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

[David Loeper]

Originally Posted by beren

I've been hearing a lot of ominous things about the US economy. What is the best investment strategy if you want to hedge against an US economic collapse?

I'm thinking of investing in a fund that tracks the MSCI Emerging Markets index. But my friends tell me that if American economy collapses, foreign markets will go down too. What's left? Gold and oil? Help!

Ecomonic collapse as in Great Depression...or worse than that where dollars become completely worthless as what happened in Germany? If you are not worried about all dollars becoming wallpaper, and only about a Great Depression type of environment, a conservatively balanced portfolio holds up relatively well.

Neither I, nor anyone else knows what is going to perform well in the next X years. Anyone that tells you that they do know, is either lying, selling something, niave', or brilliant, but the odds are against that.

I wouldn't put more than 10% of any portfolio in Emerging Markets, and frankly wouldn't bother with the expense of having them at all. The countries are too unstable, too corrupt, too communist or risk of becoming so (keep in mind that is when the government takes all your assets as says it is theirs.)

Gold is currently down about 12% from it's high, about like the market. Who knows, maybe it will go up to 1,500 an ounce so its 30 year return matches its 200 year return of 0% on a real basis.

Oil could certainly keep going up forever, just like was predicted by many experts back in the early 80's that were peddling partnerships like Petro Lewis. Those experts made 8% commissions and the investors lost everything.

Personally, I'd try to avoid the temptation of trying to outsmart the markets.

[Soundar]

Over the last decade, I have read several financial advisers and newspaper articles talk about how it Roth IRA is a better alternative to Traditional IRA since you do not have to pay taxes on your distributions when you retire.

I have been resisting the conventional wisdom so far. Me and my wife have most of my savings in traditional IRA and invest in Roth only in a year when I max out by 401K and cannot contribute to traditional IRA.

My case may be special though. I plan to go back to India after I retire in about 10 years and settle there and I can get by for about $2000 a month taking into account inflation. If I only withdraw $2000 a month I assume I will pay little or no taxes on a $24000 annual income for married couple filing jointly. So I do not pay anything now and also will not have to pay anything when I take the money out.

Am I correct?

[Will]

Thanks for another great week of answers Dave.

Here are the lucky winners from last week:

Fooldotcom and admiral!

[David Loeper]

Originally Posted by Will

Thanks for another great week of answers Dave.

Here are the lucky winners from last week:

Fooldotcom and admiral!

Thanks Will...I always try my best.
I thought it would be a good idea to post a link to a press release that was covered by Forbes, Yahoo and dozens of other media outlets.
(http://sev.prnewswire.com/banking-fi...6052008-1.html)

Last week we announced a free service for 401(k)/profit sharing plan participants to help them get their employer to comply with their fiduciary obligations for reasonableness of fees under ERISA. I recently spoke with one of the attorneys in the $60 million class action lawsuit against Wal-mart for the excessive fees in their 401k plan and based on the case, this is just one of many lawsuits to come, and your employer may be next.

With our new "401k Fee Protection Service" (available at http://www.401kripoff.com/planparticipants.htm) employees can have us contact their company on their behalf about excessive 401k fees but remain anonymous, keep the Department of Labor out of the picture, and help their employer to get a free competitive fee quote of what is available in the marketplace and disclosure from their current vendor, all in Department of Labor suggested format to help the employer comply with ERISA regulations.

I just thought some of the frugal Wisebread members might want to know about this.

[David Loeper]

Originally Posted by Soundar

Over the last decade, I have read several financial advisers and newspaper articles talk about how it Roth IRA is a better alternative to Traditional IRA since you do not have to pay taxes on your distributions when you retire.

I have been resisting the conventional wisdom so far. Me and my wife have most of my savings in traditional IRA and invest in Roth only in a year when I max out by 401K and cannot contribute to traditional IRA.

My case may be special though. I plan to go back to India after I retire in about 10 years and settle there and I can get by for about $2000 a month taking into account inflation. If I only withdraw $2000 a month I assume I will pay little or no taxes on a $24000 annual income for married couple filing jointly. So I do not pay anything now and also will not have to pay anything when I take the money out.

Am I correct?

You are absolutely correct. Like much of the conventional wisdom (target date funds are the most offensive example perhaps) the benefits of Roth while actually very helpful to some, are questionable and even harmful to many individuals.

The certainty of the value of the tax deduction now must enter the equation, along with the uncertainty of applicable tax rates that would be applied in the future and the value of tax deferred compounding for what would be a higher contribution in the regular IRA or 401k over the Roth.

It sounds like you analyzed this objectively and made the right decision for your situation. Congrats for doing so and not falling victim to conventional wisdom.

[Julie Rains]

Soundar, I am curious about how tax laws in the USA will impact you in India. I suppose if you are a US citizen then you pay USA taxes but if you are an Indian citizen, then will you have USA taxes as well?

[Soundar]

Originally Posted by Julie Rains

Soundar, I am curious about how tax laws in the USA will impact you in India. I suppose if you are a US citizen then you pay USA taxes but if you are an Indian citizen, then will you have USA taxes as well?

I recently became a US citizen, but I also hold an Indian 'green card' since I was born in India. I will have to pay taxes only on the money I earn in India (which will be nothing ). I plan to keep my savings in US banks/mutual funds and plan to withdraw only as I need for my needs.

[richdor]

I recently turned 59 1/2 and I am planning to retire from federal service next March. My question involves taking a lump sum from my TSP account to pay off some outstanding loans which total about $16,000. This would greatly reduce my expenses in retirement and free up about $700 per month. I could then take this extra money and put in my Roth IRA or just add to my emergency fund. My husband will continue to work for about four more years. I will have no other debt except my mortgage after this other debt is eliminated. The mortgage will be paid off in 2010. My CPA says to wait until I actually retire to take the money out because I will be in a lower tax bracket. I also realize that I am giving up the power of compounding on the money that I am removing from my 401K. This is a real dilemma for me and I would appreciate any advice on this matter. Many thanks.

[Will]

The winners for week 12 (5/12 - 5/18) are beautiful and vanetwerk.

Congratulations!

[David Loeper]

Originally Posted by richdor

I recently turned 59 1/2 and I am planning to retire from federal service next March. My question involves taking a lump sum from my TSP account to pay off some outstanding loans which total about $16,000. This would greatly reduce my expenses in retirement and free up about $700 per month. I could then take this extra money and put in my Roth IRA or just add to my emergency fund. My husband will continue to work for about four more years. I will have no other debt except my mortgage after this other debt is eliminated. The mortgage will be paid off in 2010. My CPA says to wait until I actually retire to take the money out because I will be in a lower tax bracket. I also realize that I am giving up the power of compounding on the money that I am removing from my 401K. This is a real dilemma for me and I would appreciate any advice on this matter. Many thanks.

I would have to agree with your CPA on this, unless the interest rates you have on your debt are extraordinarily high and you have no alternatives to reduce them to more competitive rates.

Taking a large sum out of your tax deferred assets will push you into a higher tax bracket. Also, funding a Roth now when you are in a higher tax bracket where you do not get the benefit of an immediate and certain tax deduction to have the money come out later in retirement tax free when you will probably be in a lower tax bracket isn't wise either.

Roths work best when you are fairly certain that your tax rate now is relatively low compared to what your tax rate would likely be in retirement.

I'm all for paying off debt, but at $700 a month you should be able to pay of the debt in two years, and I'd do that instead of funding the Roth. The additional taxes you would have certainty of paying now (and you have the choice to defer) on the size of the distribution you would need to pay off the $16,000 in debt would probably be at least $5,000.