March 22, 2016
Your Questions Answered: Retirement Advice From Jane Bryant Quinn
When Jane Bryant Quinn appeared on the show March 8 to talk about her new book “How To Make Your Money Last,” calls, emails, tweets, comments and more poured in from curious listeners. The hour wasn’t long enough to get to many of them, but Quinn graciously agreed to take on a few more here. Her answers appear below.
“We are planning to retire in 4 years. There are so many options for taking our pension. Do you recommend talking to a financial planner? Or will we just be sold a product we don’t need? Who should we talk to?” (email from Debbie in Indianapolis) Also, do you have any tips for those looking to manage their own finances without the help of a professional?
JBQ: I start with the premise that a monthly pension should cover a spouse 100%, even though that reduces the monthly check. That’s to protect the spouse if the holder of the pension suddenly dies. You’d choose a smaller check for a spouse only if you are positive, positive, that the spouse would have enough money for life in the pension holder died.
If you take the pension as a lump sum, you have to receive good investment returns to provide the same lifetime income that a regular pension would pay, expecially if you exceed life expectancy (which you never can tell).
I never recommend financial planners who earn commissions. They like to sell you products, like variable deferred annuities with lifetime benefits or fixed-index annuities, which are very high in cost and probably won’t deliver the returns you expect. I do like planners who charge fees for their time and sell no products. Try the Garrett Planning Network or NAPFA.org. I also recommend my book, “How To Make Your Money Last,” which answers exactly the kinds of questions you’re asking, including the investing question. Yes, you can do it yourself or get free help at places like Vanguard.
“I purchased my first home at 24 (I’m 27) but I haven’t started saving for retirement yet, how do I know how much I should be saving?” –tweet
JBQ: 5 percent of income is a good start. By 30, go to 10 percent, then up to 15 percent. You sound like a good saver, so perhaps you can put away even more.
“Jane… do you support a traditional 60% stock/40% bond ratio for a retired person, or do you go with Buffet’s suggestion of the S&P 500 Van Guard investment fund with 90% and 10% in short term treasuries?” (email from Terry in Barefoot Bay, Florida)
JBQ: Buffett’s suggestion was for his wife’s trust, which is being managed for the next generation. I think it’s too aggressive for retired people who will need their savings for themselves. 60/40 is classic and fine.
“My mother is 93 and living on the dividends from investments made by a money management firm. They keep shifting things around and she has lost half the value of whatever is in her portfolio. We are afraid she will run out of money to keep her comfortably in the assisted living facility where she lives. They seem to charge her a lot of manage the losses they are overseeing. What do you recommend for a lady this age who will probably live another 10 years?” (email)
JBQ: I can’t make specific recommendations because I’m not a professional investment adviser and I don’t know all the circumstances, but you should have a stiff conversation with the person managing your mother’s money. If the adviser is trading a lot, he or she is earning commissions without regard for your mother’s interest. Both the stock and bond markets are up since 2009. Your mother is taking money out to pay her bills, but she should not be down 50 percent. If your mother agrees, you might shift the money into a low-cost mutual fund that focuses on income (dividends and interest). At the very least, visit the broker, ask to see the transactions and for an explanation of the trading. Your mother might give the broker different, written instructions. You can also talk to the manager of the office, to express your concern.
“Why an Index Mutual fund instead of an ETF?” (email/tweet from Dave)
JBQ: ETF’s (exchange traded funds) are mutual funds by another name. You buy and sell them like stocks, through a brokerage firm. By contrast, traditional mutuals funds are bought from fund companies. Index ETFs can follow the S&P, or small stock indexes, or anything else, just as traditional mutual funds do. Contributing to or withdrawing funds from ETFs costs you brokerage firm commissions, unless you’re with a firm that lets you trade indexed ETFs without paying commissions. Traditional index funds are bought directly from no-load without paying commissions. ETFs claim certain tax advantages over traditional mutual funds, but if you’re buying ETFs or funds that follow the major indexes, they’re pretty much the same. If you’ve always worked through a brokerage firm, choose ETFs (as long as there’s no sales commissions). If you’ve always worked with traditional fund companies, choose a fund.
“What do you think of new automated stock and investing tools such as Betterment?” (tweet from Alexander)
JBQ: I like them. I recommended them in my book. They invest using low-cost ETFs and adjust your asset allocation according to your age and goals. They rebalance for you automatically, also a good thing.
“I am concerned that my investments may fund in corporations that pollute the environment. How can I invest in socially responsible funds?” (email from Marty in Takoma Park, MD)
JBQ: There are socially conscious index funds, such as Calvert, TIAA-CREF Social Choice, Parnassus, Domini, and the ETF called iShares MSCI USA ESG Select index. The socially conscious world has evolved. Some stay entirely away from, say, oil companies; others invest in oil companies that pollute the least. Some pay more attention than others to such things as workplace fairness. Check their published goals before you invest.
“Should you contribute more than the employer match if you have outstanding loans? Student loans, car, or personal?” (tweet from Robert)
JBQ: Use any extra money to pay off high cost loans first — credit cards, for example, or expensive private student loans. If your student loans carry a modest cost, I’d keep on paying at your current rate and increase your retirement contributions.
“How can you tell if you should be doing a 401K or a Roth? If you are young looks like you should do a Roth but I am 52. Can you point me to a calculator to help???” (email)
JBQ: I don’t know of any online calculator that I’d trust. But, at 52, you are still young! You’re likely to live at least to your mid-80s and probably longer. Roths have a lot of advantages, including the fact that you can withdraw your own contribution at any time, without penalty, or, conversely, even make withdrawals at all if you don’t need the money.
“Even if my company 401k plan offers a target date Vanguard or Fidelity fund, does it add other administrative fees on top of that? If so, doesn’t the compounding of that extra fee over the years cost me a great deal? Worse yet, what if my plan does not offer these low cost mutual fund options. In short, are all 401k’s created equal and if mine is not a good one, what should I do?” (email)
JBQ: Yes, there is a cost on top of the target-date fund fees. Your company should disclose it. And no, not all 401(k)s are the same, but there’s a huge value in having an automatic savings plan, and most plans now have target date funds, index funds or very broad-based stock and bond mutual funds. You want to be in your company’s fund if there’s a match and/or if you can put more into it than you could into an IRA. If not, you could consider a traditional or Roth IRA outside the plan. But will you actually contribution to the IRA every month??? The moment you start skipping a month, you’ll fall behind what your company’s automatic plan would have provided to you.
“My friend is 77; her health is not that good. Her income is not enough to live on, but she recently sold her house and netted about $125,000. She will have to make monthly withdrawals to supplement her income. For now, it is in a money market fund at 1%. Should she put all or some in an index fund? You recently had an article that people who need their savings to live on should not invest in the market.” (email from Judith)
JBQ: That article must have been by someone else. I have never written that people who need their savings to live on should not be in the market. In their 60s, they could be aggressively in the market, to grow their money so they’ll have more to live on when they’re 80. At 77, and in poor health, however, stocks probably are not the right answer. She might consider putting part of the money into an immediate annuity, that provides a monthly income for life. There are annuities for people with “impaired” health that pay more than regular immediate annuities. To check out the field, start with the website immediateannuities.com, then look for an agent to help with an “impaired” sale. Just be sure the agent doesn’t sell her a deferred annuity, which has high costs! Look only at immediate-pay annuities.
“I have an older relative who is invested (on the advice of an advisor) in what seems to me an odd collection of investments – managed mutual funds, some stocks, oil well shares of some kind, condominiums of some kind. I’d like to help him straighten this out if possible, but I have no idea where to start. Do you have any suggestions?” (email from Dan from Sacramento)
JBQ: Sounds like a real mess. Look for a fee-only adviser through NAPFA.org, who will get rid of all those high-commission products and create a sensible financial plan. You might also give your relative my book, which explains the virtues of fee-only planning and low cost index mutual funds. It’s a place to start. You might find it difficult to part your relative from the adviser, if the relationship has gone on for years. It helps if you can go through all the investments and find out what your relative is paying every year in fees and commissions. That can be an eye-opener, and the costs are often not disclosed on annual statements. Have a sit-down with the adviser and figure this out.
“My brother is 84. He had investments in mutual funds and recently lost a lot as we all did. Now he wants to take the money out and put it back into CDs. He has only social security income otherwise. What do you suggest?” (email from Asheville, NC)
JBQ: If he had his money in broadly based stock funds, such as index funds, he should have more than made up the losses he took on 2007-08. The market is way up since then. A couple of wiggling months in the market, such as Jan. and Feb. 2016, shouldn’t matter. But… at 84, he should consider whether his money is going to last for life — and assume that’s live to 95 or 100. If CDs will get him through, at the current low rates, that’s fine. If not, he might consider keeping at least part of his money in the market, perhaps, balanced stock-and-bond funds such as the one offered by vanguard. My book, “How To Make Your Money Last” shows how to figure out if the money you have will last for life, under various investment scenarios.