JoeTaxpayer

I’ve seen remarks across the blogosphere that the recent FDIC advertisements are a bad sign. I’m not convinced. I think there are many who have no idea how the FDIC protection works, what its limits are, and how to get more coverage. First, here is one of the ads they are running:

The important thing to understand is that non-retirement accounts are insured up to $100K. If you have more cash than this, you should consider splitting it up among more than one bank. In the case of a failure, you may have to wait some time to access your money, so even if you are below the limit, using 2 or 3 banks is a good idea. See the FDIC Website for more details.

Joe

written by JOE \\ tags: banks, failure, fdic, money, Retirement, retirement account

I recently read a post “Why I love Roth IRAs” in which the author ignores much of the math going in and coming out. Now, I love Roths myself, but only when used to take most advantage of the tax rates involved. Let me explain. From my feature article earlier this year titled “Can you save too much, pre-tax?” we see that a couple with $447,500 in their 401(k) or Traditional, Pre-Tax IRA, can take withdrawals and remain in the 0% bracket. This is due to the combination of standard deductions and exemptions. The next $401,250 will support withdrawals at the 10% rate.
If you have a defined benefit pension (a traditional pension) the numbers certainly will shift, and you need to take this income into account. Pensions are getting more scarce and those who frequently changed jobs are likely to have never vested into any one plan.
So, now I’ll ask, what percent of retirees are likely to have saved this sum, a total $848,750 from the numbers above? I cite an article from AARP titled 2004-05 Boomers which offers a forecast. One chart in this report offers that for those born in 1956-65, their mean (this means average, important distinction from median, middle) wealth is forecast to be $839K. But reading on, we find that after subtracting non-retirement wealth and present value of Social Security benefits, we are looking at a retirement account balance of just $140K. It turns out the 4th quintile (this is the second 20% from the top) is forecast to have $906K, this scales to about $151K in retirement accounts. Even the top quintile (top 20%) will average $2028K total wealth, with maybe $350K-$400K in retirement accounts. So it’s only the upper portion of that group (in addition to those with fat traditional pensions) that need to consider the Roth while working. For the rest of us, we will likely be in the 10% or if fortunate, the 15% bracket upon retiring.
I’ll close with this thought - each family has their own set of numbers. This is why if you write in to a web site or magazine and ask “Is Roth good for me?”, it’s impossible to answer without knowing many details. We know more the closer you are to retirement, but only have a series of clues the further away you are. Another blog “The Finance Buff” offers a view similar to mine. I remain surprised at how many wave the Roth flag without some level of analysis. For those who have access to a Roth 401(k) and Roth IRA, it would be a shame to load those up and find that they missed out on the tax savings that pretax savings could have provided.

Joe

written by JOE \\ tags: 401(k), Finance, income, IRA, Retirement, retirement account, roth ira, saving, Savings, Social Security, tax, tax rates, traditional pension, wealth

Regular readers know where I stand on Variable Annuities, and I though thought I’d share this quote from a Suze Orman interview on CNN Money which caught my eye;

“I hate them with a passion - a passion! - especially in a retirement account like an IRA. Variable annuities have all these extra fees and tax issues and penalties, but - oh, that’s okay! - because they give you a tax deferral. But a retirement account is already tax-deferred without all those fees. It’s absolutely ridiculous. I think variable annuities exist for one reason only: to make money for the financial advisers who sell them.”

I’ve had some disagreements with some of her advice, but lately I’m finding more of her quotes that are right on target.

Joe

written by JOE \\ tags: CNN, cnn money, IRA, money, Retirement, retirement account, Suze Orman, tax deferral, variable annuities