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5 Tips to Help You Find Financial Freedom in Retirement

Answers to popular investment questions from the African American community

Q: I need to pay off some debts. Should I pull the money from my retirement savings?

A: When it comes to taking money out of retirement savings vehicles, be very careful. Making a mistake or bad decision can be very costly. For most retirement vehicles like an IRA, there will be a 10 percent penalty if you take money out before the age of 59 ½. This is in addition to the taxes that are withheld when you take the money out. Let's look at an example. You take $10,000 from your IRA. Well Uncle Sam gets $1,000 in the form of a penalty. You will never see this money again! No refund, no credit, no nothing. Just gone. Perhaps you live in a state that has income tax. Let's use 5 percent as an example. So now $500 of your money goes to the state coffers. We can't forget the IRS. We'll put you in the 25 percent tax bracket at the federal level. There goes $2,500. So let's see what just happened. You took $10,000 out and netted $6,000. Ouch! With savings rates where they are in the African American community, we can't afford to take those kinds of hits. If you are participating in an employer-sponsored plan like a 401(k), you may have the opportunity to get a loan from the plan. In general, you would be borrowing your own money, paying yourself the interest and your money stays invested the whole time. No matter where your retirement dollars are, think through your options and don't be afraid to ask for help.

Q: My family never discussed investing growing up. Now I'm a bit lost and worried about retirement. What should I do?

A: Click your heels three times and say "There's no place like home." I'm just kidding. The reality of today's stock market can make you wish that we could all close our eyes and wake up in Kansas, or Harlem (if you're partial to The Wiz). Unfortunately, that's not an option. What it means for us is that we have to pay attention and educate ourselves so that we have a better handle on things. I still have conversations with many of my clients who say, "We never talked about money around the table growing up. Investing was something that other people did." Unfortunately, that conversation happens too often with many of my African American clients. The shift to 401(k)-type plans has put us in a position where we have to be armed with as much knowledge as we can get our hands on. Take a long hard look in the mirror and assess where you are and where you want to go. I talk to my clients about having an investment policy statement. The easiest way to think of this is having a game plan that takes into consideration things like how you feel about the markets, how long you have until you will need to use the money and how you or your advisor expect different investments to perform in the future. Once you have your game plan drawn up and your investments allocated, it's a good idea to go back and check this document to see if it's still valid. Another thing that we do with clients is to go back periodically and move things back in line with our allocation targets. This is called rebalancing. Here's an example. You started off with 25 percent of your portfolio in a large U.S. stock fund. Over time it has become 33 percent of your portfolio. Rebalancing tells us that we should sell some of this fund and get closer to our original target.

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