Ask an author: David Loeper here to answer your retirement planning questions!

[Will]

Author David B. Loeper will be dropping by this thread to answer your questions about retirement planning. So go ahead and post a question!

David has also given us free copies of his new book Stop the 401(k) Rip-off! Eliminate Costly Hidden Fees to Improve Your Life to give away to folks who post in this thread. To enter the contest, simply post a valid question or comment in this thread. For the next couple of weeks we will hold a random drawing to give away 1 free copy of the book per week.

Here are some of David's credentials:

• David's new book is the number one bestseller in Amazon's retirement planning category.

• He has been quoted in news sources such as Bloomberg, Christian Science Monitor, Dallas Morning News, The Examiner, and TheStreet.com.

• According to his bio, David earned the CIMA® designation (Certified Investment Management Analyst) from Wharton Business School in 1990 in conjunction with IMCA, and once served on the Investment Advisory Committee of the $30 billion Virginia Retirement System. He is also the founder and CEO of Financeware Inc.

• He has perfect hair like John Edwards and looks like a gentler version of Hugo Weaving (Agent Smith from The Matrix).

Please feel free to stop by and ask a question. If we get a good response from this we will bring in a lot more authors in the future.

Winners of David's book:

• mama4jc and Megan!
• Night Runner and kav122!
• Desdemona!
• jusrme and troyte
• amyschiff and Kathryn
• KelR1 and sam12587
• sancho and mcstarrett
• ScottPax and just_kelly
• idorunyc357 and GreerAngell
• houstontexas and sast
• fooldotcom and admiral
• beautiful and vanetwerk
• gr8fl1 and cmfalken
• richdor and 72Tiger
• Soundar and breckrider
• DistilledRose and stephaniestang
• mlmg and flowergirl
• FlorenceMcGillicutty
• kristyr8
• TahoeJohn
• puglogic
• jig

[Legal disclaimer: Mr. Loeper is not affiliated with Wise Bread in anyway nor have we verified his credentials. Everything posted on Wise Bread is for informational purposes only and not intended as legal or investment advice.]

[kav122]

Ok, here is my question:

Back in January I noticed that my allocation percentages were off. Not thinking, I just hit "automatically re-allocate" at my 401(k)'s website. Now I think that I made a big mistake, because does that mean that I sold some stocks for cheaper than I bought them? (Forgive my 401(k) ignorance)

Do you recommend reallocating ever? If so, when?

[blueviolet]

I was married at a young age and had children within the first couple of years and have been a homemaker ever since. I don't have enough credits built up to get social security and I don't have a 401K. I am really worried about my financial future. Is it too late to open a 401K? Will it even make a difference and what should I do to get started? It's overwhelming and I am at a loss as to what to do.

[Kathryn]

There's a lot of questions I could ask, but I'll start with this one: I recently became self-employed. My husband and I have a choice of investing part of his income in an employer 403(b) (no matching) or an equivalent part of my income in an SEP-IRA (or splitting our retirement savings between the two).

What factors do we need to weigh when considering which vehicle is best for us?

[David Loeper]

There's a lot of questions I could ask, but I'll start with this one: I recently became self-employed. My husband and I have a choice of investing part of his income in an employer 403(b) (no matching) or an equivalent part of my income in an SEP-IRA (or splitting our retirement savings between the two).

What factors do we need to weigh when considering which vehicle is best for us?

In general, the SEP will offer you more flexibility, the potential to reduce expenses (most 403b plans are loaded with excess expenses- but that may not be true in your husband's case...it depends on the options available) and higher contribution limits. Obviously if there were a match on the 403b, you would take the free money option of the match though. The other thing to consider is the nature of your business. With a SEP you will have to make contributions for other eligible employees. If you are currently the only employee of the business that isn't an issue today, but if your business grows and you need to add staff (there are some additional complexities if you use leased employees as you cannot use the IRS-model Form 5305-SEP) the cost of contributions on behalf of eligible employees might make the 403b a more attractive option.

[David Loeper]

I was married at a young age and had children within the first couple of years and have been a homemaker ever since. I don't have enough credits built up to get social security and I don't have a 401K. I am really worried about my financial future. Is it too late to open a 401K? Will it even make a difference and what should I do to get started? It's overwhelming and I am at a loss as to what to do.

Well, the first thing you need to remember that you effectively own half of your husband's retirement plan benefits and you accrue spousal social security benefits as well. You cannot make contributions to an IRA without earned income. (401k plans are offered by employers, individuals cannot open their own 401k.) You can however open a spousal IRA provided you file a joint tax return. The contribution limits for a spousal IRA are the same as traditional IRAs. One thing to remember though, if your husband's job offers a 401k with a match and he isn't taking full advantage of the matching contributions, it would be best for both of you to fully capture that match before opening a spousal IRA. The other thing you might want to consider is getting a part time job with an employer that allows you to defer most of your income to your 401k plan. This would enable you to accrue both your own SSI benefits and would enable you to sock away a lot of money in savings, and if you defer your income into your 401k with your new employer, it wouldn't affect your joint tax bracket.

[David Loeper]

Originally Posted by kav122

Ok, here is my question:

Back in January I noticed that my allocation percentages were off. Not thinking, I just hit "automatically re-allocate" at my 401(k)'s website. Now I think that I made a big mistake, because does that mean that I sold some stocks for cheaper than I bought them? (Forgive my 401(k) ignorance)

Do you recommend reallocating ever? If so, when?

Rebalancing is appropriate whenever your current asset allocation is off by more than 2-3% of the asset class target weights relative to the total portfolio. Say for example that the appropriate asset allocation for your goals is 60% stock and 40% bonds and that is the model you follow. I would rebalance if the stock portion became less than 57% or the bond portion became more than 43% (or conversly if the stock portion became more than 63% and the bond portion became less than 37%.)

Don't worry about whether there were individual funds that you sold at less than what you paid for them...that is an artificial benchmark we mentally establish, but rebalancing actually does the opposite for you. Since stocks are down and bonds are way up, you were probably overweighted in bonds and underweighted in stocks, so you probably bought more stocks when they were cheap and sold some bonds at a profit.

[kav122]

ok, another question:

I follow Dave Ramsey's financial plan and I always hear him say "Make sure to only invest in funds that have at least a 10-year track record."

How do I know that my 401(k) is in 'funds that have at least a 10-year track record.' Do I just call the representative and ask them to make sure that that is where my money is going?

[72Tiger]

Thanks for providing this service. My question is, do 401K contributions help when one is approaching the income limits for the alternative minimum tax? In other words, does the AMT kick in based on gross income, or income after 401K contributions are made? Thanks.

[David Loeper]

Originally Posted by kav122

ok, another question:

I follow Dave Ramsey's financial plan and I always hear him say "Make sure to only invest in funds that have at least a 10-year track record."

How do I know that my 401(k) is in 'funds that have at least a 10-year track record.' Do I just call the representative and ask them to make sure that that is where my money is going?

You should have a website that you can log into that has information about the funds you have available. The bigger question though is whether or not you have a time machine because unless you do, that "track record" is pretty much useless. Wall Street and the product peddlers want to convince you that you need to pay needless fees because of their out performance (as supposedly evidenced in their "track record") but if you had 10,000 monkeys randomly picking stocks, half of them would beat the market. Does that mean the winning monkeys were smart or is it just the nature of randomness? (It is the later) That doesn't mean there aren't smart investors out there, it is merely that a ten, twenty or eighty year track record doesn't prove whether or not they were smart, or lucky. And, by attempting to out perform, you are introducing the risk of underperforming which you have the choice to avoid, in addition to having 100% certainty of higher expenses to pay for the HOPE of outperforming. Finally, even if you outperform you run the risk of WHEN the superior results occur relative to your wealth (see my whitepaper Measuring Temperature with a Ruler at http://www.financeware.com/ruminatio...WithARuler.pdf to learn about the simple facts of the game the product vendors are attempting to sell you on.) You may also want to look at www.fundgrades.com to see how are real fiduciaries evaluate funds. There are no free lunches out there!