Personal Finance: Another Perspective

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Personal Finance Another Perspective

• Retirement Planning 5
• Questions and Answers

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Questions

• 1. What are some strategies for the Accumulation
  stage of retirement?
• 2. What are some strategies for the Retirement
  stage of retirement?
• 3. What are some strategies for the Distribution
  stage of retirement?
• 4. How do I determine the taxable / retirement
  split from the hourglass?
• 5. Why do I have to look at all the details with
  mutual funds. Cant I just use the Morningstar
  Star rating to pick my mutual funds?

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Questions (continued)

• 6. What are the tax implications of the different
  between the Roth and the traditional
  IRA/401k/403b?
• 7. Should I have and use both traditional and
  Roth retirement vehicles in my retirement plan?
• 8. What is the most important thing I can do now
  to prepare for retirement?

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1. Strategies for Accumulation

• What are some examples of possible strategies for
  the Accumulation stage of retirement?
• 1. Live on a budget and save 20 of everything
  you make after school
• Of that 20, put half or 10 into retirement
  vehicles for your retirement
• 2. Follow the priority of money (for saving and
  investments)
• Get free money first, then tax advantaged money
  (tax eliminated and tax deferred), and then
  tax-efficient and wise investing

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Accumulation (continued)

• 3. Depending on your tax and investing views,
  maximize the amount of money in Roth vehicles
  versus traditional retirement vehicles
• Put as much new money as possible into Roth
  vehicles
• With sufficient money saved in Roth vehicles, you
  can plan for and minimize your taxes during
  retirement

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2. Strategies for Retirement

• What are some examples of possible retirement
  strategies for the Retirement/annuitization
  stage of retirement?
• 1. Determine your minimum acceptable level of
  retirement income (your survival amount)
• Try to get that part of your monthly expenses
  annuitized, i.e., paid to you each month for life
• The process is
• a. Determine how much money you will have with
  Social Security each month
• b. Determine any funding you will have from
  defined benefit plans each month

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Retirement (continued)

• c. Determine the difference between these
  amounts and your minimum acceptable level of
  retirement income, and obtain an immediate
  annuity at retirement that would give you that
  amount
• That way you will have your minimum amount for
  living expenses covered for the rest of your life
• Then, depending on the size of your retirement
  assets and your risk levels, you can annuitize
  more if you have a lower risk tolerance, or
  annuitize less, if you have a higher risk
  tolerance

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Retirement (continued)

• 2. With your spouse, determine how to take your
  distributions from your retirement accounts
• Work first to annuitize sufficient to give you
  your minimum survival level discussed earlier
• Make sure you use wisdom and judgment in your
  decisions
• Invest the remainder consistent with your risk
  level

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3. Strategies for Distribution

• What are some examples of possible Decumulation
  / Distribution strategies for the decumulation
  stage of retirement?
• 1. Use money from your deferred retirement
  accounts first, until you get to a target level
  for taxes to be paid
• Additional money beyond your target level of
  taxes can be taken out of your Roth (tax
  eliminated) vehicles tax free. Use them wisely
• 2. If you are required to take minimum
  distributions from your tax-deferred accounts and
  you dont need the money, you can roll those
  distributions into another qualified plan, i.e.,
  another Rollover IRA without taxes or into a Roth
  IRA

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Distribution (continued)

• 3. Watch the percentage of your total portfolio
  that you take out each year, i.e., your
  distribution percentage.
• If you take out a maximum distribution of
  3.5-3.9 of your portfolio each year (or less),
  your money is more likely to last your lifetime
• 4. Use the time on your missions to transfer
  money from your tax-deferred accounts to Roth
  accounts
• If you are under the income limits, you can
  transfer funds to a Roth at a low level of taxes

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Distribution (continued)

• 5. While it is important to help your kids who
  are having financial problems, realize that your
  first priority is to take care of you and your
  spouse and to make sure you have the financial
  resources to do that adequately first during
  retirement
• Make sure you plan to cover your medical costs
  and expenses and the impact of inflation
• Once you are set up well financially, then worry
  about your childrens finances
• They are responsible for their own finances
• Parents who continually help their adult children
  financially will find their adult children always
  need help

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4. How do I Determine the Taxable / Retirement
Split?

• The split between taxable and retirement assets
  is determined by
• a. Your personal goals, and
• b. Your available retirement vehicles
• Personal goals might be save 20, and half or
  10 goes into retirement vehicles build your
  emergency fund save for childrens education and
  missions, etc.
• The goal would determine the category
  retirement (retirement), missions (taxable),
  education (retirement), down payment (taxable),
  etc.
• Note that education funds are similar to
  retirement in that you cannot take out the funds
  without a penalty

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Taxable / Retirement Split?

• Available retirement vehicles are based on what
  you are able to invest in. This is determined by
  whether you have a qualified retirement plan
  (QRP) currently at work and whether your current
  income is within IRA deductibility limits.
• With a QRP and within 2012 IRA limits You can
  put up to 17,000 per year into a QRP
  (401k/403b/457 Plan) and up to 5,000 into an
  IRA.
• Your spouse can also contribute up to 5,000 into
  an IRA account
• With QRP and outside IRA limits You can
  contribute up to 17,000 to the QRP
• You nor your spouse can contribute to an IRA

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5. Why do I have to pick funds? Cant I just
use the Morningstar star rankings?

• Some investors use Morningstar and other
  newsletters to do their homework for them.
  Shouldnt that be enough?
• Morningstar ratings are backward looking, i.e.,
  they use historical data
• Research has shown that the rankings have no
  predictive value for future performance
• Funds with 4 and 5-star ratings typically have
  the highest inflows of assets. With more assets,
  it is harder to put all this new money to work
  effectively

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Morningstar Star Ratings

• 10 Year Results of Morningstar Ratings
• Data
• Of 248 stock funds rated 5-star in 1999, only 4
  kept that rank after 10 years (1.7)
• Of the 218 domestic stock funds rated 5-star in
  1999, all typically lagged behind their category
  averages and benchmarks over the period
• Results
• 5-star funds typically do not continue to lead
  their peersthey typically do worse
• Use this ranking at your peril

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Morningstar Star Ratings

• We know the principles of successful investing
• Invest low cost, tax efficiently, be diversified,
  know what you invest in and who you invest with,
  invest long-term, etc,
• Ratings should be one tool of this analysisbut
  only one tool
• If you will follow the principles taught in this
  class, you will do a lot better than those who
  blindly follow Morningstar or other star rankings
• See Sam Hamudi, Investors have Stars in their
  Eyes, Wall Street Journal, June 1, 2010, p. C7.

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6. What are the tax implications between the
Roth and traditional vehicles?

• The tax implications are
• With the Roth you pay taxes upfront and outside
  of the retirement vehicle
• You get no tax deduction now for assets to be put
  aside or saved for retirement
• The benefit is you will have to pay no future
  taxes on assets in these vehicles
• This includes no taxes on earnings, capital
  gains, interest or dividends
• Now, regardless of earnings type, you will pay no
  taxes on these assets. Therefore, put your
  highest tax assets in these vehicles
• Requires no minimum distribution

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Tax Implications of Roths (continued)

• With the traditional 401k/IRA/403b, you get an
  exclusion from total income now
• This reduces your total income so you pay no
  taxes on the amounts in qualified plans
• However, when you take the assets out at age 59½
  for retirement, they are
• Taxed as ordinary income
• This in essence converts long-term capital gains
  (which they likely were) into ordinary income,
  which is taxed at the highest rate
• Requires minimum distributions after age 70½

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7. Should I have both tax eliminated and tax
deferred assets in my retirement plan?

• Is there logic for having both traditional and
  Roth retirement vehicles in your Plan?
• Yes. The US tax system is progressive. As you
  tax out more assets from your tax-deferred
  retirement vehicles you are taxed at a higher
  rate
• However, for the first 17,400 in 2012 you are
  taxed at only 10, and only 15 between 17,400
  and 70,700
• By having both traditional and Roth vehicles you
  can manage your tax rates to a target percentage
  first, i.e., 10. Then any additional funds can
  be taken from your Roth vehicles to ensure a low
  effective tax rate

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8. What is the Most Important Thing I can do Now
to Prepare for Retirement?

• What is the most important thing I can do now?
• Realize that you cannot spend your way to a
  successful retirement. It is critical that you
  begin saving now! Assume a 2 million goal at
  8. To save for this goal for the following
  years you would need to put the following amounts
  away each month
• Years Till Retire Amount Years Amount
• 40 Years 573 35 Years 872
• 30 Years 1,342 25 Years 2,103
• 20 Years 3,395 15 Years 5,708
• 10 Years 10,932 5 Years 27,219
• 1 Year 160,644

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Most Important Thing to Do Begin Now

• The key is to make it a priority and to start now!