40-Something Retirement Strategy


Reader Question: There seems to be lots of articles written about retirement planning for the ‘just getting started’ as well as the ‘I’m about to retire’ crowds but precious little written for the ‘I’m in my 40’s’ crowd. I am forty years old; make about $150,000 per year; have $350,000 in my 401k which I contribute enough to capture my company’s matching contribution. I also maintain about $5,000 in emergency reserves. What else can and should I be doing to prepare for retirement? J.R.
Answer: First, you deserve a round of applause! You have a high paying job and have done a great job of accumulating investment assets. Clearly, early in your career, you established one of the most important habits of retirement planning and that’s contributing heavily to your company 401k plan. Way too many young people think they can afford to postpone their investment program only to wake up one day and realize they no longer have enough time to adequately save for retirement. At this point, I’d recommend that you do several things:
·         First, determine your ‘number’. How much capital do you need to accumulate between now and your target retirement date? When people do this exercise, most are shocked at how much money they’ll need to be able to maintain a similar lifestyle during their retirement years (hint: your number is in the millions!). For a nifty retirement calculator, visit www.WelchGroup.com; click on the ‘Resources’ tab; then ‘Links’ and ‘Retirement Calculator’.
·         Have multiple types of investment accounts. Retirement accounts are great for accumulating wealth during your working years because you typically get a tax deduction for your contributions and earnings grow tax deferred. However, during retirement, your withdrawals are fully taxed as ordinary income. For us, the perfect retirement client is one who has a lot of money in both a traditional retirement account and a personal investment account. That way we get to choose where to pull money from and in doing so, can exercise a lot of control over the income taxes we pay in any given year. Start with the Roth IRA. While your contributions are not tax deductible, withdrawals at retirement are 100% income tax free. If you don’t qualify to contribute to a Roth IRA because you make too much money, you can invest in a non-deductible IRA and immediately ‘convert’ it to a Roth IRA. There will be no income tax implications unless you already have a traditional tax-deductible IRA account. Be sure to work with your CPA. Beyond the Roth IRA, set up a personal investment account using no-load mutual funds, exchange traded funds (ETFs) or individual stocks.
·         Focus on debt reduction. In most cases, when working with clients, one goal is to be debt free, including home mortgage, by retirement. You’d be amazed at how much less financial-related stress there is if there’s no debt. It boosts confidence and gives you the sense that you can withstand any financial crisis.
Reader Question: A few years ago I opened an account with American Century Investments and invested in a capital preservation fund (symbol CPFXX), that only buys short-term treasury bills for maximum safety but is paying very little interest. If the dollar dropped significantly do you think this fund would still be safe? M.E.
Answer: The fund you’re in is about as safe as any mutual fund out there in terms of capital risks.  Even though U.S. Treasuries were downgraded one notch from AAA status, they remain the world’s ‘gold-standard’ for quality and safety. Your real risk here is inflation risk.  You’re earning a meager one-tenth of one percent with inflation running over 2% and inflation could accelerate in the future.  Essentially, you’re trading a guaranteed return of your money for a potential return on your money.  You didn’t say how much you’ve invested in the fund but if you don’t anticipate needing it for at least 5 years, you might consider investing where there is more opportunity. If you follow my column, you know I favor U.S. blue chip dividend-paying stocks for their relative high dividend yields and potential for growth over the next three to five years. You could buy individual stocks or if you want to stick with mutual funds, check out Vanguard’s Dividend Appreciation Index Fund (symbol VDAIX). Its dividend yield is about 2% and has a low 0.25% expense ratio. So far this year, the fund is up over 10% and has a 5-year annualized return of 3.4%.