Withdrawal Sequencing Strategies: Excerpt from The Smartest Money Book You’ll Ever Read

Equifax Personal Finance Blogger Dan Solin is out with a new book, “The Smartest Money Book You’ll Ever Read,” in which he answers some of your top retirement and retirement strategy questions.

Most people have their retirement funds in various accounts—401(k) plans, IRAs, annuities, taxable accounts, and pensions. The sequence in which you withdraw funds from accounts can affect how long your money lasts, although sometimes your choices are limited. For example, you must start withdrawals from a traditional IRA at age 70 ½.

Here is the basic order in which you should tap your accounts:

1. Post-tax accounts, which are funded with money that has already been taxed. Only the gains will be taxed, at the usually lower capital gains rate.
2. Deferred retirement accounts, such as 401(k)s and traditional IRAs. Withdrawals will be taxed at the income tax rate that applies to you at the time.
3. Roth IRAs, which are funded after-tax dollars. Withdrawals of principal are not taxed, neither are investment earnings once you reach age 59 ½, if the plan has been in existence for at least five years. These funds aren’t subject to compulsory withdrawals, so this should probably be the last account you tap.

Use these rules of thumb for planning your withdrawal strategy, but modify them for your situation to maximize the life of your money.

What’s the point?

When you retire, you need a plan for withdrawals so your money will last you and your spouse the rest of your lives.

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Pay Yourself First: Excerpt from The Smartest Money Book You’ll Ever Read

Equifax Personal Finance Blogger Dan Solin is out with a new book, “The Smartest Money Book You’ll Ever Read,” in which he answers some of your top retirement and retirement strategy questions.

“Putting money away systematically is the best way to “dollar cost average” and save for retirement.”
-Jim Lentini, president, Lentini Insurance and Investments Inc.

Banks have various ways of attracting depositors, and some are more useful than others. Among the most attractive are automatic savings plans, which virtually any bank will set up for you. The bank with transfer specific amounts from checking to savings on specific days of the month. This is the surest way to save money.

Initially, target your savings at least 5% of your income and increase that to 20% (or more) as quickly as possible. The exception would be if you have debt with high interest. Getting that off your balance sheet would probably be the best first step.

Otherwise, pay yourself first. An automatic savings plan keeps money out of your hands. It takes your savings off the top of your income, just like the IRS takes taxes.

Most employers offer direct deposit of payroll checks. This makes having a specific amount transferred to savings on payday a snap. Many employers also offer automatic retirement savings plans, typically a 401(k). Automatic savings, particularly for retirement, is a great idea—especially if there is an employer match.

Make the minimum contribution necessary to maximize the employer contribution. Otherwise, you are passing up free money.

To meet the goals you set in Part One, set up a separate interest-bearing account. You also need an account for emergency or periodic expenses like dental care, car repairs, and replacement of appliances.

Ensuring that the money is there when the transfer is made can require more focus if you’re self-employed and don’t receive regular, reliable paychecks. In that case, just as you pay quarterly estimated income taxes, you have to plan your cash flow to fund the automatically transfer to savings on specified dates. (You also need automatic transfers into an income tax savings account.)

Whether you are employed or self-employed, the key to a successful automatic savings plan is to start with an amount you know you can cover and then periodically increase that amount. Smart small (even if it’s under 5%) and increase the amount as you develop the savings habit.

Reprinted from The Smartest Money Book You’ll Ever Read by Daniel R. Solin by arrangement with Perigee, a member of Penguin Group (USA) Inc., Copyright (c) 2012.

Investors have a lot to be fearful of these days. They have legitimate concerns about the deficit, the state of the economy, and high unemployment rates.

You need to ignore all the hype and noise and focus on fundamental, sound, academically based guidelines for coping with your fears.

Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, and The Smartest Retirement Book You’ll Ever Read. . His latest book is Timeless Investment Advice.

Watch Dan on YouTube. Follow Dan Solin on Twitter.

Many employees have choices when it comes to retirement planning. Here are three common retirement-planning choices:

• A Roth 401(k)
• A traditional 401(k)
• A Roth IRA

How do you decide which is best for you?

Don’t be paralyzed by your choices. You can’t start planning too early for your retirement.
Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, and The Smartest Retirement Book You’ll Ever Read. . His latest book is Timeless Investment Advice.

Watch Dan on YouTube. Follow Dan Solin on Twitter.Read More:529 College Savings Plans Are Best For Saving For Your Grandchildren’s College Education
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With record unemployment rates, many employees are confronting the decision of how to handle the funds in their 401(k) plan when they leave their present employment.
For most employees, the choice is clear: they should take control of their retirement planning and roll it over. Here’s why:

If you decide to roll over your 401(k), be sure you follow all the rules for doing so. The funds must be transferred directly from the trustee of your 401(k) plan to the trustee of your new IRA. Otherwise, you can trigger adverse tax consequences.

Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, and The Smartest Retirement Book You’ll Ever Read. . His latest book is Timeless Investment Advice.

Watch Dan on YouTube.

Follow Dan Solin on Twitter.

Read More:

529 College Savings Plans Are Best For Saving For Your Grandchildren’s College Education
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You would think that after the Bernie Madoff scandal was exposed, the era of Ponzi scammers would come to an end. Sadly, this is not the case.

Recently, former Denver Broncos quarterback John Elway and his business manager were scammed out of $15 million in a massive Ponzi scheme. The Colorado district attorney alleges that hedge-fund manager Sean Mueller may have stolen as much as $122 million from hapless investors.

These schemes are deceptively simple. Typically, the fund manager makes no investments. He pays off old investors with funds contributed by new investors. Word of outsized returns spreads, and gullible investors—lured by the promise of reward without commensurate risk—flood the fund with their hard-earned money. Inevitably, the house of cards collapses, criminal charges ensue, and investors get pennies on the dollar, if anything.

It’s very easy to protect your portfolio against Ponzi schemes and other scams. For starters, I recommend an excellent book by Tom Ajamie and Bruce Kelly, Financial Serial Killers. You’ll be scared straight. Here’s a list of tips adapted from the book and my own recommendations for protecting yourself from con artists who will say anything to get their hands on your money:

1. Make all investments directly to a custodial account in your name only. The custodian should be a household name, like Charles Schwab, Fidelity, or TD Ameritrade. Never make a check payable to your adviser or fund manager. All checks should be payable to the custodian. You should be able to access your account from the website of the custodian. Following this one simple rule would eliminate most fraudulent conduct.

2. Beware of high returns, especially returns that are “guaranteed.” Increased returns always mean increased risk. There’s no free lunch in the investing world.

3. Don’t rush to invest. High-pressure tactics are designed to create a sense of urgency where none exists. Take your time and do your due diligence.

4. Don’t let greed sway you. Con artists prey on the greed of their clients. There’s no easy way to make money in the market. The only thing “easy” about investing is how quickly you can be conned by the false promise of a fast buck.

5. Beware the con artist posing as your friend. He belongs to your club, worships with you, is your golf partner and often your best friend. He’s also the person you would least suspect of scamming you. That’s why he’s so dangerous.

6. Remember that investing is very simple. Complexity is the best friend of the con artist. Remember derivatives? If you don’t understand an investment after a ten-minute explanation, don’t invest in it.

7. Don’t be lured by a promise of steady returns. No one legitimately makes money in all markets. If you are promised steady returns with investments exposed to the stock market, run for the door.

8. Don’t rely on the mainstream financial media for your information. Time on radio and television stations is often purchased and then made to appear like legitimate news. There’s no software or trading program that can produce positive returns over the long term. It’s the sellers of these items that profit, at the expense of the buyers.

Financial scammers are tough to spot. They look just like you and me. Instead of relying on appearances and promises, follow these guidelines to Ponzi-proof your portfolio.

Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read and The Smartest 401(k) Book You’ll Ever Read. His latest book is The Smartest Retirement Book You’ll Ever Read.

Follow Dan Solin on Twitter.

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Whenever I talk about IRAs and estate planning, I can almost see the numbness come over my audience. I can understand why confronting your own mortality comes well behind the name of the latest contestant to be kicked off Dancing with the Stars on the interest scale.

But one aspect of IRAs is genuinely exciting, because it permits you to take a humdrum, modest IRA and turn it into a huge windfall for your heirs. It’s very easy to achieve this goal. Just leave an IRA to a beneficiary of your choice.

Check out this example of the magical power of an inherited IRA, taken from my book, The Smartest Retirement Book You’ll Ever Read:

Assume a forty-five-year-old man inherits a $50,000 IRA from his mother. She took care to educate him about the benefits of an inherited IRA. She cautioned him not to cash it out, because of the immediate tax consequences. He consults with his tax advisers and complies with the rules governing required distributions for an inherited IRA from a non-spouse. (You can find a good summary of these distribution rules here.)

He stretches his required withdrawals out over the next 38.8 years (his life expectancy, according to the IRS). Assuming the funds remaining in the IRA grow at 8 percent per year, he would pull out a staggering $303,113 before the IRA was exhausted.

It’s even better for spouses who inherit an IRA. They have the option to do a spousal rollover. If they elect that option, the IRA will be treated as their own, with the normal IRA rules applying to their minimum required distributions. Basically, these rules don’t require any distributions until the owner reaches 70½ years of age.

Just think about the value of an inherited IRA to a newborn grandchild, who can spread required distributions out over 82.4 years, which is the longest period of time permitted by the IRS.

To ensure your IRA is inherited according to your wishes, you need to take some very simple steps:

1. Check the beneficiary form you filled out when you opened your IRA. Be sure the beneficiary is still the person you want to inherit it. If not, update the form. The financial institution where you opened your IRA will have a copy of the form. Request it, review it, change it if necessary, and keep a copy with your important estate-planning documents.

2. Educate your beneficiary. A little-known minefield can trip up non-spouse beneficiaries. He or she must leave the original owner’s name on the account. If the account is changed to reflect only the beneficiary’s name, the IRS will treat the entire value of the IRA as immediate income to the beneficiary. The IRA must continue to have the decedent’s name on it, and his or her date of death, together with the Social Security number of the beneficiary.

Because of the complexity of these rules, if you have the good fortune to inherit an IRA, you would be wise to consult with a qualified tax adviser. Saving on professional fees can be very costly if you mess up and trigger adverse tax consequences.

Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read and The Smartest 401(k) Book You’ll Ever Read. His latest book is The Smartest Retirement Book You’ll Ever Read.

Follow Dan Solin on Twitter.

Strategies for Outsmarting Uncle Sam at Tax Time
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While reliable data on divorce rates is hard to come by, everyone who has been through a divorce can confirm that it’s devastating—emotionally and financially.

Discussing a prenuptial agreement with the love of your life is not easy, which is why so few people have them. It’s difficult to say, “I love you, but let’s talk about what happens if it doesn’t work out.” Nevertheless, it can be a matter of pay now or pay later.

A prenup is especially critical for seniors entering into second (or even third) marriages. By some accounts, a higher percentage of these marriages end in divorce. If you don’t have a prenup, the laws of your state may give your spouse certain rights in your assets at the time of your death. These laws may be totally inconsistent with your desire to protect your children or other heirs, and they can defeat provisions in your wills and trusts that are in conflict with them.

Here are some basic guidelines for those contemplating a prenup:
1. Be honest about your assets. You need to fully disclose all aspects of your financial history, including life insurance policies. Ideally, you should exchange several years’ worth of your tax returns. If you own, or have an interest in, a business, you should disclose the business’s returns as well. It’s important to be candid about your finances, because if you aren’t, it may be hard to enforce the prenup.

2. Seek professional help. A prenup is a very serious document with major consequences. If the time comes, you want to be sure it will be enforced. Each party should select, retain, and pay for his or her own attorney. Be sure the attorneys are specialists in family law, with vast experience in drafting prenuptial agreements in the state in which you reside.

3. Make sure the document is fair to both parties. Overreaching in these agreements is a red flag for the courts. One attorney tells the story of a couple who wanted to include a provision that if either the husband or the wife required long-term care, the infirm person would be responsible for all costs. Payments made by the healthy partner would be deemed to be a loan. It is very unlikely this provision would be enforced by a court. A prenup with such an unfair provision might not be enforced at all. Unfair provisions also encourage litigation.

4. Don’t sabotage your prenup. It’s important to keep the terms of the prenup in mind during your marriage so you will not do anything inconsistent with it. For example, if you intend to leave your home to your children, the title should not have a right of survivorship that would cause it to automatically transfer to your spouse.

5. Don’t lose the prenup. You can’t enforce a document you don’t have. File copies with your important estate-planning documents. Keep the original in a safe-deposit box at a bank (but be sure your heirs have access to it) or in the vault of the attorney who drafted it.

Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read and The Smartest 401(k) Book You’ll Ever Read. His latest book is The Smartest Retirement Book You’ll Ever Read.

Follow Dan Solin on Twitter.

Strategies for Outsmarting Uncle Sam at Tax Time
Participating in Your Company’s 401(k) Plan Is Not a No-Brainer
All Money Market Funds Are Not Created Equal
Maximize Your 401(k) Returns

Here’s what goes through the minds of most investors when they read about the stellar returns advertised by mutual funds: “I owned that fund, and I didn’t get anywhere near those returns.”

One article estimated investors end up with less than 20 percent of the annual returns of the mutual funds they once held.

After inflation and taxes, many investors are in the red.

This is not an isolated problem. It’s true for many major mutual funds. For example, the difference between the returns of the Fidelity Aggressive Growth Fund and the returns realized by shareholders for the period from January 1, 1998, to December 31, 2001, was an astounding 26.9 percent. You can find a chart with the largest gaps among the largest funds here.

Over longer periods, the same results were found. For the twenty-year period from 1990 to 2009, the returns of the average stock fund investor were only 3.17 percent. The S&P 500 Index returned 8.21 percent.

The reason isn’t hard to understand. Most investors are advised by brokers. Brokers typically encourage them to chase returns by investing in “hot” funds with stellar recent performance records. The funds get a massive influx of cash and are unable to repeat their prior performance.

How can you avoid this investor trap? It’s stunningly easy.

First, stop dealing with a broker or any adviser who tells you he or she can “beat the markets.” This includes virtually all brokers.

Second, do not invest in any actively managed stock or bond fund. By “actively managed,” I mean any fund where the fund manager attempts to beat the performance of a given benchmark.

Third, don’t try to pick one sector of the market that will outperform any other sector. Instead, invest in a globally diversified portfolio of low-cost stock and bond index funds in an asset allocation (division of your portfolio between stocks and bonds) suitable for you.

In essence, you are fundamentally changing the way you invest. Instead of engaging in discredited and unreliable practices like market timing and fund manager picking, you are capturing the market returns of the world’s economies.

This simple strategy will get you almost—but not completely—to your goal of capturing 100 percent of the returns of the funds in which you invest. Investors in index funds typically capture between 75 and 88 percent of the returns of the fund, which is not bad. They fail to capture the balance because they don’t have the discipline to stay invested during the tough times.

A purely passive investment adviser can bridge the gap. These advisers (full disclosure: I am a passive investment adviser) focus on educating investors to stay the course in volatile markets, which changes investor behavior and increases returns. There is ample data demonstrating that passive advisers who educate their clients in this manner (and advise them to rebalance their portfolios) achieve returns for their clients that exceed the advertised returns of the funds in which they’ve invested. The rebalancing requires their clients to purchase funds that are going down and to sell funds that are going up, which accounts for this impressive result.

If you have the discipline to do this yourself, you may not need an adviser. Otherwise, consider hiring one, but be sure to limit your search to someone who focuses on your asset allocation and recommends investing only in a globally diversified portfolio of low-cost index funds, exchange traded funds, or passively managed funds.

Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read and The Smartest 401(k) Book You’ll Ever Read. His latest book is The Smartest Retirement Book You’ll Ever Read.

Follow Dan Solin on Twitter.

Strategies for Outsmarting Uncle Sam at Tax Time
Participating in Your Company’s 401(k) Plan Is Not a No-Brainer
All Money Market Funds Are Not Created Equal
Maximize Your 401(k) Returns