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

[David Loeper]

Originally Posted by cmfalken

Our company 401K is with AllianceBernstein, and while I know the expense ratios for the different funds that I have, is there a way to find the specific amounts that are being deducted and when? They aren't listed on the statements (no surprise!), and I'd like to confirm that other amounts aren't being deducted and/or that the amounts are appropriate. What would you recommend?

The next most obvious (not really that obvious) place to find where some additional expenses might be hidden is in a document you get every year, but probably throw away because is doesn't appear to have any useful information. It is called "Summary Annual Report" and it reports information for the total plan, not just your balances. But you can use it to find out some of what you might be paying in additional costs. You may have to request a copy of this document if you didn't save it.

In the section of this document called "Basic Financial Information" you take the "plan expenses" and subtract "benefits paid." Then you divide this by the "total plan assets at year end." The resulting percentage of this calculation then needs to by multiplied by your personal 401k balance. The amount could be zero...or it could be a lot...

Before I got my company's plan fixed, I was PERSONALLY PAYING over $1,000 a year that could only be discovered by going through these calculations.

If you go through these steps (I realize it requires subtraction, division and multiplication) and find the expenses are low to zero, you aren't out of the woods yet.

Look at http://www.401kripoff.com/fees.htm to find a listing of other fees you often won't receive any documentation for and ask your employer if any of these fees might also be charged against your 401k balance.

Also, if you use the advanced search feature on www.fundgrades.com you will find that Alliance Bernstein currently doesn't have ONE fund that earns an overall honor roll grade.

[David Loeper]

Originally Posted by troyte

Hi,

I have a question regarding pensions. I am a County employee who is eligible for a pension make around $48000/yr. I am eligible right now for 10% of my salary pension, but it could be up to 60% of my final annual salary if I put in another 20 years into the system. How do I plan for retirement. I put now the yearly max in a ROTH per year through vanguard and another $4800 per year in a 403B (non-match) have around $68,000 in retirement funds. I have a 60,000+ mortgage I am trying to pay off early as well? How do I balance my future goals with the present high costs of living and am I on track? Would love to retire at 60. Fill real pinched for money now.

While I don't know how old you are (i.e. is age ideal retirement age of 60 twenty years away?) or any of the other goals you personally value, I'll assume that you are fairly young since you mentioned putting another 20 years into the system.

But, if you are feeling "pinched" and you are planning on working another 20 years, you might be saving too much and needlessly sacrificing your lifestyle (I know that few planners expose this, but if it is possible to be underfunded for your goals, it must also be possible to be over funded and those additional savings might just be a needless sacrifice to your lifestyle.)

There are other inputs that are important as well. What's planned asset allocation in your retirement funds? Is there a cost of living adjustment (COLA) included in your pension benefit? (When I served on the investment advisory committee of the Virginia Retirement System we were dealing the funding issue of the "COLA"). Also, are you eligible for social security too?

There are a lot of uncertainties to think about too. How secure is your job with the county and is your income likely to keep pace with inflation or even exceed it?

The biggest uncertainty is how the markets will behave. I wrote a whitepaper last month for financial advisors that gave an example of a twenty year old widow with $100,000 in life insurance proceeds from her deceased husband in 1926 needing a $5,000 a year in inflation adjusted spending (about $50,000 in today's dollars) and based on ONLY the uncertainty of the markets, she literally had equal chances of being more than a billionaire to being broke as young as age 54 (both had a 10% chance.) (The paper if you are interested in it is available at:
http://www.financeware.com/ruminatio...WithARuler.pdf )

The back of my book has tables where you can look up your approximate age, current savings balance, asset allocation, planned savings and shows you the confidently supportable retirement income you could plan for in retirement.

Alternatively, you may want to consider consulting with an objective advisor. See post #64 to see some key questions to ask before hiring an advisor.

[David Loeper]

Originally Posted by fooldotcom

What do you think of the idea of retiring at 62, collecting a reduced Social Security payout for 7 years, investing the money the whole time, then paying it back at 70, and re-retiring then to collect the higher payout? No dependents or spouses are involved. And the SS is not "needed" for living expenses, etc. And there would be no problem writing a check for the payback amount at the proper time. Of course, you "win" if you die before 66 or 70, since you do get a chance at the SS fund you paid into. Thanks for any comments you may have!

I think this is an under utilized strategy, but there are some risks.

There are many people that could afford to retire earlier if they analyzed this accurately.

With this strategy you are in essence getting an almost "free" put option against the Social Security Administration because you do not owe any interest on the SSI you will be paying back later and you get to keep the investment return you receive.

The reason I say almost free is because depending on your situation, you may end up paying taxes on some of your SSI benefit which would have to be included in the cost calculation if applicable to you.

Also, depending on how you invest the money, there may be some market risk which means that when it comes time to pay back the money, it might not be worth enough to pay it back.

Obviously there is also the risk of not being disciplined about it and end up spending some of it. The example you give though says there is no doubt you could pay it back. In such cases, this is a great strategy.

All that being said, I know of many people that are needlessly delaying their retirement when they could use this strategy if the option proved worthwhile or necessary later in life.

[troyte]

Good points. I am 36. My vanguard ROTH is 90% invested in the Vanguard 2035 retirement fund, 5% in Third Avenue Real Estate and 5% Vanguard Energy Fund. My 403b is aggressive strategy. My county job is pretty secure with the pension eligible for COLA and social security benefits.

[David Loeper]

Originally Posted by KelR1

Hello David!

What do you think of a housewife/househusband opening their own Roth IRA? Also, if one is going to start a retirement account outside of an employer-based one but one is also paying a mortgage and paying down debt what is a good amount to contribute at this time?

In general, if such contribution isn't excessive relative to your goals, it is a great idea.

But, keep in mind that half of the working spouse's benefits are effectively owned by the homemaker. (see post #6 here: http://www.wisebread.com/forums/pers...html#post11338 on the same topic.)

The amount to contribute depends on a lot of things, like goals, age, resources, priorities, etc.

Before I'd make the additional Roth contribution, I'd make sure my spouse is getting the maximum match on their 401k plan (does the spouse's plan have a Roth 401k option and are you getting the maximum company match?) before investing in another tax advantaged vehicle without the match.

Unless your mortgage is a home equity line, is at a subprime type interest rate or you have negative equity now, it might be worthwhile to consider delaying prepaying your mortgage to enable an additional Roth contribution for the homemaker, but again, it depends on all of the details of your personal circumstances and goals.

Also, the other debt, depending on how it is financed and at what rate, it might be worthwhile to fund the Roth instead of accelerating payments.

For example, instead of paying down a 30 year fixed mortgage at 5.85%, it might be worthwhile to use that to fund a Roth instead, especially if you have 20% or more equity in your home.

But, if you have negative equity, one of those paired mortgages that have high non-deductible PMI costs and/or subprime interest rates, it might be worthwhile to delay making the Roth contribution for a while.

[David Loeper]

Originally Posted by sam12587

Thank you for taking the time to answer our questions.
I have a kinda weird question.
I work for a public school & they take a mandatory percentage of our paycheck out for retirement. For me it’s 170.88 & I make about 25k. I turn 30 this weekend & don’t currently have any other retirement funds.
I was thinking of doing a Roth IRA when I get out of debt but I wonder if it’d be better to put the money in a regular investment vehicle in the event there’s an emergency & I need to get to the money penalty free.
If I stay with my current job for 20 years then I get the average of my 3 highest earning years starting at 65 for the rest of my life. If I leave before hitting the 5 year mark then I get cut a check that’d I’d have to hurry & slap in an IRA. There’s lots of if/then’s in between those two times – between 5 & 20 it’s a varying percent that I’d get upon turning 65 years old. I don't know if I'll stay in this job for 20 years & I'd always wanted to retire as early as I can but I mightbe too later for that to happen..

I’ve been to retirement seminars at work & asked what will happen to our retirement system when a good chunk of baby boomers retire & I’ve been told it’ll stay the same since there will be about the same amount of current employees paying in and retired employees collecting. I’m skeptical about that though
While I realize you can't give exact investment advice I am curious... if you were in my shoes what would you do?? I'm so conflicted & hear coworkers mention what they are doing but I'm not sure what's right for me other then to get out of debt.

Well, getting out of expensive debt is a good thing. Not all debt is "bad" though in the scheme of things. It depends on the interest rate, tax treatment, other resources and the cost of utilizing other resources instead of debt (i.e. penalities)etc.

For example, if you are planning to work at least another 20 years, have 20% equity in your home, and your only debt is a high quality mortgage at a competitive rate, I would probably make the Roth contribution before paying off the mortgage.

But you bring up a good point. Before you fund the Roth you should have some cash socked away in a very liquid and safe account for the endless emergencies that life seems to bring us. Car needs a new water pump, porch needs painting, unexpected uncovered dental bills...the list is endless of those life uncertainties between now and when you might retire, and they do not stop once you do retire.

Once you have a sufficient cash reserve (at least a couple months income...maybe up to six) I would start funding the Roth.

Make sure you replenish the cash reserve whenever you need to draw on it, but once you have a couple months income stashed away in savings, you might consider splitting how much you add to savings with a Roth too and as you get close to 4-6 months of cash reserves, fund more of the Roth.

It isn't too late to plan for a much earlier retirement. It all depends on your goals, priorities and the choices you make.

I would not worry too much about your pension. Most State Pension Funds (I'm assuming that is the pension your district uses) operate like ERISA governed plans (even though not governed by it) meaning they have to pre-fund the liabilities and this is calculated by actuaries every year.

While there have been some plans in the news lately that have been underfunded and received payouts by the PBGC (Pension Benefit Guarentee Corporation) and others have become materially underfunded (for example some of the airline pilot's plans), in general pensions are normally run fairly reliably.

I'd just ask to see the annual report each year. The way actuaries calculate things you will know that things are getting into trouble (like the funded status is below 75%) long before the benefits you have the right to will change.

[David Loeper]

Originally Posted by troyte

Good points. I am 36. My vanguard ROTH is 90% invested in the Vanguard 2035 retirement fund, 5% in Third Avenue Real Estate and 5% Vanguard Energy Fund. My 403b is aggressive strategy. My county job is pretty secure with the pension eligible for COLA and social security benefits.

Depending on the lifestyle you want in retirement (let's assume maintain your present lifestyle for a moment) you very well could be over saving and needlessly sacrificing your current lifestyle.

With a pension replacing 60% of your income with a COLA in 20 years, SSI benefits (also with a COLA), a paid off mortgage at or near retirement, you probably do not need to be saving as much as you are.

I wouldn't be using a target date fund though. The only thing a target date fund considers in adjusting your equity allocation is the calendar. Invariably, it will be changing your allocation at the wrong time for your personal goals and the other variables merely because another page turned on the calendar.

You are probably taking a lot of needless investment risk right now when you could have confidence in meeting your goals with a lot less equity market risk.

The white paper I wrote for financial advisors that I referenced in my prior post shows an example of how the typical target date fund strategy cost an investor millions. While this paper is 40 pages long and written for professional advisors, it might be worth a read to you. I've linked it again here: http://www.financeware.com/ruminatio...WithARuler.pdf

[houstontexas]

I have an old 401k which last time I checked was giving me a return of -3.6%!!! Mostly due to the fluctuations in the market right now I believe.

My question is AFTER I've determined what the fees are in my old 401k provider should I rollover this simply due to my current return? At the time I had invested I had haphazardly chosen any investment based on past returns (which after researching realized its true that past returns don't mean future returns!!!)

Thanks.

[David Loeper]

Originally Posted by houstontexas

I have an old 401k which last time I checked was giving me a return of -3.6%!!! Mostly due to the fluctuations in the market right now I believe.

My question is AFTER I've determined what the fees are in my old 401k provider should I rollover this simply due to my current return? At the time I had invested I had haphazardly chosen any investment based on past returns (which after researching realized its true that past returns don't mean future returns!!!)

Thanks.

Your "current return" is not really "current", it is past return, just like the track record you picked it on. I don't know what you are invested in or for the asset allocation you have whether that would be a good, average or bad return. Regardless, past returns are only useful if you have a time machine!

We just released a new feature on our free www.fundgrades.com website that shows how a fund (or portfolio of funds) would have been graded three years ago and what its grade is now. You will find a lot of former "winners" that have been losers for the last three years.

If you have low cost Honor Roll type funds in your 401k, you might be better off leaving it in your 401k than rolling it over because the costs for your individual IRA could be a bit higher versus the institutional pricing your 401k SHOULD get for you.

Unfortunately, there are probably hundreds of thousands of 401k plans that are not getting good pricing and participants are paying massive needless expenses. That's why I wrote the book and if your 401k is expensive like many plans are, then you should roll it over. Post #103 ( http://www.wisebread.com/forums/pers...html#post13530) discloses some of the expenses you need to be aware of if you are looking at an IRA rollover with someone like Schwab, Etrade, Ameritrade or Fidelity for example.

[just_kelly]

What would be the best thing to do: Pay of student loan debt and become completely debt free or build up a emergeny fund? Thanks!