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Retirement Planning When You Don't Have a Job

January 24th, 2010 at 05:38 pm



When you were still lucky enough to be employed, you may have faithfully contributed to your retirement through payroll deductions directed into your 401(k). Now that you're out of work, there's no point in even considering continued retirement planning until you find your next job, right?

Wrong. While it's true that for most jobless people, retirement contributions may have to be put on hold, there are still important steps you can take to manage your existing retirement assets.

1. Rebalance your portfolio.
If you haven't rebalanced your portfolio lately, it's important to do so now. With stocks having rebounded sharply higher since last spring, your stock/bond/cash weightings may be out of kilter with your intended asset allocations.

You should be rebalancing at least once a year, and the start of 2010 is an ideal time to do so, since performance data from 2009 is readily available. By rebalancing now, prudent investors will be able to lock in gains by selling some of their winners and buying weaker-performing funds at bargain prices. They'll also be able to restore diversification - a key tool in managing risk - in their portfolio.

2. Convert to a Roth IRA.
For most individuals who believe their tax bracket in retirement will be higher than in their earlier working years, a Roth IRA is preferable to a traditional IRA. That's because with a Roth IRA, while you don't get a tax break when you make contributions, after age 59 1/2, all your withdrawals, including accumulated earnings, can be taken tax-free.

Compare that to traditional IRAs, which are taxed upon withdrawal, based on the tax bracket you fall into at the time of withdrawal.

Despite the more favorable tax treatment of Roth IRAs, the stumbling block preventing many from converting traditional IRAs to Roth IRAs has been the hefty tax bill that can often come due from such a conversion, since the amount converted is added to your income and is subject to tax.

That's why long-term unemployment or underemployment can make a Roth IRA conversion a much more doable event with a much less painful tax bite.

If you've been out of work or underemployed for a while, this could be an ideal time to take advantage of your lower tax bracket and convert your IRA to a Roth IRA. The conversion could cost you very little. (Remember, in 2010 there are no income limits restricting who can do a Roth IRA conversion.)

Consider such a tax-advantageous move only if you have adequate savings and won't hurt yourself by paying the IRA conversion tax bill.

3. Don't Write Off Retirement Contributions Completely.
Granted, sudden unemployment has a way of helping one prioritize very quickly. The distinction between "necessity" and "discretionary" becomes very clear as you end up cutting cable TV, eating out, your kid's dance lessons or pending home improvements in favor of paying the mortgage, utility bills and health insurance.

The problem is, when you stop retirement contributions "temporarily," whether due to joblessness, underemployment or self-employment, it can be difficult to catch up to where you should be later. When you land your next job, you may wind up deferring retirement contributions for longer by telling yourself you have other more pressing needs for your newfound money.

Despite the unavailability of an employer-sponsored 401(k) plan, those who are determined to save for retirement even during a challenging employment period can do so. In addition to funding your Roth IRA or traditional IRA, you might also consider opening a SEP IRA if you've turned to self-employment or freelance work to help you get by. You can contribute 25% of your net income, up to $49,000.

(If you're planning on doing a Roth IRA conversion this year, it might be best to avoid opening any new SEP IRAs because it could increase your tax bill on the Roth IRA conversion.)

Another attractive option for self-employed individuals is a solo 401(k) plan. Unlike a regular 401(k) plan, a solo 401(k) plan is only available to self-employed individuals or small business owners who have no other full-time employees (unless it's the owner's spouse).

A solo 401(k) plan lets you save for retirement as employer and employee. As a sole proprietor, you can contribute 25% of your net income, up to $49,000. And as your own employee, you can contribute up to $16,500 more.

Fully funding any of these retirement vehicles may seem like wishful thinking when you're struggling to get by, but even a modest contribution of $50 or $100 a month can make a big difference over time, thanks to compounding interest and investment gains.

Skip doing so and you may have to do an all-out sprint in later years to make up for lost time.

A job layoff doesn't have to mean your retirement planning is stopped dead in its tracks. Even if there's nothing extra to put toward retirement savings, being mindful of your investments and positioning them appropriately can help keep your long-term retirement plans from being derailed by a temporary setback.

Consult your financial adviser for recommendations based on your personal circumstances.



The Magic Number for Retirement is....

January 18th, 2010 at 05:13 am



You'll need at least $500,000 to be happy in retirement, say retired respondents to a recent Consumer Reports Retirement Survey of over 24,000 respondents.

Survey respondents' satisfaction with their retirement peaked when their net worth was between $500,000 and $1 million. Having a much higher net worth didn't translate into an extremely happy retirement.

% of retirees who said they were "very satisfied" or "completely satisfied" with retirement, based on net worth:

Less than $250,000 = 51% said they were happy.

$250,000 - $499,999 = 64% said they were happy.

$500,000 - $999,999 = 74% said they were happy.

$1 million - $1.499 million = 77% said they were happy.

$1.5 million to $1.99 million = 79% said they were happy.

$2 million + = 78% said they were happy.

What's your magic number for retirement?

Smart Move: Roth IRA Conversion When You're Jobless

December 3rd, 2009 at 05:04 pm



Being out of work can be a daunting experience that's mostly filled with anxious questions about how you're going to pay the mortgage and your many day-to-day expenses.

While the good things one can say about how unemployment affects your finances are few and far between, there is at least one positive scenario you should take advantage of if you've been out of work for more than a few months: a Roth IRA conversion.

For most investors, Roth IRAs have long been recognized as a preferable alternative to traditional IRAs, due to their tax treatment.

With a Roth IRA, you don't get a tax break when you make contributions, but after age 59 1/2, all your withdrawals, including accumulated earnings, can be taken tax-free.

In contrast, all or a part of your contributions to a traditional IRA may be tax deductible, which could lower your taxes. You will be taxed, however, on withdrawals, and your tax rate will vary according to what tax bracket you fall in at the time of withdrawal.

While you must take minimum distributions from a traditional IRA by age 70 1/2, there is no such requirement associated with Roth IRA withdrawals, making them an ideal tool not only for retirement, but for passing assets on to heirs.

Many workers believe their tax bracket upon retirement will be higher than in their earlier working years, making Roth IRA conversions an attractive option.

Yet the stumbling block for some has been the sizable tax bill that can often come due from such a conversion, since the amount converted is added to your income and is subject to tax.

That's why long-term unemployment or underemployment can make a Roth IRA conversion a much more doable event with a much less painful tax bite.

In my case, I was laid off in September 2009, so I will still have significant 2009 income to report when I do my taxes. But given the extraordinarily poor job market, it's conceivable I'll remain unemployed for much of 2010; what income I do earn, aside from unemployment benefits, may come from freelance writing or other temporary work assignments.

If that's the case, or for others who have already been out of work for much of 2009, this could be an ideal time to take advantage of your lower tax bracket during this time and convert your IRA to a Roth IRA. The conversion could cost you very little.

In my own case, I've been wanting to convert at least a portion of my traditional IRAs into Roth IRAs for some time, but the subsequent tax bill made me reluctant to do more than think about it. If my unemployment continues well into next year, however, my income will be abnormally low and I could fall into a lower tax bracket.

Remember when calculating your total income to include any unemployment benefits you may be receiving.

A Roth IRA conversion now might still make sense for you, even if you've only been out of work for a few months. If, for example, your salary when you were employed placed you close to the minimum income within any of the federal tax brackets. In a case like this, even a small reduction of income could bump you into a lower bracket.

Remember, you can only convert to a Roth IRA if your modified adjusted gross income is under $100,000 in 2009. And this limit on income disappears next year.

Consider such a tax-advantageous move only if you have adequate savings and won't hurt yourself by paying the IRA conversion tax bill. But then again, if your only income is unemployment benefits or sporadic, part-time work, the tax bill could be pretty manageable.

Please consult a certified finance planner or tax professional to determine whether a Roth IRA conversion is suitable for your needs.

In Super Saver Mode...

March 18th, 2009 at 01:18 pm

I have updated some of my savings goals. Well, the goals remain the same, but I've outlined my strategy in more detail, and until I did the actual calculations, I had no idea how much I was really saving from a percentage point of view. I am in Super Saver Mode, to be sure. Saving 46% of gross income is no small feat.

Now if I can just keep it up and stay the course. Of course, that's the thing that trips up a lot of people. You start out with the best of intentions and then your plan falls by the wayside. If I can just hold onto my job and keep my goals uppermost in my mind, I can get there.

It's not that I'm awash in money. In fact, my income is average. But I am extremely disciplined and a little self-deprivation is something I don't mind doing if the long-term payoff is there. For me, financial independence is the ultimate goal and something worthy of deprivation in the short-term.