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Financial Security for You and Your Family

Transcript of Chat With Carrie Schwab-Pomerantz and Jane Bryant Quinn

Jane Bryant Quinn, a personal finance expert who also writes for AARP Bulletin, joined Carrie Schwab-Pomerantz, a vice president of brokerage firm Charles Schwab, for a live chat about financial security in retirement on Feb. 1, 2011.

Here is a transcript of the chat:

Carrie Schwab-Pomerantz: Hi, I am Carrie Schwab-Pomerantz and I have been servicing family financial needs since I've been working for my father's company since I have been 16 years old. I understand today we have so many financial priorities to juggle and I am excited to be a part of this chat.

Jane Bryant Quinn: I'm Jane Bryant Quinn. You've read me in Newsweek and The Washington Post over the years. And now I'm thrilled to be your monthly columnist in the AARP Bulletin. As you know, I have a new book out, Making the Most of Your Money NOW, which has a lot about saving and debt, and especially planning for retirement. I'm looking forward to talking to you about it.       

Question from Tom Balchunas: My wife and I are 60 years old. Our retirement funds are in fixed income funds, money funds and bank CDs for safety. Our bond funds continue to lose money. Where do we go for some sort of growth plus safety?

CSP: I would say that you never know how the markets are going to move. Some days bonds are in favor and other days stocks are in favor. We believe to minimize risk, you should always maintain an asset allocation made up of a diversified portfolio of bonds, stocks and cash, percentages based on your time frame of when you need the money and risk tolerance. Sticking to a diversified portfolio and an asset allocation is the best way to minimize risk and maximize returns.      

JBQ: Great points, Carrie. [These investors are] clearly very conservative and have been afraid of the stock market. You have to consider this when making your future plans.

If you don't have a capacity for taking risks, I don't think you should allocate a lot of money to the stock market, even though the long-term numbers suggest that you should. I think you should probably try putting a small percentage of your money into a stock-owning mutual fund, not individual stocks. I'm a fan of stock index funds that follow the market as a whole.

Another point about bond funds: When interest rates go up, the manager of your bonds is buying bonds that pay higher interest, so the income from your bond fund increases. If you use that income to reinvest in your bond fund, you're buying shares at a lower price. So, you own more shares.

In the future when interest rates go down again, your share values will go up. People often forget about these points.

How Do I Start My Own Individual Retirement Plan? >>

Question from Ingrid: Do you have information about how somebody starts an individual retirement plan?

CSP: Great question, Ingrid. Congratulations on taking action on your financial future.

There are two different IRAs to consider: The Roth IRA is available depending on your income. It does not allow you to deduct your $5,000 contribution, it does grow tax free and withdrawals are tax free when you turn 59 and a half. Two: The traditional IRA, depending on your income level, typically let's you deduct your $5,000 contribution from your income and grows tax-deferred. However, when you start to take withdrawals, it is taxed at your ordinary tax rate.

I would check with your tax adviser on which of these IRAs is best for your tax situation.     

JBQ: Great tips, Carrie. There are two places to call for an individual retirement account: your bank and mutual fund groups.

Question from KJ: What is the best way to find a financial adviser? Is there a good way to check their background?

JBQ: Excellent question, KJ. Many call themselves "financial advisers" or they may call themselves senior advisers or financial consultants, they are sales people who sell products. Their advice will be influenced by that fact. It might be good advice for you or might not. My favorite financial advisers are called "fee-only." They charge for advice [and] they do not sell any products. They may charge a flat fee for a tune-up or a plan.

If they manage your money, they will charge typically 1 percent or less of the money they manage. Try a search engine and search "fee-only financial planners." One warning: Some planners call themselves "fee-based" and they usually sell products as well as advice.        

CSP: All great points, Jane. Another resource is to tap your friends for their advice. When you do meet with an adviser, ask for their ADV form — which explains their investment philosophy.    

Should Pre-Retirees Look at Income-Based Instruments? >>

Questions from Pam: I'll be retiring soon. I'd like to keep most of my money in stocks and periodically purchase some instrument to guarantee income for a certain period of time (five to 10 years). What sort of instrument would be best for this?

CSP: Never go into retirement without seeking financial help from an expert. You mention that you are in all stocks. Because you are close to retirement, you may want to consider some more conservative investments, such as bonds and cash, so that you can weather short-term ups and downs in the market.

A financial consultant will help you assess what you will have in retirement and what you will need to make up any financial gaps. Proper asset allocation and diversification and a savings plan will protect you for what will hopefully be a very long and happy retirement.

JBQ: Carrie, I couldn't agree more. This is the wrong time to be completely in stocks. You should be diversifying already into bonds and mutual funds. There is no guaranteed income from bond funds but if interest rates rise, your bond fund income rises, too.

The only source of guaranteed income for [five to 10] years would be a CD or an insurance annuity. You are too young to be buying annuities. They also have many hidden fees you might not realize you're paying. This is the time to stay with simple things: stock mutual funds, bond mutual funds and cash.

Complicated products often do not do what you want and cost you unexpected fees.

Question from Roger: We are retired and I was wondering what you think of "immediate" annuities to have a steady income coming in.

JBQ: That's a big question for retirees. I am a big believer in immediate annuities, but not at age 65.

A married couple aged 65 faces a better than 50 percent chance that one of you will live to age 90-plus.

A lot of inflation can happen during those years, so you don't want to rely on fixed-income now. You should allocate a sufficient amount to bond funds to cover basic fixed expenses and add stock funds on top.

I also believe in holding two to three years of the income you need in cash so you can weather any market.

Think about buying a lifetime annuity when you're 75 or 80.

One alternative is something called a longevity annuity; you can buy it now and it won't click in until you're 85. It's very cheap to buy one this way and worth considering if you're from a family of healthy, long-life people.

Should Retirees Invest Directly in Individual Stocks for Yield? >>

Question from Paul Evans: I am retired, with a financial adviser (fee-only), and had everything invested in mutual funds for many years. Performance very satisfactory. Now I was approached by a large, well-known investment company advocating direct stocks, etc., investing because of larger yield and less expense than mutual funds. Your opinion, please.

JBQ: No! No! No!

Individual stocks are much too risky and you can never beat professionals who know more than you do and are trading all the time.

Think of all the widows who thought they were safe with big bank stocks. You are happy with your mutual fund performance. Congratulations for finding a place that has done well for you, and don't let any big-name, so-called advisers peel you off.

Question from a guest: Are bond ladders relevant for retirement in the current interest rate environment?

JBQ: Interesting question. Many advisers suggest bond ladders when interest rates go up.

They prefer ladders to mutual funds because when rates go up, you can see the share values of mutual funds go down. Of course, the market value of the bonds in your ladder go down, too. You just don't see it.

I have two problems with bond-fund ladders:

1. You are buying individual bonds with fixed interest rates, so when interest rates rise you can't get that increase rate income. You have locked yourself into a lower income.

2. If you have to sell any of those bonds before maturity, you will take a big haircut on the price.

Plus a third objection: You need a broker to manage this ladder; not only do you pay commission, you also pay a big markup in price when you buy bonds from a broker at retail.

If you buy a mutual fund instead, the manager is buying at wholesale prices. Your annual fee will be low and you have access to the money if you need it.

CSP: Just to add on to those points ... Jane, I agree with everything you said; another point to consider is when you invest in individual bonds you want it to be a diversified portfolio just as you do for your stocks. And to diversify bonds, you need well over $100,000.

Because interest rates are somewhat tenuous, I would consider a short- to intermediate-term bond fund with maturity of anywhere from [two to five] years so that you can be prepared to reap the benefits as interest rates go up.

What Other Investments Might I Need Besides a 401(k)? >>

Question from Maria: I am 52 years old. I have a 401(k), some government bonds that pay out dividends twice a year and real estate investment (not a property purchase). What else do I need to have in place before I retire?

CSP: I just turned 50 last year and I think our age is a perfect time to sit with a financial consultant, someone who will look at the assets we have and the kind of income we can expect to generate from them, and compare it to what we think our financial needs will be in retirement.

A lot of people don't know how expensive retirement is. You not only need to save in a 401(k), but also in an IRA and a taxable account to achieve the lifestyle you've become accustomed to.

A financial consultant will give you a savings plan and will [make sure] that your current investments are properly diversified (hopefully in mutual funds) that reflects your time frame for retirement and your risk tolerance.

Without seeing your portfolio — what's in your 401(k) — it's hard to comment on any specifics for your portfolio, but you're on the right track for inquiring and hopefully building a plan.

JBQ: Great advice and just a couple of things to underline. So many people keep asking how to diversify between stocks and bonds and what they should own and buy. None of that matters if you are not saving enough money.

Saving more money is worth more than almost any asset allocation plan I can think of. While you are at it, get rid of your debt and pare down your spending.

You will succeed if you enter retirement with no debt, reasonable living expenses and more savings — no matter where you invest.       

Question from Craig in Denver: I'm 52 years old. I have no pension but have a small retirement nest egg worth $100,000. How do I start planning for retirement?     

CSP: Do some basic calculations. How much do you need each year to live on? Then figure out exactly how much your savings will grow, how much you will receive in Social Security or from other sources, and determine how much more you have to save each year to make up the difference. You may want to consult with a financial adviser.

You will get the maximum Social Security benefit if you are able to defer benefits at least until your "full retirement age" (66-plus) or even more until age 70. So, realistically, you should think about working (even if it is part time) well into your mid to late 60s.

Save, save, save! First, be sure you are capturing any employer match. And then try to contribute the max to your 401(k) or other retirement account.

In order to save, you will likely have to get creative about ways to save. Even small things like conserving on your phone bill or cable bill can add up over time. A smart budget can be your best friend.

Make your savings automatic — the best way to follow up on your plans to have your savings automatically directed to your retirement or savings account.

Be smart about how you invest your savings. You likely don't want to take on a huge amount of risk, but with more than 10 years to go until you retire, you will need some potential for growth in your portfolio. Again, it can be wise to consult with a financial planner so that you get yourself on the right track

Stay vigilant. A couple of times a year check your progress against your goals, and make adjustments as needed.