Questions & Answers
I welcome your questions and I will endeavor to answer as many as I can right here. Unfortunately I am unable to respond to all of them. Priority will be given to matters raised in questions that are of interest to many of the visitors to the site. I hope you find the following question and answer section to be helpful. Jonathan Pond Question: Sincerely, Ernie Answer: Dear Ernie: Sincerely, Jonathan
Jonathan, I appreciate your thoughts on this matter. Thank you, Tim Answer: Dear Tim, Thank you for your question. While it's difficult to generalize the future growth of your investments, I would assume 7% annual growth less taxes. You might beat that, but it's prudent to be conservative when planning for retirement, particularly an early retirement. As far as how much you can safely withdraw from your stash, at your age I would assume 4% to no more than 5% in your first year of retirement, and then bumping up each subsequent year to account for inflation. Sincerely,
Thanks Answer: Thank you for your question. One quick and dirty way to approximate the present value of a stream of income is to divide the annual income amount (provided by SSA) by 8% (0.08). Best wishes,
Dear Sir I had $6886 in a Roth IRA (AimValue AVLBX) in Sept 99. Today I have $5840. All it does is go up & down. Any suggestions would be much appreciated. Jennifer Answer: Losses have been widespread since September 1999. But this is a very mediocre Fund, and you will likely have to pay a 5% fee to get out of it. Check with your investment advisor about switching it into another AIM Fund (or a couple of Funds) without having to pay a penalty. One to consider is AIM Basic Value (GTVBX). Jonathan Pond
What Should I Do With My Extra Money? My husband and I are each contributing 10% of our incomes to our companies 401(k) plans and have some money left over to invest elsewhere. Would it be better to put that money away for our kids college or make extra payments against the mortgage? EH Answer: Probably neither at this stage. Rather, you should add to your retirement savings plans at work if you can get to 15%, great. Then, I think you both should do an IRA. While saving for college and paying down the mortgage are both noble objectives, your most important objective at this stage in your life is putting enough money away for retirement. Moreover, contributing to plans at work and IRAs are simply better financially than college savings and extra mortgage payments. Since there are limits as to how much you can contribute to retirement plans, each year its a use it or lose it proposition. If you forego putting as much money as you can into a plan in a particular year, its a year that can never be made up in the future. But once youre over the hurdle of putting enough money away for your retirement, then you can go on to college savings and prepaying your mortgage. Perhaps you could do a little of both with whatevers left over at the end of the month.
Looking for Bargain Basement Technology Stocks Please help me decide whether Im missing the boat. A friend of mine whos really into stocks says hes going to make a killing snapping up a some of the technology stocks whose share prices are now selling one-half or even one-quarter of their highs. He says its only a matter of time before they recover all of their losses. Im not convinced hes right, but maybe he is. Answer: Allow me to propose a bet. Ill bet you dollars to donuts that your tech-stock-jockey friend hasnt been talking a whole lot about how his investments have fared as a result of the collapse in tech stock prices. One of the most amusing things about investor behavior in the midst of this long bull market (if were still in a bull market) is that so many investors believe that just because a stock has declined in value, ipso facto its a bargain. A guy on a talk show recently opined that if a stock he had his eye on that was trading at a price/earnings ratio of 60 might be pricey, if it plummeted to a p/e of 55, it would be a bargain. So it goes with investor opinion about so many beaten down stocks amidst this market correction. They reason that the shares have sunk so far, theyve got to be bargains. If you share that opinion, hold onto your money for a moment more and hear me out. Many of the companies that have suffered the worst are no more attractive at share prices that are a fraction of their highs. These companies, notably many high tech companies and most dot com companies have chances ranging from slim to nil of even justifying their current slimmed down prices. So buying on the dips (or on the dives) is no surefire way to stock market profits. Certainly, if a company like Xerox or Proctor & Gamble suffers a sharp loss (as those two have), it might be an attractive buy candidate. But companies like these have great brands, know how to make money, and arent in danger of disappearing from the investment scene. Instead, the chances of their shares rebounding are quite good, although you may have to be patient to reap the rewards. But before buying a stock simply because it seems to be in the bargain basement, make sure the company has a real future. Remember, it doesnt matter how little you pay for a stock. You can still lose all of your investment. And there are a lot of tech stocks that are being snapped up at lower and lower prices by eager investors like your friend who think theyre getting a bargain. But they may well be jumping on a stock whose price has a one way ticket to zero.
Im Changing Jobs. Should I Move My 401(k) Plan Investments into an IRA? SL Answer: Most job changers roll their 401(k) plan money over into an IRA for the reason you indicate. They can invest in almost anything, not only mutual funds, but also individual stocks and bonds. If youre comfortable with making your own investment decisions or using a broker or investment advisor to advise you, then a rollover would probably be the ticket. But there may be a couple of situations where keeping the money in the 401(k) plan may be the better decision. First, if the 401(k) plan choices are very strong and youre satisfied with them, then you may be just as well off staying put, particularly if the plan expenses are lower than you would have to pay with an IRA. Second, many investors are comfortable with their 401(k) plan choices, but are at the same time anxious about the prospect of having thousands of investment choices that may be available in an IRA. Sometimes the devil you know is preferable to the devil you dont know. In either of these two instances, keeping the money in the former employers plan would certainly be okay. Finally, remember that all investors are bombarded with one-sided guidance on whether or not to do a rollover. The entire investment community, including the financial institutions and investment advisors, will encourage you to do the rollover. After all, they stand to benefit if you move your 401(k) money over to them. But in some instances, you might be better off standing pat. You can always postpone your rollover decision. In matters financial, sometimes the best thing to do is nothing.
Retiree Prefers Safe Investments Im a retiree with quite a bit of money that is all invested in CDs, Treasury bills, and money market funds. I can pretty much live off my pension and the interest that these investments pay me. I really think at my age -- 73, its too late to do anything different with my money. I realize that my money would have done better in the stock market, but at my age and with stocks as high as they are, isnt it too late to invest in stocks? I N Answer: Questions like these add more gray to my hair color. On the one hand, I want you to be able to sleep at night rather than toss and turn fretting over your investments. But on the other hand, investing as conservatively as you are at best is doing a disservice to your children or other heirs. At worst, should you ever need to tap into the money later in life (always a possibility), investing it all in low-return interest-earning investments may run the risk of your running out of money later in life. So permit me to advance a line of reasoning that I hope will lead you to conclude that youll sleep better at night if you put at least some of your money into investments that offer the opportunity to grow in value. Interest-earning investments generally provide two things that offer comfort to people who need income from their investments. First, they provide steady interest income. Second, the principal is usually safe; you get your investment back at maturity or, in the case of money market funds, whenever you sell the fund. But you pay a price for that safety insofar as the purchasing power of your investment money declines over the years while the income these investment pay doesnt increase. Remember that there are two risks in investing. First is the risk of losing principal that is always a possibility with stocks. Second is the hidden risk of your money losing ground to inflation, which is at least as important to investors, even retired investors, as the risk of principal loss. You may well live another 20, even 30 years; at least you need to plan financially for a long life. Over that time your living costs will certainly rise substantially. Will your safe investments be able to sustain you over that time? I would recommend that you gradually begin to invest in stock mutual funds and/or high quality individual stocks. There is no need to make a big shift in your investments right away, but if you follow this course, over the next few years you should become more comfortable with investment risk. I would like to think that eventually youll have half or more of your investment money in stocks. That way, youll enjoy both income and growth from your investments which is essential to long-term investment success. While you (and millions of others in your stage of life) feel that risk is a bad thing, in my opinion, the biggest risk in investing is taking no risk at all at any age.
Pension Traps and Annuity Opportunities I have to make a decision soon on taking out an annuity for part of my retirement nest egg. My insurance agent is anxious to have me take out a particular annuity, but how can I be sure its the best one for me? I.K. Before collecting checks from a company pension plan or a deferred annuity or if youre going to take some retirement money and put it into an immediate-pay annuity, it pays to investigate your options. By comparison shopping among several insurance companies, you may wind up with hundreds of dollars more per month in your pocket at no additional risk. An immediate annuity is an insurance contract that, in return for a one-time payment, starts paying a fixed sum for your lifetime or for some other period. A single-life annuity, for example, pays the agreed-upon sum every month (or every quarter) until the purchaser dies. Also, when youre getting ready to retire from your company, know your options. Before you automatically accept the monthly pension check your company plan offers, ask if the plan permits a lump-sum distribution instead. See what you can get in monthly income by purchasing an immediate annuity from an insurance company with some of that money. You may discover that youll get a significantly larger payment with the annuity than with your company pension. But above all, whenever you have a choice, be sure to comparison shop among many insurance companies. Chances are that the annuity that someone is particularly anxious for you to take out will not be the best annuity thats available. One not of caution: Dont sink all your money into an immediate annuity all at once. You may be purchasing at a trough, and annuity rates may rise. Consider purchasing several annuity contracts over time. Also, because you can probably generate at least as much income by investing the retirement money yourself, one rule of thumb is to annuitize no more than 50 percent of your total investable assets.
This Stock Market Frightens Me While I cant complain about how my investments have fared over the past several years, Im beginning to get frightened about the levels that stocks have risen to. Am I the only one who wonders why so many technology stock prices have exploded when the companies havent even made one cent of profits? E.P. I agree with you and share your trepidation. Or, to paraphrase a noteworthy, if not notorious citizen, I feel your pain. But Im also here to educate, so let me try to impart some lessons about uncertain stock market conditions. I think they may help you and the rest of us as we try to make the most of our money. First, wed better get used to the stock markets discomforting gyrations. I dont know about you, but some days Im relieved when stock prices go no where. But dont panic if stock prices go through an extended period of decline. This has happened in each of the past two years only to be followed by a sudden rebound that more than offset the losses. Second, be prepared for a change in market leadership. While technology stocks have a very bright future, there is going to be a severe correction in the prices of many tech stocks because several high-flying companies will never be able to perform at a level to justify the prices these stocks are trading at. Never. Other industries will regain a leadership position, so be sure your investments are not overweighted with technology stocks. And remember, many of your growth mutual funds are in reality technology funds. Finally, interest rates have risen to a level that makes bonds very attractive. Even many Wall Street pros who have a definite stock bias are saying that wise investors will shift a bit of their money into bonds this year.
The Dangers of Jointly Held Property I hold most of my property in joint name with my wife. Someone at work told me that he had heard that married couples should not hold property in joint name. Is that true? L.W. It depends in large measure on the size of your estate. Married couples often decide to hold their property in joint name. After all, it just seems right to hold property that way. But this cozy arrangement could lead to some estate tax complications. Although property held jointly with a spouse is usually not subject to estate taxes when the first spouse dies, much larger estate taxes could be due when the second spouse dies. Heres why: Each spouse individually has an estate tax exemption of $675,000. (This amount is increasing each year and will cap out at $1 million in 2006.) However, when an estate is held jointly, you lose the tax exemption of the first spouse to die because that money is automatically included as part of the second spouses property. When the second spouse dies, estate tax is paid on any estate value over the tax exemption amount applicable in the year the surviving spouse dies. If your estate is large enough to potentially cause this problem, you can avoid at least some estate tax by setting up a so-called marital deduction trust in your will and your spouses will. Under such a plan, both spouses put property into individual names and, upon the death of the first spouse, these assets pass in a trust to individuals other than the spouse (typically the children or other close younger-generation relatives). By the way, the surviving spouse is still entitled to receive the income and can use the principal of this trust if necessary. But on the death of the surviving spouse, any assets remaining in the trust would be passed on to the heirs. Use of a marital deduction trust (also called a unified credit trust, QTIP trust, credit shelter trust, or family trust) can save as much as $250,000 in estate taxes. Of course, I think you should plan to spend all of your money before you die, but in the event some is left over, most of us would prefer to leave it to our kids or other family members than to Uncle Sam. If you think you may need a trust, be sure to speak with an attorney who is knowledgeable about estate planning. Changing ownership from joint to single name is pretty easy to do for married couples. On the other hand, the attorney may indicate that joint name is okay, which it might be even if you have a pretty sizeable estate that includes a lot of retirement plan investments that cant be put into a trust.
Can I Borrow From My IRA? I am reading your book Your Money Matters and have enjoyed your advice on all financial subjects. In the book, you mentioned that its possible to borrow from your IRA without penalty or interest. How does this work and how do I report this to the IRS? PJ You can borrow from your IRA for a period of up to 60 days if you replace the borrowed money into the same or another IRA within the 60 day time limit. But you can only do this once a year, although the once-a-year rule applies to each of your IRA accounts if you have more than one. The one-year period commences on the date you received the distribution from the first IRA account and applies to all additional loans that you make from other IRA accounts within that year. The loan is considered an IRA rollover and with any IRA rollover you have 60 days to put the money into another account without being penalized. But if you miss the 60-day period, no matter whos at fault (the financial institution, youre dog ate the paperwork the IRS has heard it all), youve got big problems, including taxes and, if youre under age 59 ½, probably a penalty. So loans from IRAs should be considered temporary loans only which you fully expect to be able to replace well within 60 days. Dont replace the money at the last minute, because even if its one day late, youre sunk. But this little-known loan privilege may come in handy from time to time (dont make a habit of it, thought). For example, if the April 15th IRA funding deadline looms but youre short the necessary bucks, borrow from an existing IRA to fund the new IRA. This will give you 60 days to scrounge up the booty to replace your IRA loan. As far a reporting this to the Internal Revenue Service, if you roll over funds from one IRA to another, the total distribution should be reported on Line 15a of Form 1040 or Line 10a of Form 1040A. If the entire distribution was rolled over, enter zero as the taxable amount of Line 15b (Form 1040) or Line 10b (Form 1040A). The rules on this loan strategy, so you may want to download IRS Publication 590 that deals with rollovers. TO ACCESS IRS PUBLICATIONS CLICK ON: http://www.irs.ustreas.gov WHICH IS BETTER A 401(K) OR A ROTH IRA? T.I. A Roth IRA contribution will in most instances provide a higher after-tax retirement income than an unmatched 401(k) contribution. Those whose employers offer a match should certainly contribute at least up to the level where they receive a match. But, getting back to the unmatched 401(k), keep in mind that it does take time for the tax-free withdrawal advantage of the Roth IRA to offset the initial tax-savings advantage of a 401(k) contribution since Roth IRA contributions must be made with after-tax dollars. Let me add a couple of additional comments to your dilemma, because its shared by a lot of people. First, one of the beauties of a 401(k) plan is that, in most situations, your contributions rise as your income rises. But the maximum annual Roth IRA contribution limit is $2,000. Thus, I fear that people who use the Roth IRA in lieu of their 401(k) will miss the opportunity to regularly and automatically increase their contributions. Second, unless youre one of those rare birds who got into the habit of maximizing your 401(k) plan contributions very early in your career, youll find that in order to achieve a financially comfortable retirement, youll need to save quite a bit more money than you save in a 401(k) alone. So, in the best of all worlds, you should get into the habit of contributing to both your 401(k) and a Roth IRA.
I Cant Keep Up With the Indexes The stock market did so well in 1999 that anyone could make money. The problem for me is that while I made money, my investment performance came no where near earning the profits that the major indexes showed. This isnt the first time my investments have lagged the averages, but each time it does, I get more distraught. J.M. First, most of the indexes use really flawed mathematics to calculate their gains. The larger a companys market capitalization (or in the case of the Dow Jones Industrial Average, the higher the stock price), the more the stock moves the average. How much sense does that make. It has been said that just 3 stocks Microsoft, Intel, and Cisco account for almost 40% of the move in the NASDAQ index. So it is not at all unusual for the indexes to reflect a return that is far higher (or lower) than the returns that most investors made. In 1999, the indexes really obscured what was a mixed year. While technology stocks skyrocketed, stocks in many other industries languished. But all attention was directed to the NASDAQ index, which is rife with technology stocks. It rose 85% last year. But close to two-thirds of publicly-traded stocks actually lost value -- about 6% on average. There was no safety in bonds, either, because rising interest rates in 1999 caused bonds to suffer their worst year since 1994. So dont be too harsh on yourself or your investment advisor if youre investments didnt perform spectacularly last year. It was an okay year, but it was hard to beat the indexes unless you were loaded up with technology stocks.
We Cant See Eye to Eye on Our Finances H.G. Its important to periodically take stock of your stocks and other investments. Heres what you need to do. First, summarize where you stand by tallying up your assets and liabilities. Once you get into the habit of summarizing your financial status each year, youll be able to measure your financial progress year by year. Next, decide how much youre going to save both inside retirement plans if youre still working and outside retirement plans. Set a savings goal that is higher than last year, but still achievable. The third item to do on your annual financial checkup day is to prepare a forecast of expected expenses and income during your retirement years (whether youre working age or retired). You should do this even if youre already retired. There are lots of Internet sites that can help you prepare your forecast check my index of web sites. Finally, review other areas of your financial life that may need some attention, including your insurance coverage, taxes, loans, and estate planning. |