Quoted in Dallas Morning News on 2010 Roth conversions
October 25, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
I had the opportunity to talk with Pamela Yip, personal finance columnist at the Dallas Morning News, a couple weeks back about 2010 Roth IRA conversions. Her article provides a good synopsis of the changes for 2010, and quotes me on when conversion makes the most sense. Click here to read the article.
Who should consider Roth conversion
September 18, 2009 by Jean Keener, CFP, CRPC, CFDS · 2 Comments
Given the historic opportunity of 2010 to spread the tax payment over 2 years in 2011 and 2012, everyone with a traditional IRA should take at least one look at Roth IRA conversion for next year.
It is most beneficial to you when all of these apply:
- You’ll pay the resulting “conversion” tax with non-IRA funds
- You have 10 years or more before you will be taking distributions from the Roth IRA
- You will be in the same or a higher tax bracket when you start taking those distributions.
But even if only some or none of these apply, it doesn’t mean you should rule conversion out.
There are still many times where it can make sense, and some that don’t. It’s easiest to discuss these by looking at few examples.
I did an analysis for a 64-year-old who didn’t have the money to pay the tax with non-IRA funds, so the taxes were going to come out of his IRA. He also only had 6 years until he planned to start taking distributions. He was going to be in the same tax bracket in 2011-2012 and in retirement. In his situation, he still came out ahead with conversion – having over $1,000 more in after-tax retirement income by converting. He won’t be subject to the 10% penalty on the amount withdrawn to pay the tax because he is over 59 ½. His situation was also helped by not planning to take social security until age 70. If he was already receiving social security benefits, we would have needed to consider any additional income tax implications on his social security benefits for the years he claimed the conversion income.
Another analysis was for a 32-year-old woman. She has a pre-tax employer
401k and was also trying to decide if conversion made sense. She also does not have the funds to pay the taxes with non-401k money, and she would be subject to the 10% penalty by withdrawing funds from the 401k before age 59 ½ to pay the taxes. We estimated her tax bracket in 2011-2012 and in retirement as the same. In her case, conversion did not make sense. But it was quite close. If she believed that her tax rates were going to be higher by the time she retired by even 1%, the conversion would have significantly increased her after-tax income.
One last example – 44 year old. He had a traditional IRA and had money to pay the taxes from a non-IRA account. However, we estimated that his tax bracket in retirement would likely be lower than it is now, by about 3%. In his case, conversion was still a great deal even with the projected lower retirement tax rate. Having all those years of after-tax growth more than off-set the potential for a slightly lower rate in retirement.
If you have a traditional IRA, an analysis is in order.
The above examples illustrate that even when your situation doesn’t meet the “ideal conversion” criteria, it still may make a significant difference in your after-tax retirement income. If you’d like to see the specific calculations on any of the examples listed above, please feel free to contact me and I’d be happy to send them to you.
A few other considerations to keep in mind
If your estate is potentially subject to the estate tax, a Roth conversion can be a powerful planning tool.
The market’s relative “high” or “low” value when you convert is also a factor in how good a deal conversion is – low values mean you pay tax on a lower amount.
There are also opportunities to convert in early 2010 and undo the conversion later based on circumstances or market performance. We’ll discuss this in future posts.
Paying the Bills: Potential Sources of Retirement Income
August 18, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Planning your retirement income is like putting together a puzzle with many different pieces. One of the first steps in the process is to identify all potential income sources and estimate how much you can expect each one to provide.
Social Security
According to the Social Security Administration (SSA), more than 9 of 10 people aged 65 or older receive Social Security benefits. However, most retirees also rely on other sources of income.
The SSA sends you an estimate of your benefits each year. The closer you are to full retirement age, the more accurate that estimate will be. For a rough estimate, you can use the calculator on the Social Security website (http://ssa.gov).
Your Social Security retirement benefit is calculated using a formula that takes into account your 35 highest earnings years. How much you receive ultimately depends on a number of factors, including when you start taking benefits. You can begin doing so as early as age 62. However, your benefit may be 20% to 30% less than if you waited until full retirement age (65 to 67, depending on the year you were born).
As you’re planning, remember that the question of how Social Security will meet its long-term obligations to both baby boomers and later generations has become a hot topic of discussion. Concerns about the system’s solvency indicate that there’s likely to be a change in how those benefits are funded, administered, and/or taxed over the next 20 or 30 years. That may introduce additional uncertainty about Social Security’s role as part of your overall long-term retirement income picture, and put additional emphasis on other potential income sources.
Pensions
If you are entitled to receive a traditional pension, you’re lucky; fewer Americans are covered by them every year. Be aware that even if you expect pension payments, many companies are changing their plan provisions. Ask your employer if your pension will increase with inflation, and if so, how that increase is calculated.
Your pension will most likely be offered as either a single or a joint and survivor annuity. A single annuity provides benefits until the worker’s death; a joint and survivor annuity provides reduced benefits that last until the survivor’s death. The law requires married couples to take a joint and survivor annuity unless the spouse signs away those rights. Consider rejecting it only if the surviving spouse will have income that equals at least 75% of the current joint income. Be sure to fully plan your retirement budget before you make this decision.
Work or other income-producing activities
Many retirees plan to work for at least a while in their retirement years at part-time work, a fulfilling second career, or consulting or freelance assignments. Obviously, while you’re continuing to earn, you’ll rely less on your savings, leaving more to accumulate for the future. Work also may provide access to affordable health care.
Be aware that if you’re receiving Social Security benefits before you reach your full retirement age, earned income may affect the amount of your benefit payments until you do reach full retirement age.
If you’re covered by a pension plan, you may be able to retire, then seek work elsewhere. This way, you might be able to receive both your new salary and your pension benefit from your previous employer at the same time. Also, some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age, while you continue to work part-time for the same employer.
Other possible resources include rental property income and royalties from existing assets, such as intellectual property.
Retirement savings/investments
Until now, you may have been saving through retirement accounts such as IRAs, 401(k)s, or other tax-advantaged plans, as well as in taxable accounts. Your challenge now is to convert your savings into ongoing income. There are many ways to do that, including periodic withdrawals, choosing an annuity if available, increasing your allocation to income-generating investments, or using some combination. Make sure you understand the tax consequences before you act.
Some of the factors you’ll need to consider when planning how to tap your retirement savings include:
- How much you can afford to withdraw each year without exhausting your nest egg. You’ll need to take into account not only your projected expenses and other income sources, but also your asset allocation, your life expectancy, and whether you expect to use both principal and income, or income alone.
- The order in which you will tap various accounts. Tax considerations can affect which account you should use first, and which you should defer using.
- How you’ll deal with required minimum distributions (RMDs) from certain tax-advantaged accounts. After age 70½, if you withdraw less than your RMD, you’ll pay a penalty tax equal to 50% of the amount you failed to withdraw.
Some investments, such as certain types of annuities, are designed to provide a guaranteed monthly income (subject to the claims-paying ability of the issuer). Others may pay an amount that varies periodically, depending on how your investments perform. You also can choose to balance your investment choices to provide some of both types of income.
Inheritance
One widely cited study by economists John Havens and Paul Schervish forecasts that by 2052, at least $41 trillion will have been transferred from World War II’s Greatest Generation to their descendants. (Source: Why the $41 Trillion Wealth Transfer Is Still Valid) An inheritance, whether anticipated or in hand, brings special challenges. If a potential inheritance has an impact on your anticipated retirement income, you might be able to help your parents investigate estate planning tools that can minimize the impact of taxes on their estate. Your retirement income also may be affected by whether you hope to leave an inheritance for your loved ones. If you do, you may benefit from specialized financial planning advice that can integrate your income needs with a future bequest.
Equity in your home or business
If you have built up substantial home equity, you may be able to tap it as a source of retirement income. Selling your home, then downsizing or buying in a lower-cost region, and investing that freed-up cash to produce income or to be used as needed is one possibility. Another is a reverse mortgage, which allows you to continue to live in your home while borrowing against its value. That loan and any accumulated interest is eventually repaid by the last surviving borrower when he or she eventually sells the home, permanently vacates the property, or dies. (However, you need to carefully consider the risks and costs before borrowing. A useful publication titled “Reverse Mortgages: Avoiding a Reversal of Fortune” is available online from the Financial Industry Regulatory Authority.)
If you’re hoping to convert an existing business into retirement income, you may benefit from careful financial planning to minimize the tax impact of a sale. Also, if you have partners, you’ll likely need to make sure you have a buy-sell agreement that specifies what will happen to the business when you retire and how you’ll be compensated for your interest.
With an expert to help you identify and analyze all your potential sources of retirement income, you may discover you have more options than you realize.
Retiring Later Boosts Social Security Benefit
May 28, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The following chart illustrates how the age you begin receiving benefits can greatly affect the amount of income you receive from Social Security every month. The chart assumes a full retirement age of 66, and a base benefit at full retirement age of $2,000 (which is nearly the maximum Social Security benefit an individual can receive).
In this hypothetical example (your individual situation will be different), the Social Security benefit available at age 62 is $1,500, which is 25% less than the $2,000 monthly benefit available at full retirement age. But at age 70, the benefit available is $2,640, which is 32% more than the monthly benefit available at full retirement age, due to delayed retirement credits. Keep in mind, too, that other factors, including post-retirement earnings and cost-of-living increases, can also affect your monthly benefit check.
You can explore various retirement benefit scenarios using the calculators available at the Social Security Administration’s website.
Social Security Myth Debunked
May 26, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Question: Help! I’m 62 and my income is declining. Should I take social security now to lock in my benefits?
Quick answer: this is not a good reason to take social security early.
Social security uses your highest 35 years in calculating your benefit. They index the years before age 60 for inflation, and then average them. So while lower earnings in the last few years before you take social security don’t help increase your “high 35″ average, it doesn’t reduce it either. Bottom line: lower earnings now is not a reason to start taking social security earlier.
One thing to be aware of: it may appear on your social security statement that your future projected benefit at full retirement age is declining if your earnings are going down. That’s because each year when your statement is generated, social security projects that your income will stay the same as last year’s income all the way through retirement. If that doesn’t happen, they need to adjust the projections.
You should really base the decision on when to take social security on whether you need the money now or not, and how life expectancies run in your family. If people tend to live a long time in your family, waiting is likely a very good idea if you can afford to live without the income now.
Of course, social security is under-funded, and there are no guarantees for any of us. But those in the 60+ age group can have more certainty in planning on full or close to full benefits than people under 50.
If you want to read more about this, you can walk through your calculation at http://www.socialsecurity.gov/pubs/10070.html#estimate.
April 2009 Newsletter
April 6, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The April 2009 newsletter is now available online. It includes an update on market conditions, plus information on the Cobra subsidy, writing off worthless securities on your taxes, an estate planning pitfall to avoid, a conversation for parents about saving for retirement vs. college, and a how-to on budgeting. Click here to read the newsletter.
Retirement V. College
April 3, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
So many parents struggle with the dilemma of whether they should prioritize saving for kids’ college or their own retirement. Some parents believe that children benefit the most from being responsible for their own college funding through personal work, savings, scholarships, and borrowing to get hrough college. Other parents have a strong desire to fully fund at least an undergraduate degree for their children because they believe their children will enjoy college the most and be best positioned for success in life by not being responsible for these costs. Both viewpoints are valid. Which category you fall into seems to have a lot to do with your personal experiences and the affect you feel they had on you — if you worked your way through college and felt it contributed to your personal responsibility and character, you probably think it would be good for your kids too. If you worked your way through and felt like you missed out on parts of college life or graduated with crippling debt, you probably want to help your children have a different experience. Or if your parents supported you through college and you felt that support made an important difference in your later success, you probably want to do the same for your children. But regardless of your motivation, if you want to help fund your children’s education, you are likely faced with a dilemma.
So how do you juggle the two?
First, know what your financial needs are for each goal. If you’re working with Keener Financial Planning, we will go through a series of questions and projections with you to help assess the cost of each goal. But if you’re working on your own, answering the following questions can help you get started.
For retirement:
- How many years until you retire?
- Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
- How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, now mailed every year by the Social Security Administration. However, if you’re under age 55 now, you may wish to count on a lesser amount than your statement indicates.)
- What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
- Do you or your spouse expect to work part-time in retirement?
For college:
- How many years until your child starts college?
- Will your child attend a public or private college? What’s the expected cost?
- Do you have more than one child whom you’ll be saving for?
- Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
- Do you expect your child to qualify for financial aid?
Figure out what you can afford to put aside each month
After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.
If possible, save for your retirement and your child’s college at the same time
Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment.)
Help! I can’t meet both goals
If the numbers say that you can’t afford to fund your child’s education or retire with the lifestyle you expected, you can choose to scale back your goals or make some sacrifices now to fund additional savings. There are lots of financial levers you can pull. The trick is figuring out which option is the least painful for you. Options for your consideration:
- Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
- Work part-time during retirement.
- Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
- Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
- Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss).
- Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
- Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty–a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
- Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.
Retirement takes priority
I can not emphasize this strongly enough. Though funding college is extremely important, it should not be paid for at the expense of your retirement funds. With generous corporate pensions mostly a thing of the past and social security under-funded, the burden is primarily on you to ensure a secure retirement. Your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan! And the biggest gift you may be able to give to your children is being financially secure in your retirement so they don’t worry about your well-being.
Can retirement accounts be used to save for college?
Yes. Should they be? NO! This is almost always a bad idea. However, if you decide to go this route, know the consequences. With IRAs, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10 percent penalty on any withdrawals made before you reach age 59½ (age 55 in some cases), even if the money is used for college expenses. You may also be subject to a six month suspension if you make a hardship withdrawal. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)
Working During Retirement
February 5, 2009 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Planning on working during retirement? If so, you’re not alone. An increasing number of employees nearing retirement plan to work at least some period of time during their retirement years.
Why work during retirement?
Clearly, if you work during retirement, you’ll be earning money and relying less on your retirement savings–leaving more to potentially grow for the future and making your savings last longer, as shown in the chart below:
| Assumptions: Retirement savings $1,000,000 Earnings rate 6% Preretirement income $150,000 Social Security $2,000/month Desired income replacement 80% ($120,000/year, $10,000/month) |
|||
| Without working, you’ll need to use $8,000 ($10,000 desired income minus $2,000 Social Security) of retirement savings per month, and your savings will last 16 years. | |||
| But if you earn this amount monthly… |
for 3 years, your savings will last… |
for 5 years, your savings will last… |
for 10 years, your savings will last… |
| $1,000 | 17 years | 18 years | 19 years |
| $2,000 | 18 years | 19 years | 22 years |
| $3,000 | 19 years | 21 years | 26 years |
| $4,000 | 20 years | 23 years | 32 years |
| $5,000 | 22 years | 26 years | 39 years |
| This is a hypothetical example and is not intended to reflect the actual performance of any specific investment, and does not take into account the effect of taxes and inflation. | |||
If you continue to work, you may also have access to affordable health care, as more and more employers are offering this important benefit to part-time employees.
But there are also non-economic reasons for working during retirement. Many retirees work for personal fulfillment–to stay mentally and physically active, to enjoy the social benefits of working, and to try their hand at something new–the reasons are as varied as the number of retirees.
How will working affect Social Security?
If you work after you start receiving Social Security retirement benefits, your earnings may affect the amount of your benefit check. Your monthly benefit is based on your lifetime earnings. When you become entitled to retirement benefits at age 62, the Social Security Administration calculates your primary insurance amount (PIA), upon which your retirement benefit will be based. Your PIA is recalculated annually if you have any new earnings that might increase your benefit. So if you continue to work after you start receiving retirement benefits, these earnings may increase your PIA and thus your future Social Security retirement benefit.
But working may also cause a reduction in your current benefit. If you’ve reached full retirement age (65 to 67, depending on when you were born), you don’t need to worry about this– you can earn as much as you want without affecting your Social Security retirement benefit.
If 
you haven’t yet reached full retirement age, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit ($14,160 in 2009). A special rule applies in your first year of Social Security retirement–you’ll get your full benefit for any month you earn less than one-twelfth of the annual earnings limit, regardless of how much you earn during the entire year. A higher earnings limit applies in the year you reach full retirement age. If you earn more than this higher limit ($37,680 in 2009), $1 in benefits will be withheld for every $3 you earn over that amount, until the month you reach full retirement age–then you’ll get your full benefit no matter how much you earn. (If your current benefit is reduced because of excess earnings, you may be entitled to an upward adjustment in your benefit once you reach full retirement age.)
Not all income reduces your Social Security benefit. In general, Social Security only takes into account wages you’ve earned as an employee, net earnings from self-employment and other types of work-related income, such as bonuses, commissions, and fees. Pensions, annuities, IRA distributions, and investment income won’t reduce your benefit.
Also, keep in mind that working may enable you to put off receiving your Social Security benefit until a later date. In general, the later you begin receiving benefit payments, the greater your benefit will be. Whether delaying the start of Social Security benefits is the right decision for you, however, depends on your personal circumstances.
One last important point to consider: in general, your Social Security benefit won’t be subject to federal income tax if that’s the only income you receive during the year. But if you work during retirement (or receive any other taxable income or tax-exempt interest), a portion of your benefit may become taxable. IRS Publication 915 has a worksheet that can help you determine whether any part of your Social Security benefit is subject to federal income tax.
How will working affect my pension?
If you work for someone other than your original employer, your pension benefit won’t be impacted at all–you can work, receive a salary from your new employer, and also receive your pension benefit from your original employer. 
But if you continue to work past your normal retirement date for the same employer, or if you retire and then return to work for that employer, you need to understand how your pension will be impacted.
Some plans will allow you to start receiving your pension benefit once you reach the plan’s normal retirement age, even if you continue to work. Other plans will suspend your pension benefit if you work beyond your normal retirement date, but will actuarially increase your payment when benefits resume to account for the period of time benefits were suspended. Still other plans will suspend your benefit for any month you work more than 40 hours, and will not provide any actuarial increase–in effect, you’ll forfeit your benefit for any month you work more than 40 hours.
Some plans provide yet another option–”phased retirement.” These programs allow you to continue to work on a part-time basis while accessing all or part of your pension benefit. Federal law encourages these phased retirement programs by allowing pension plans to start paying benefits once you reach age 62, even if you’re still working and haven’t yet reached the plan’s normal retirement age.
If your pension plan calculates benefits using final average pay, be sure to discuss with your plan administrator how your particular benefit might be affected by the decision to work part-time. In some cases, reducing your hours at the end of your career could reduce your final average pay, resulting in a smaller benefit than you might otherwise have received.
How will working affect my health benefits?
Many individuals work during retirement to keep their medical coverage. If working during retirement for you means moving from full-time to part-time, it’s important that you fully understand how that decision will impact your medical benefits.
Some employers, especially those with phased retirement programs, offer medical coverage to part-time employees. 
But other employers don’t, or require that you work a minimum number of hours to be benefits eligible. If your employer doesn’t offer medical benefits to part-time employees, you’ll need to look for coverage elsewhere. If you’re married, the obvious option is coverage under your spouse’s health plan, if your spouse works and has coverage available. If not, you may be eligible for COBRA coverage.
COBRA is a federal law that allows you to continue receiving medical benefits under your employer’s plan for some period of time, usually for 18 months, after a qualifying event (including loss of coverage due to a reduction in hours). But it’s expensive–you typically have to pay the full premium yourself, plus a 2% administrative fee. (COBRA doesn’t apply to employers who have fewer than 20 employees.) Another option is private health insurance, but that will also be very expensive.
Of course, once you turn 65, you’ll be eligible for Medicare. You’ll want to contact the Social Security Administration approximately three months before your 65th birthday to discuss your options. If you have private or employer-sponsored health insurance, talk to your benefits administrator or insurance representative before enrolling in Medicare to find out how your current health insurance fits in with Medicare.
Annuities: Retirement Income Option
December 5, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Everyone like a guarantee. Unfortunately, in the financial services industry they’re few and far between. And those that are available often come with a steep price — if you can even figure out what the price is.
- Life only. Payments continue during your lifetime, but stop at your death.
- Period certain. Payments are made for a fixed period of time (e.g., 5, 10, 15, 20 years). If you die prior to the end of the chosen period, your beneficiary will continue to receive payments for the remainder of the fixed period.
- Life with a period certain. Payments are made for the rest of your life or a minimum period of time. If you die prior to the end of the minimum payment period, the beneficiary you name in the annuity will receive the payments for the remainder of the period certain, but no longer. If you outlive the period certain, payments will end at your death.
- Joint and survivor. Payments are based on the lives of two people, typically you and your spouse. When either of you dies, payments continue to be made to the survivor. This option can also be combined with a period certain option, in which case payments will continue until both of you have died or for the minimum period of time you select, whichever is longer.
- Installment refund/cash refund. If you die prior to receiving at least the return of your investment in the immediate annuity, your beneficiary will receive an amount equal to the difference between what you invested and what you received. Your beneficiary will receive this amount in either a lump sum (cash refund) or periodic payments (installment refund).
The amount of each SPIA payment you get can be affected by the payment option you select. For example, a 60-year-old man who invests $100,000 in an immediate annuity may receive annual payments of $7,260 for the life only option, $6,696 for life with a period certain of 20 years, or $7,920 for a fixed period of 20 years. (This example is for illustration purposes only and does not reflect actual insurance products or performance, nor is it intended to promote a specific company or product.)
December 2008 Newsletter
December 5, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
The December Newsletter is now available.