Really, Really Smart Money
By: Source: AARP.org Date Posted: 2004-12-27 00:00:00-05:00
by Russell Wild
They've spent their lives teaching finance to others—scribbling formulas on blackboards and calculating and recalculating until their chalk turned to dust—and now they're looking forward to retirement. So, figuring what's good for one retiring educator might be good for others, we asked these veteran professors and finance experts to share some of their personal money strategies. Here is what they told us.
Get ready to roll. As you probably know, there are two kinds of tax-advantaged retirement accounts. One kind—your traditional IRA, for example—allows you to defer paying taxes on any money made until you cash out. The other kind—the Roth IRA—isn't taxed at all, no matter how much the kitty grows. Is it time to swap one IRA for the other? Once you retire, and likely fall into a lower tax bracket, swapping to a Roth may make sense, says Connie Fontaine, 60, a professor of taxation at The American College in Bryn Mawr, Pennsylvania. “Once I retire, I'll start moving the money in my traditional IRA to a Roth IRA,” she says. “The tax hit should be minimal at that point, and I’ll gain a literally tax-free investment.” But such conversions are tricky, she warns, and should be made only after consulting your tax advisor.
Begin to give. You can lessen your heirs’ tax hit by starting to divest now, says Fontaine. Generally, you can gift up to $11,000 a year ($22,000 for a couple) to each of your children (or anyone else, for that matter) with no tax consequence whatsoever.
Seek safety. "As you move from earning to tapping savings, you should become more conservative in your investments," says Richard Bower, 76, professor emeritus at the Tuck School of Business at Dartmouth College in New Hampshire. Bower has about half his nest egg in low-cost stock mutual funds, and the other half in bonds, CDs, money-market funds and home equity. "The more you have, the more you can risk in the stock market. Historically, stocks give the best return, by far, but can be very risky. Whatever you need to live on should be invested in a safer place."
Take from Uncle Sam. Joseph Giacalone, 65, a professor of economics and finance at St. Johns University in New York City, plans to retire to travel and write in another two to three years. In the meantime, he is collecting Social Security. "In most cases, it makes sense to take Social Security as soon as you qualify for full benefits." (If you were born prior to 1938, this would be age 65. The cutoff age has been hoisted for everyone else—up to 67 for those born in 1960 or after.) "It's a simple matter of probability," explains Giacalone. "For most of us, taking the benefits sooner rather than later should mean more money in our pockets."
Grab that lump sum now. Taking a pension as a lump-sum payment rather than a monthly check doesn't make sense for everyone. But if you have the discipline to save and invest and you feel confident to do so, then a lump sum may be for you, says Giacalone. The reason is that interest rates, although they've risen a bit lately, are still at historical lows. And when your employer figures your lump-sum payout, those low interest rates, which are used to calculate the so-called present value of all anticipated future payments, result in a bigger bundle of cash.
Stake out your state. Estate tax…property tax…sales tax…income tax… "Taxes can differ radically from state to state," says Frank Wolpe, 68, since 1974 a professor of taxation at Bentley College in Waltham, Massachusetts. "In some states, pension income is taxed as regular income, and in other states, pension income is untouched. You can start comparing online at Retirement Living.
preview