for other purposes later in your retirement.

Congratulations on getting started investing. You’re not too late to the investing game: you’re right on time. A lot of 36, 46 and 56-year olds wish they’d started when they were 26, as you are. So don’t beat yourself up at all about your age. Glad to hear you’re starting a Roth IRA. It’s a great way to save for retirement. Regarding the 401(k), your investment options will be dictated primarily by the offerings that your employer has available. I can tell you in general that Edward Jones has a good reputation and is known for quality financial advice. However, the mutual funds you choose are equally important. So the main question you need to find out tackle is: based on my investment objectives, how much of my 401(k) should be in stocks, bonds, and cash? Then you can think about what funds or stocks to buy to match those objectives.

If you don’t have an adviser helping you, I’d strongly suggest that you get a professional to create a financial plan for you and offer you some specific recommendations based on your goals, risk tolerance and personal circumstances. You can get good help from the National Association of Personal Financial Advisors (www.napfa.org) or from the Financial Planning Association (www.fpanet.org).

Well, only you know whether or not it’s time for a major career shift. But based on what you said, you seem to be a bit overwhelmed in dealing with such an emotionally demanding job. You said you’ve worked there since 1997 and have been in the special education field since 1990, so the good news is that it’s not too much of a stretch to take the skills and experiences you’ve amassed over 20 years and apply them in the general education arena. From a financial standpoint, however, since you have no savings and described yourself as struggling to make ends meet, I would advise you to be cautious about taking money out of your 401(k) plan. You said you planned to roll it over. But into what? Your message didn’t indicate specifics. Into an IRA or something else? Read this post about Roth IRAs and this one as well about the benefits of having a 401(k), as well this item on the drawbacks of taking money from your 401(k) before you are age 59 1/2.

You are correct in your assumptions. Yes, you can open two IRAs (one for 2009 and one for 2010), and safely convert them into a Roth this year because of the removal of the income limits on Roth conversions. I double-checked with an expert on this, David Mendels, who is a Certified Financial Planner and the President-Elect of the New York Chapter of the Financial Planning Association. David is also an adjust faculty member at New York University, as well as the head of the fee-based financial planning firm, Creative Financial Concepts, LLC. So he is very well-credentialed and I’m confident in his knowledge ane expertise. He told me to offer you two caveats, just to make sure your efforts go smoothly.

First, if you have any existing IRAs that are traditional IRAs or IRAs other than the new ones you plan to open, be aware that your basis will be calculated over the combined IRAs that you have, not just the ones you are opening now. Second, to make sure you don’t experience any future issues if any questions ever arise, keep very clean records about this for the future. Here’s how: wait a brief period after you open the non-deductible IRA before you do the conversion. David suggested that you wait a week or so – or as long as it takes until the IRA custodian has a record that your original contribution was a non-deductible IRA. After that’s done and you have written confirmation, then go ahead and do the conversion.

A final tip: you can open two IRAs if you want, but you certainly don’t have to. If you prefer to keep things simpler (again, from a paperwork and record-keeping standpoint), you can just open a single non-deductible IRA. Put in your contribution for 2009 — you have to do it by April 15, 2010 — and make sure that the contribution is specifically designated for 2009. Then you can make another, separate contribution that is specifically earmarked as a 2010 contribution. Either way (one or two IRAs) accomplishes your goal and allows you to ultimately convert two years’ worth of IRA contributions into a Roth. Good luck!

I recently wrote the following article that answers your question about saving money and getting a good return on it. Here is the article, entitled, Three Ways to Save More Money By Getting Paid to Save.

Three Ways to Save More Money By Getting Paid to Save

Everyone wants to save more money. Yet many cash-strapped people feel like they “can’t afford” to save. One way to make saving each month a little easier is by super-charging your savings – and making your money work as hard as you do. Here are three special ways to turbo-charge your savings. Try them and watch your savings grow faster than ever.

Strategy #1: Open an Individual Development Account or IDA

An Individual Development Account, or IDA, lets low-to-moderate income earners save money for a specific goal – such as a down payment on a house or starting a business – and receive matching funds from non-profit groups, corporations, and government agencies. Many IDAs provide a $3 to $1 match, meaning for every dollar you save, you get $3 in contributions. What’s the catch? You must agree to save money for a set period of time, usually at least one year. Some IDAs require you to set aside money for two or three years. Whatever the term, it’s worth it – because you’ll get rewarded with a huge cash bonus in the end.

The Payoff: If you save $100 a month, or $1,200 in one year, and your IDA has a $3 to $1 match, at the end of a year, you’ll receive a $3,600 contribution.

Resource: Visit www.IDAnetwork.org to find an institution in your area that offers Individual Development Accounts.

Strategy #2: Open a High-Yield Savings Account

Are you frustrated by savings accounts that are paying a paltry 0.5% or less in interest? Don’t despair. There are better yielding options available – if you shop around online. For example, the new InterestPlus Online Savings Account from Capital One currently carries a 1.45% Annual Percentage Yield (APY) – well above the national average. Plus, you can get a quarterly bonus equal to 10% of the interest you earned in the previous quarter. That’s a fantastic deal because you’re basically getting paid twice to save.

The Payoff: Keep $2,500 in your Capital One savings account each month, and you’ll earn an APY that’s roughly three times the amount that’s being offered elsewhere with other savings accounts.

Resource: Go to www.CapitalOne.com/directbanking to learn more about the no-fee InterestPlus Online Savings Account.

Strategy #3: Enroll in Your Company’s Retirement Savings Plan

If your company has a 401(k) or a 403(b) retirement savings plan, and you’re not contributing to it, you’re making a big financial mistake. Not only are you missing out on the opportunity to set aside money for your Golden Years, you’re also likely forgoing one of the best perks available to workers these days: a corporate match on your retirement contributions. Some companies offer a dollar for dollar match on the money you save for retirement, up to a certain percentage. Other firms offer 50 cents on the dollar. No matter the amount, it’s free money, so it’s foolish not to grab it.

The Payoff: Getting a dollar for dollar matching contribution from your employer’s 401(k) plan translates into a 100% return on your money. Guaranteed. You’ll never get that on Wall Street, or anyplace else.

Resource: Head to your company’s Human Resources Department today, and get the enrollment papers you need to sign up immediately for your 401(k) or 403(b) plan. If you’re already in the plan, consider boosting your contribution slightly. Also, read up on the benefits of having a retirement plan at the Employee Benefit Research Institute (www.ebri.org).

By using these three savings methods, you’ll become a more diligent saver, you’ll watch your money grow quickly, and you’ll make the process of saving money pain free. Best of all, pretty soon you’ll feel cash rich instead of cash-strapped.