IRAs, Roths, and the AARP

Posted on September 24, 2014September 24, 2014 by Danielle

One of the benefits of reaching 50 is that you get to join AARP. No, I’m not talking about the endless promos you will then begin to receive for dubious insurance, but their magazine and Bulletin, which offer some of the most sensible consumer financial and health advice around. Even if you’re not over 50, it’s worth taking a look at the September Bulletin’s Retirement Guide, which offers an excellent primer on most of the issues. I do have a few comments on their Step 4: Avoid a Nasty Tax Surprise.

It’s a pretty good discussion of the benefits of choosing a Roth or Roth 401k over contributing to a Traditional IRA or a regular 401k. I heartily agree that retirees can find themselves in quite a predicament when they discover that their required minimum distributions (RMD) from the regular 401k or Trad IRA don’t come free—you’re going to pay ordinary income tax on that, and the RMD even has the possibility to kick you up into a higher tax bracket. So that withdrawal is definitely not going to be all spendable income, ouch.

Honestly, I’ve only recommended a client favor contributing to a Trad IRA once this year. In nearly every other circumstance, the better choice is a Roth (and Roth 401k, if your company offers it). Ask yourself:

Is your income over $60K (single) or $95K (couple)? You’re probably not going to get the deduction anyway. You can contribute to a Roth without phase-out until $114K (single) or $181K (couple). (Regular 401k limits apply to Roth 401ks.)
Do you think taxes are going down? Most people, according to the article, stay in the same tax bracket when they retire. But it’s probably a safe bet that taxes will be higher in 10, 20, or 30 years so you’ll be paying more on that Trad IRA/401k, plus being taxed fully on increases produced by the investment.
Does the deduction really help that much? Here, probably the answer is yes in the 401k and no for the Trad IRA. So split it up.
Could you withdraw money in such a way that in at least some years your taxable income will be low enough so that you won’t pay tax on your Social Security benefits? This is a pretty complex question, so you probably need to give me a call to work through that possibility.
Any chance you won’t need all your possible income at 70, or maybe at all? With no RMD, you can leave that money invested to grow longer, or leave it to your heirs. Or take it all out at once if you need to pay for long-term care, without incurring more income taxes.

Although the article suggests that you should be at least ten years from retirement to select a Roth, I’m not so sure. Some of these reasons make a Roth desirable even for people much closer to retirement, and in the case of some earners, worthwhile because of the income eligibility limits on the Trad IRA. If you didn’t save from your very first job, and are trying to power-save now, a Roth might still be the right answer.

The old concept of the three legged retirement stool is one I love: no matter a little shortfall or instability in one area, the whole can provide a steady seat.

Regular taxable investments—at least right now, tax savvy allocation can produce taxation at the capital gains rate rather than at the usually higher ordinary income rate
Pensions, Social Security, and other guaranteed income, so you have a solid floor.
Retirement funds—nice if you can manipulate them so that they’re all tax-free coming out (pay attention, those not yet old enough to join AARP). Older workers—don’t beat yourself up! Roths have only been available since 1997.

No, you’re probably not going to be able to dodge the tax man entirely, but paying attention to tax requirements and thoughtful asset location can loosen his hoary grip.

Home ownership and (not so) routine maintenance

Posted on August 20, 2014August 20, 2014 by Danielle

I’m a born condo dweller so I don’t know why I still have this darn house. Okay, it was because I didn’t follow my own advice and kept the house in the divorce. (See this post for why you shouldn’t.) It wasn’t a terrible decision financially—the divorce valuation was at the height of the bust, so the value has allegedly gone up quite a bit, it has a great home office, and my dog thinks the yard is her kingdom. But the reason I should be living in a condo is because I hate maintenance.

If you’ve slugged it out for a while in a divorce, or been on the rocks for a few years before (my hand is up!), you can bet there’s a ton of deferred maintenance. But even if you’re as on top of maintenance as my mom used to be, you can count on being frenemies with some contractors every year your address is a single family dwelling. It’s very important to recognize the ongoing nature of repairs, and budget for them (especially when you’re thinking through a divorce or retirement).

A decent rule of thumb is to budget 1% of the home’s value for regular, ongoing repairs and maintenance. I suppose this might have been accurate if the ex had been dependable and completed the myriad of projects he either started or ignored. But the first few years after my own divorce I had a ton of clean-it-up projects to fix—including the raining in my office which he had been “getting to” for 7 years.

The 1% is a good place to start, but take a closer look at your home for better estimation. Consider these points:

What’s the house made of? If you have wood siding or a lot of trim, you need a paint job probably every 5-7 years. Get an estimate and divide by 5. If it’s stucco, not so much maintenance but in my first hand experience you occasionally have a piece crack and fall off. Even if you have brick, you’re not home free—tuck-pointing and trim painting will need to be done if you’re not going to develop “unexpected” leaks.
What’s the yard look like? Personally, I’m continually at war with the weeds. In 20 years, I haven’t won, but they really gained ground during two consecutive summers when I first broke my foot and then had to get my dad’s (neglected) home ready for market–I barely touched the yard. My DIY tendencies are rampant when it comes to the yard and I’ve wasted a ton on harebrained ideas—a push mower, lots of plants that I forget to water, and plants sold to me as shade tolerant that succumbed nearly instantly. Nevertheless, if you have a yard you have to budget for plants and trees: replacement plants for the ones that inevitably croak, and tree maintenance. Trees are huge (ugh, pun)—trimming at least every other year, various schemes to abate or prevent pests, and crashes. In 5 years I’ve had to remove 3 trees–$890, $1,600, $2,500. Breathtakingly expensive and often an emergency. If you have teenage kids or are paying for a health club, in my view you don’t need a lawn service. Your mileage may vary. Lawn services, if regular, are not really part of this 1% rule.
How old is your heating plant, water heater, and roof? Make a good guess and put them on the maintenance calendar.
Painting, floor refinishing, and new carpeting are a few things home and condo owners will both need to replace, but for most other issues, the condo assessment fee (if well thought out by the association) should pay for most structural, exterior, or common elements.

As an aside, if you are a condo dweller and want to analyze your assessment, add up the cost of any utilities and insurance it covers, a decent allowance for “saving” for future repairs, and that 1% of value and you have a rough gauge of whether your assessment is reasonable. I’m not quite sure how to measure the aggravation level of finding contractors who actually show up and finish the project.

Every once in a blue moon, I don’t actually spend that 1%. Okay, I do (and more) but I dream about the time when I might get a break. You might not spend that every year, but suddenly get hit with the need to replace the furnace. Start that repair fund now and you’ll keep your plastic in your pocket and your heart in your chest.

So long carpenter. I have to go call the painter.

Investing for the old and foolish

Posted on July 10, 2014July 10, 2014 by Danielle

I’m pretty tired of hearing about scams involving the elderly that paint older people as doddering children. (It’s a corollary of the cultural motif of “Dad is a Doofus”). But lately, there have been some respectful public service announcements with intelligent looking older people (finally!) warning you to check out any investment advisor and be careful. Great idea which I totally support.

However, like many research projects, the devil is in the details. It just isn’t the easiest thing to find out who is trustworthy and knows what they’re doing. Not any different with a doctor, lawyer, or accountant, really. So here are some ways:

One that doesn’t work is checking out Yelp, endorsements or testimonials on the advisor’s website or LinkedIn, etc. Fee-only advisors are not supposed to have any of these, and you’ll note that there aren’t any on the website you’re currently viewing. In fact, if you see testimonials you can be pretty certain you are looking at a broker’s website, not a fee-only advisor. If you see a tiny footnote on a page mentioning anything about the sale of securities, you’re on a stockbroker website.

You can check to see if the advisor has any complaints registered here.(There’s a corresponding one for brokers, but you shouldn’t be looking for one if you listen to me.) But as any landlord who runs credit checks can tell you, just because nobody has registered a formal complaint doesn’t mean the advisor is trouble free. Worth a look, though.

Check out and read the profiles on the Garrett Network and NAPFA. Okay, I’m biased because I belong to both of these organizations. But they are the leading membership organizations for fee-only advisors. Many Garrett members are one or few-person operations dedicated to helping people with everyday financial questions, personalized for the specific situation. NAPFA members range from one-person shops on up, and some are more focused on investment management. Their profiles will indicate this.

Next, talk to the advisor! Many offer a free get acquainted meeting so you can get a feel for their philosophy and methods. Most people in this industry are convivial, so being “nice” isn’t a reason, alone, to hire any of us. But ask some hard questions:

what would you do if I wanted to be more conservative/aggressive in investing than you recommend?
How did you arrive at your projected return for me?
Give me some examples of tough planning problems you’ve worked on.
What if I don’t like some of your recommendations?
Why do you recommend X?
How did you get into financial planning?
What would you advise if my portfolio took a dive?

NAPFA and Garrett both have information on what to ask an advisor, and tons more information on what to look for.

And here are some dumb questions—I’m answering them now so you don’t have to ask me:

Where do you think the market is going? Who knows? Not me and not your brother in law and not Jim Cramer.
How did you do last year? For whom? I don’t have a canned portfolio for everyone, and many of my planning clients are concerned about many more issues than investment portfolios. In any case, one year tells you nothing.
I have a great investment that will make me 10-15-100%, guaranteed. What do you think of it? Um, call me back when you lose it all.

But let’s return to investing for people over, say, 80 years old. Most likely, this is not a portfolio that has to last another 30 years, or that needs to support the purchase of a new BMW or extensive and frequent travel. If so, of course we can plan for that. But for most people at this age or above, the portfolio needs to help support a decent lifestyle, quality medical care, assistance when needed, and perhaps leave a legacy to children, charity, or both.

No matter what age, a portfolio should take the least risk necessary to achieve the investor’s goals. Sometimes I see a conflict between children who would like their inheritance to be larger and feel the parent is managing too conservatively to maximize return, but only the owner is really entitled to define the degree of risk that is tolerable. Sometimes it’s the opposite—the elder is scrimping in order to leave a larger legacy, at the cost of reasonable comfort and care.

Other tips:

Don’t get desperate or greedy. If it sounds too good to be true, it is.
Know what advice is costing you. As I once told my dad, nobody gives you advice for free just because you’re a nice old guy. Nobody works for free, but know how your advisor is getting paid.
Keep learning. There are plenty of tried-and-trues in financial planning, but some things do change. You should always understand how you are going to make money from the investment, and what the rules are (watch out particularly in insurance).
Don’t believe someone because they’re nice. Believe them because they know what they’re doing and because they’re honest.
Check out the information the advisor puts out. Does the website seem canned? If they blog, does it reflect any personal attitudes and are you comfortable with that kind of advice? Or does the entire website seem like it was put together by corporate headquarters or a production company?
Read the advisor’s ADV. It’s a document designed to protect you, the consumer, by giving you information about how the advisor does business, and what investment philosophy he or she promulgates. Also, you can get information about what the advisor charges, and what type of projects they handle. Generally it’s on the website, but the advisor is required to provide it to you so just ask. (Mine’s on this page.)

As with most thorny decisions, you have to seek a reasonable balance, get advice from someone who has background and expertise, and be guided by that expertise while still using your own common sense. BTW, Warren Buffett is nearly 84. I don’t know anyone that thinks he’s old and foolish.