Preparing For Retirement-Critical Factors to Consider

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

Here is a great overview of the critical factors to consider when preparing for retirement.

Life expectancy and portfolio performance: Many retirees underestimate how long they will live and overestimate how much their investments will return annually. To be financially safe, you should expect to live to 95 and expect an annualized return on investments of 6%, based on a mix of 60% stocks and 40% bonds and other fixed income securities.

Inflation: Inflation is a big enemy of the retiree since increased costs reduce the value of your assets. Based on historical inflation trends, it is estimated that a person who retires at age 60 is likely to experience an 80% rise in living expenses by age 80. To calculate your income needs, estimate inflation at 3% annually.

Taxes: The only thing certain in life is death and taxes. As you approach retirement, don’t assume that you taxes will decline sharply in retirement. Remember that you will pay income tax on withdrawals from 401(k)s and traditional IRAs. So for retirement planning purposes, advisors suggest that you estimate that your taxes will drop by no more than 10%.

Expenses: Generally, the experts suggest that retirees spend on average 75% as much as they did during their working years; however, this is directly dependent on your lifestyle during retirement. The key question is whether your assets and investment income will be sufficient to fund your living expenses.

Health Insurance: Unless you have healthcare insurance provided by your employer in your retirement, you will need to consider premiums for individual healthcare insurance until you become eligible for Medicare.

Social Security: The earlier you start taking Social Security payments before you qualify for the full monthly base amount–which could be as late as 67 depending on when you were born- the lower your monthly checks will be. Unless you need the money or are in poor health, it’s often better to delay starting benefits until you reach full retirement age.

To help you calculate how much you will need to save for your retirement, we provide this calculator at Soundview Financial’s Retirement Savings Guide by clicking here.

uTango- Lifestage Rewards Program

We found this interesting news story on uTango, the lifestage rewards program for singles, engaged couples and newlyweds. The programs offers long term payouts to members by leveraging their spending through its merchant network. If you achieve certain spending milestones, you can receive payments ranging from $250,000 to $1,000,000 in thirty years. The catch: You need to stay married for that 30 year period. The uTango program is a very innovative approach to offering young couples a way to leverage their current spending to create a plan to supplement their retirement income. You can check out the news story here and visit uTango here.

6 Ways To Fix Your 401(k)

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

Great tips from Tom Middleton at MSN Money on ways to improve your 401(k). Here are Tom’s thought:

Resolve not to make basic mistakes

• Dump that stable-value plan. Insurance companies “guarantee” these plans and tout them as the ultimate in safety. According to Cerulli Associates, 12.5% of 401(k) assets are held in these plans — one dollar of every eight! What they actually guarantee is poverty; when you take the money out 30 years later and pay taxes on it, you’ll have less purchasing power than you started with. The rate in my wife’s plan is 3.6%. You can do better at a bank, and you might get a toaster, too.

• Dump that company stock. In case you don’t remember Enron, it’s dangerous to have both your income and your nest egg invested in the same place. Amid the creative destruction brought on by globalization, take note of these remarkable facts unearthed by Leuthold Group in Minneapolis: “Back in the 1930s, a company joining the S&P 500 list could expect to remain there for 65 years or so. At present, the average life of an S&P 500 company is around 15 years.”

Actually, Enron’s meltdown early in this decade did make an impression on retirement savers. Since 2001, assets held as company stock in the nation’s 401(k) plans have declined to 13.7% from 18%, according to Cerulli. But 13.7% is still way too much. Many companies fund their matching contributions with their own stocks, but you can often convert company stock to something else the next year. This is the next year.

• Demote that me-too big-capitalization growth fund from the majority of assets to the minority. Tom Modestino, a Cerulli senior analyst, says 51.4% of 401(k) assets are held in equity funds and that “large-cap domestic is the biggest chunk.” A more reasonable allocation to domestic big-cap stocks is 20% or so.

3 ways to earn more

Taking these steps can free much more of your money for more productive uses:

• Load up on small and midsize stocks, both domestic and foreign. Small stocks are out of favor at the moment because they are particularly sensitive to the economy, and it is weakening. That just means they’re on sale. Over long periods they outperform big-company stocks by around three-quarters of a percentage point annually. Midcaps are not on sale at the moment, but they seldom are. Over the past 15 years they’ve outperformed small caps by 1.2 percentage points annually — and big caps by nearly 2 points.

• Go foreign, and the stranger the better. Over the past five years the MSCI EAFE developed-market foreign-stock index surged an annual average of 21.3% — nearly 10 percentage points per year more than the S&P 500. Emerging markets soared 32.7% per year. Emerging markets have emerged to the point that Mexico and Russia are investment-grade credits. This isn’t performance-chasing; it’s globalization.

• Go alternative. That is, embrace securities that are independent of stocks and bonds. The two kinds most commonly available in 401(k) plans are energy and real-estate funds. These two groups, plus gold, another alternative, make up 13.5% of my personal portfolio. Agricultural commodities would be even better, but few plans offer exposure to them.

These three categories — small, foreign and alternative — account for 64% of my retirement portfolio, with the balance devoted to domestic big caps, bonds and cash. (And I own not a single S&P 500 Index fund.) What most folks ignore have garnered me outstanding returns for years.

Five Key Estate Planning Documents

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

We’re frequently asked what you should look for in a basic estate plan. Of course, one of the most important things you can do for your family is to have a comprehensive estate plan. Here is a quick summary of the five essential documents that can provide a foundation for your personalized plan. For more information on estate planning strategies, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

1. Will

A will is simply a set of instructions on how to distribute your assets to loved ones and charities upon your death. Be aware, however, that a Will will not cover any specific beneficiary designations you have made on investment and retirement accounts. So, for example, if you IRA account has your son Jimmy as the beneficiary but your Will has your daughter Suzie receiving the account assets, Jimmy will get the assets.

2. Durable Power of Attorney

You name another person to act on your behalf, with limited or broad powers, as you see fit. Choose carefully because, in general, this person can buy and sell your assets. A “durable” power lets someone act on your behalf if you are disabled and terminates on your death.

3. Health Care Power of Attorney

This document authorizes someone to make medical decisions on your behalf if you become incapacitated, providing a path to avoid family conflicts and possible court interventions.

4. Living Will

This document lays out your wishes regarding the use of life-sustaining measures in the event of terminal illness. It’s best used in tandem with a health care power of attorney, since a living will alone doesn’t give anyone the authority to speak for you.

5. Revocable Living Trust

This document provides for management of financial affairs during your lifetime (if your are incapacitated), upon your death and for future generations. This trust helps your estate avoid probate, lessening the risk of personal information becoming public record.

401(k) Roth Conversions

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

Starting in 2008, you can directlyconvert funds from a traditional 401(k) to a Roth IRA, rather than going through the cumbersome process of first transferring the funds to a traditional IRA and then converting that account to a Roth IRA, as would have been necessary in previous years.

Strategy: When you leave your employer, consider transferring 401(k) assets to a Roth IRA, rather thana traditional IRA. Although you must pay tax on the amount converted, the investment will grow tax-free from then on.

For more information on Roth IRAs, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

Top 10 Roth IRA Questions

This Blog is sponsored by Soundview Financial’s Roth IRA Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for Roth IRAs and retirement planning.

We found this great article on Roth IRAs from The Motley Fool at Yahoo! Finance. Of course, for more information on IRAs generally and Roth IRA specifically, please visit Soundview Financial’s Roth IRA guide by clicking here.

If you’re considering a Roth IRA, here are some questions that may be relevant to you:

Q. Can my 16-year-old make a Roth IRA contribution?

A. As long as your child has earned income with which to open the Roth IRA account, and as long as he or she falls under the adjusted-gross-income (AGI) limitations, then he or she can make an IRA contribution regardless of age. The key is having earned income, such as from working a job. See more on this point a few questions down.

Q. Can my 73-year-old parent convert a regular IRA to a Roth IRA?

A. Again, age is not a determining factor. If your parent’s AGI is less than the $100,000 limitation, then your parent is eligible to make the conversion. Any required minimum distributions that your parent must take from a regular IRA will not count against the $100,000 AGI limitation.

Q. I’m retired and drawing Social Security. Can I contribute part of my Social Security benefits to a Roth IRA account?

A. Nope. Sorry. To make a Roth IRA contribution, you must have earned income. Earned income is generally money you receive as compensation for your labor. It’s reported to you on a W-2 form, or you report it on Schedule C (Business Income) or Schedule F (Farm Income) with your normal tax return. Earned income typically does not include Social Security benefits, pensions, interest, dividends, rental income, or capital gains. It can, however, include alimony.

Q. I want to contribute to my Roth IRA, but my custodian says I can’t put annual contributions into an account that has been converted. Is this true? And if so, what should I do?

A. There’s no legal reason for you to separate your contribution and conversion funds into separate accounts. Under the old Roth IRA rules, contributions and conversions had different five-tax-year start times, depending on conversion and/or contribution dates. Because of these staggered start times, the IRS suggested that contributions and conversions be maintained in separate Roth IRA accounts. That suggestion was then passed on to financial institutions, and the institutions passed that information on to their clients.

But with the changes that the Tax Reform Act of 1998 brought to the Roth IRA, the need for these separate accounts has been negated. It is now acceptable to commingle your Roth IRA conversions and contributions. While there are still staggered start times for contributions versus conversions, the rules surrounding those start times are much clearer. So having conversions and contributions in the same account, though still tricky, isn’t impossible to deal with.

If your broker still insists that you separate your conversion funds and contribution funds, make sure to tell him or her of the new law that removed the segregation restrictions. And if that doesn’t work, consider finding a new broker.

Q. I converted my regular IRA to a Roth IRA back in January. I’ve just discovered that my AGI will exceed the $100,000 conversion limitation this year. What should I do?

A. You can “recharacterize” your converted Roth IRA back to a traditional IRA without any penalty or tax. You just need to do it before Oct. 15 of the following year. That’s right — the following year. If you made your conversion in January 2007, the recharacterization wouldn’t have to take place until Oct. 15, 2008. You’re also required to “unconvert” not only your original conversion amount, but also any of the earnings generated by that original conversion.

So, just because you go over the AGI limitation, that doesn’t mean all is lost. Your broker should be able to help you recharacterize back to a regular IRA account.

Q. I intend to retire at 50. When I do, I’ll need income. Can I take money from my Roth IRA without paying any taxes or penalties?

A. Potentially, yes. Under the IRS ordering rules, you are allowed to remove your original contributions at any time without tax or penalty. In addition, after you’ve waited at least five tax years, you’re able to withdraw your original converted amounts without taxes or penalties. It’s only when you get to the earnings generated by the original contributions and conversions that you will have a tax and/or penalty problem.

Even if you do determine that you’ll have to break into the earnings before you reach age 59 1/2, you may still be able to avoid the penalty — but not necessarily the tax. If you remove the funds from your Roth IRA account using a distribution method that is part of a scheduled series of substantially equal periodic payments made over your life expectancy (and the life expectancy of your beneficiary), you may still be penalty-free.

Q. When I convert my regular IRA to a Roth IRA, do I have to pay the taxes all at once?

A. Yes. You’re required to report the entire conversion income in the year of conversion. There was a one-time option to spread out conversion income when Roth IRAs first came out in 1998, but that option is no longer available.

Q. If I convert my IRA to a Roth IRA, will that income increase my adjusted gross income for the current year?

A. Absolutely. The income you have to report for an IRA conversion to a Roth IRA will have an impact on all tax issues that are based on AGI — except for any direct Roth contribution and/or conversion issues. In other words, if you meet the AGI limitation rules to convert or contribute to a Roth before taking the conversion income into consideration, this income won’t make you ineligible based on an increased AGI. But any tax provisions that use AGI as a guidepost will be affected — including medical expenses (7.5% AGI floor), miscellaneous deductions (2% AGI floor), taxability of Social Security (based on AGI), passive loss limitations (based on AGI), and many others.

In some cases, your AGI may be severely affected. You must take that into consideration when you decide to make a Roth IRA conversion.

Q. If I have a large tax balance due next April because of my Roth IRA conversion, will I be able to avoid the underpayment penalties related to estimated taxes?

A. No. You can’t be exempted from the underpayment penalty just because the balance due was caused by a Roth IRA conversion. There are other exceptions to the underpayment penalty that you might want to review, since they may allow you to dodge the penalty, but there is no “safe harbor” simply because the underpayment was caused by a Roth IRA conversion.

Q. I’ve heard from a friend that the AGI limitation for a Roth IRA is $100,000. I’ve heard from other friends that the actual AGI limitation is much higher. Which is it?

A. It depends on whether you’re talking about a conversion or a contribution.

If you’re talking about converting your regular IRA to a Roth IRA, then the AGI limitation is $100,000 for all filing categories, except for married folks filing separately. They’re effectively prohibited from making a conversion no matter how small their AGI is, unless the couple is separated and has lived apart for the entire tax year.

But, if you’re talking about making a contribution to a Roth IRA, then the rules are a bit different. The AGI limitations depend on your filing status. If you’re single and your 2007 modified AGI is less than $116,000 (or married with modified AGI of less than $166,000), you’ll be eligible for at least a partial Roth IRA contribution.

The Roth IRA is a powerful investment tool. Make sure you don’t overlook how a Roth could round out your investment portfolio.

The Motley Fool

2008 401(k) Planning Tips

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

In an earlier post, we discussed 2008 planning tips for IRA accounts. Here is a quick summary on new laws that may affect your 401(k). Of course, for more detailed information on 401(k)s and other retirement planning strategies, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

Starting in 2008, companies can authorize automatic enrollment of employees in their 401(k) plans. This means that an eligible employee who doesn’t opt out within 90 days or choose to contribute a smaller amount will have 3% of his or her salary put into the 401(k) the first year, and 1% more each year until the 10% cap it reached. The money will be invested in the default investment option selected by the employer unless you istruct the plan administrator to do otherwise. The default investment will likely be a targeted retirement fund whose portfolio becomes more conservative as you get closer to retirement age or a proessionally managed portfolio of various funds.

Strategy: If you are already participating in your employer’s 401(k) but your contributions are below the minimum amount under automatic enrollment, consider voluntarily increasing the contribution to beef up your retirement savings. If you are not contributing, check with your employer about how automatic enrollment will affect you.

If you want to contribute more or less than the automatic amount, ask what steps you must take. Also, if you don’t like the automatic investment choices, choose different investments from the plan’s options. Remember to consider if your employer offers matching contributions and in what amounts.

For more information on 401(k)s,visit Soundview Financial’s Retirement Savings Guide by clicking here.

2008 IRA Planning Tips

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

It’s hard to believe that we’re in 2008! Here are some things to remember regarding important changes for Individual Retirement Accounts (IRAs). The annual IRA contribution limit this year is $5,000, up from $4,000 in 2007. Individuals age 50 and older by year-end can add another $1,000, for a total contribution limit of $6,000. You can contribute up to these amouts, in total, to a traditional IRA and/or a Roth IRA.

To qualify for making full contributionsto Roth IRAs, taxpayers filing jointly must have no more than $159,000 i modified adjusted gross income his year. That limit is $3,000 higher than it was in 2007. If you have between $159,000 and $169,000 in income, they amount you are permitted to contribute shrinks- about the $169,000, no contribution is permitted to a Roth IRA.

For single and head of household filers, the income cap is $101,000, up from $99,000 in 2007, and no contribution is allowed with income above $116,000. Remember that these limits only apply to Roth IRAs and that you’re still eligible to contribute to a traditional IRA if you have income above the limits. To under the differences between traditional IRAs and Roth IRAs, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

Strategy: Although you have until April 15, 2009, to make 2008 traditional IRA or Roth IRA contributions, the earlier you do so, te sooner you can start to earn tax-advantaged income. If you are nervous about the volatility of today’s stock market, you ca put the money initially in a safe, interest bearing IRA account, such as a money market fund.

For more information, visit Soundview Financial’s Retirement Savings Guide.

6 Tips on Retirement Account Withdrawals

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

We found a great article on the U.S. News and World Report website discussing tips on retirement account withdrawals. A link to the complete article is here. Here is a summary:

Here is how you can avoid a hefty tax when drawing down money from your retirement accounts.

Keep track of your age. Uncle Sam has been letting you accrue interest on the money in your IRA and 401(k) tax free for many years, and he finally wants to cash in. Everyone age 70½ or older with a traditional IRA must take what is known as an annual required minimum distribution, or RMD, and it is taxed as income. The specific amount of the distribution changes from year to year. For 2007, the number is calculated by dividing the year-end balance of all your IRA and 401(k) accounts by your life expectancy as determined by the Internal Revenue Service.

If you fail to take that amount of money out of your IRA and report it as taxable income, the IRS imposes a 50 percent tax penalty and still taxes you anyway. So, if you are required to redeem $1,000 from your IRA and you fail to do so, the IRS claims $780: a $500 penalty for not making a withdrawal and the $280 income tax you should have paid on the income, assuming you are in a 28 percent tax bracket. IRA distributions are checked through mandatory IRS reporting.

These rules apply to 401(k)’s too, unless you are still working. But they don’t affect Roth IRAs or Roth 401(k)’s because you’ve already paid taxes on contributions to those accounts.

Don’t play the April Fool—avoid two distributions in the same year. The year you turn 70½, you have until April 1 of the following year to take your distribution. Every year after that, you have until December 31 to take your distribution. Many financial advisers recommend not waiting until the April 1 deadline to take your first distribution, because then you’d have to take two distributions in the same year. That would increase your income and might move you up to a higher tax bracket. “I would recommend beginning taking distributions in the year they turn 70 to avoid that possibility of having to take two distributions that are taxed as ordinary income in one year,” says John Barton, an investment adviser for CenterPointe Wealth Management in Wichita.

Compare retirement accounts. If you have multiple IRA accounts, you must include all the IRA balances in your distribution calculation, but you don’t have to take money out of each one. “All the IRS cares about is that you take out the correct total fee and not the amount withdrawn from an individual account,” says Jeremy Welther, a financial adviser for Brinton Eaton Wealth Advisors in Morristown, N.J. “If you have an account with higher fees, you may want to take it from that account as opposed to one that is doing better.”

You can also choose based on an IRA’s performance. “If you have invested in equities or stocks and have had remarkable performance, you may want to take your RMD from the gains that have been made there rather than giving them back to the market,” Barton says.

But 401(k)’s are a different story. If you’re still working, you can delay distributions until you retire no matter what your age. But RMDs must be calculated separately for your 401(k) and taken from that account, cautions Ed Slott, an IRA distribution expert and author of Your Complete Retirement Planning Road Map: “You generally want to roll it over to an IRA. You take control of your money; you don’t have to call the company any time you do something.”

Notify your heirs. Even death doesn’t eliminate required distributions. Beneficiaries of your retirement accounts must take them by the end of the year of death to avoid penalties, if the RMD had not already been taken that year. The first distribution amount is based on the age of the deceased IRA owner. The beneficiary’s age is used thereafter.

If there are multiple beneficiaries, the account should be split into separate inherited IRAs by the end of the year following the year of death. That way, each person can use his or her own life expectancy for calculating distributions, Slott says. If this isn’t done, the age of the oldest beneficiary is used to calculate distributions, which typically means higher taxes for the younger beneficiaries. And although Roth IRA owners do not have to take required minimum distributions during their lifetime, beneficiaries other than the spouse do. The distribution is still tax free.

Consider donations to nonprofits. If you don’t need the money, one way to avoid additional taxes is to donate your distribution of up to $100,000 to charity. But hurry: This provision of the Pension Protection Act expires on Dec. 31, 2007. If you transfer your RMD directly to your favorite charity, you don’t have to pay income tax on that amount, says Mary Baldwin, a certified financial planner in Melbourne, Fla. “Most of my clients love to give. We send it straight to their church or Habitat for Humanity.”

Colleges are a major beneficiary of these tax-free donations from IRAs and often solicit such gifts. “By naming us as beneficiary of your IRA, you can leave us a gift that is free of all income and estate taxes because we are a charitable organization,” the website of Drake University reminds alumni and prospective donors, along with an example of a 73-year-old woman who turns over a $15,000 required distribution from her IRA to the university to avoid paying taxes on that income. The catch: You can’t use these donations as a charitable deduction elsewhere on your tax return. “When you gift your IRA to charity, you don’t get a charitable deduction for the distribution,” Barton says. “I’ve found a lot more people wanting to get that deduction.”

Save your distributions. Of course, just because you must take money out of your IRA and pay income tax on it doesn’t mean you have to spend it. If you don’t need the money for immediate expenses, you can still save it for use further down the road when you might. “I try to position at least two years’ worth of those distributions in a safe place such as a money market fund,” Barton says. “I think it gives people a sense of confidence and a peace of mind to know those dollars they are going to have to take from their portfolio are in a very safe place.”

Six Critical Retirement Missteps

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning. Yahoo! Finance has a great article on crucial mistakes you should avoid when dealing with your retirement payouts. All link to the complete article can be found here, but here is a quick summary.

1. Withdrawing Money Too Soon. If you withdraw your retirement funds before age 59 1/2, you pay a 10% early-withdrawal penalty (in addition to the federal and state income taxes you pay on the withdrawn fund). There are certain exceptions to the penalty that we discuss at Soundview Financial’s Retirement Savings Guide here.

2. Interrupting Annual Payments. Once you begin taking required annual withdrawals from your retirement fund, you will incur a 10% penalty if you interrupt or modify the payments.

3. Taking A Check. If you decide to transfer 401(k) funds to a new employer’s 401(k) or an IRA, make sure the funds go directly to the new custodian. If your employer writes the check to you, it will be required to withhold 20% for taxes and you’ll be required to roll the entire amount (including the 20%) into your new retirement account within 60 days.

4. Mishandling Company Stock. Rolling your 401(k) into an IRA is generally a good idea, but it may not be the right decision when you own company stock inside your plan. That’s because distributions from IRAs, 401(k)s and other tax-deferred retirement plans are taxed at your regular income-tax rate, which can be as high as 35%. Sales of investments held longer than one year inside taxable accounts, however, are taxed at a maximum capital-gains rate of just 15%.

5. Ignoring Taxes.

There’s a big difference between the way investments are taxed inside a retirement account and outside of one. When you hold an asset for more than one year, then sell it at a profit, you pay long-term capital-gains taxes at a maximum rate of 15%—if the asset is held in a taxable account. If that same asset is held in a tax-deferred retirement account, there is no tax consequence when you sell it. But when you withdraw the money from the account, all of it is taxed — not just your profit — at your ordinary income-tax rate, which could be as high as 35%. The 20-point spread between the maximum long-term-gains rate and the top ordinary income-tax rate can make a significant difference in your after-tax income during retirement.

6. Waiting Too Long.

You are required to start withdrawing from your IRA by April 1 following the year you turn 70 1/2, and to make withdrawals by December 31 of that year and each year afterward. But if you have a large IRA balance and wait until the deadline, your required distributions could be substantial, pushing you into a higher tax bracket.