Financial Plan, Inc.
James (Jamie) Twining is the founder of Financial Plan, Inc., and a CERTIFIED FINANCIAL PLANNER™ practitioner who works with an exclusive high net worth client base. Jamie has a niche advising BP Cherry Point refinery employees.
A graduate of the University of Southern California and a devoted husband and father, Jamie enjoys spending time with his family, leading the choir at Sacred Heart Church and outdoor sports including mountain biking, scuba diving, and an annual surfing trip to Mexico.
His favorite pastime on a rainy winter’s night is to sit down with his son Gabriel, open a bottle of fine Pinot Noir and play a game of chess.
In short: no, it is not a good idea, and an insurance agent is not able to give objective advice, as they have an obvious conflict of interest here.
Insurance works best for events that are 1) unlikely to occur, and 2) catastrophic if they do occur.
The need for short term care is not unlikely to occur, nor is it catastrophic if it does. I would estimate that one in three retirees will require short term care at some point in their lives, and the cost in today’s dollars if we assume a one year need at $8,000 per month is approximately $100,000. Anyone for whom a $100,000 expense is catastrophic is likely going to run out of money in retirement regardless of whether a short term need for care arises or not. For retirees of limited means, it is quite easy to become “insurance poor” ; paying premiums for all sorts of insurance, and suffering financially as a result even if none of the insured events takes place.
Other examples of inappropriate insurance include vision and dental insurance. Neither of these costs is unlikely, nor catastrophic. Rather than reducing risk, these policies tend to simply funnel expenses through the insurance carrier, while adding on the costs of administration and the insurance company profits. It is better to simply pay the expenses directly.
Examples of appropriate insurance include life insurance for a dependent spouse beneficiary, fire insurance on a home, catastrophic medical insurance, and auto liability insurance. These insure against events that are unlikely to occur, but they can cause catastrophic financial loss if they do. Because the events are unlikely, the insurance issuers need not pay out claims very often. This serves to lower the premiums, and spread the costs over a larger group of people, while paying out large claims to those who suffer the unlikely event.
In regard to the short term care insurance question, I would go a bit further and say that the advisability of even long term care insurance is questionable. A long term care need is not terribly unlikely, nor is it necessarily financially catastrophic. Consider that if someone requires long term care, it is likely a permanent situation. Thus, the home can be sold to pay the costs. Often the equity in the home is sufficient to pay for many years of coverage. In recent years, the claims experience of long term care issuers has been dreadful, causing them to raise premiums and lower benefits. In certain situations it can be appropriate, but in my opinion it is often better to “self insure” if assets are available to sell to raise the funds. Of course if a primary objective is to pass on assets to heirs, this will color the decision in favor of the long term care insurance purchase.
I hope that this is of some help in your decision making process. All the best to you!
As a student employee, I am assuming that 1) you are single and quite young, 2) the 401k has a small balance (under $10,000) and 3) that later in life you will have higher earnings and a higher income tax bracket than you do currently. Under those assumptions, I can give you this general advice, although keep in mind that you may have unique circumstance of which I am unaware that would cause me to advise you differently:
1) Save as much as you can. Only you know how much you can save without causing undue stress on your cash flow, but it easier for a young single person to save aggressively now, before you potentially get married and have children. Your rate of savings will have a larger impact upon your ultimate success than any other decision you will make, so get into the habit right away and be persistent with it.
2) Roll and convert the 401k into a Roth IRA. This will cause you to pay tax now, rather than paying it later in a likely higher tax bracket.
3) Do not start a separate traditional IRA. A traditional IRA may negatively impact your ability to fund your Roth through conversions later if you earn over the allowable income amount to qualify for normal contributions.
4) If your 401k has a Roth option for contributions, use that instead of traditional before tax contributions.
It is apparent that you are taking your finances seriously, and I am optimistic that through your awareness and discipline you will succeed. All the best to you!
I am not an expert on the advantages of a corporate finance vs quantitative analysis emphasis, but I can give you some guidance regarding your 401k:
Chances are quite good that your new employer will have a 401k, and that it will accept rollovers. In that case, I would employ a fee-only CFP practitioner to evaluate the holdings within the new 401k. If the selections within the new 401k include sufficient index funds with which to build a diversified portfolio, I would roll your existing 401k into the new one, rather than rolling it into a personal IRA. A 401k will have an early retirement provision at age 55, allowing you to access the funds without penalty at age 55. With an IRA, the funds are not penalty free until age 59 ½. True, there are some exceptions to the IRA penalty including the 72t option, but their use is not often ideal.
If on the other hand, the new 401k is populated with expensive, high turnover active funds, I would go ahead and roll to your personal IRA. The ability to invest in low cost funds is a benefit that outweighs the disadvantage of the age 59 ½ restriction in my opinion.
When hiring a fee-only financial advisor to help you with this, it is best to ask first if he/she can manage your assets whether they are in the 401k or the personal IRA. Otherwise, there is a conflict of interest that may make it difficult for you to trust that if the advisor recommends a rollover to a personal IRA, the advice is truly in your best interest.
I hope this helps.
Yes, it is possible to pay no income tax in retirement, at least for a while. In your case, once you turn 70 ½, you will pay tax on the required minimum distributions from your IRA. But in the two- year window between your retirement at age 68 and age 70 ½, you may be able to completely avoid the payment of tax.
To accomplish this, you would temporarily allocate your taxable account into securities that do not produce current taxable income. This could be accomplished through the purchase of a fee-only deferred annuity with the majority of the taxable account. A smaller portion could be invested into tax free municipal bonds. As long as the amount in municipal bonds is kept fairly small, your social security will be tax free under current law. You would live on the municipal bond principal and interest and the Roth IRA for those two years.
Anyway, this is a long way off, and the tax rules will change between now and then, but yes, under current law it is possible.
I had a good laugh at your husband's expense. No disrespect, but that is exactly the attitude that causes so many people to be destitute in retirement. I would tell him, in no uncertain terms, that you are going to take the lead in regard to your finances, and that you will give him a monthly budget for his "mad money" expenses.
Cashing out the pension to pay off a car or to take a vacation is foolish. It will increase your income taxes and compromise your ability to retire. Your idea to roll it into your 457(b) is fine. I wouldn't cash out the $2,000 either, I would roll it over in its entirety.
Being able to succeed in retirement is exceptionally difficult; I want to give you a bit of tough love and help you succeed. Hang in there and be disciplined, and we can hope that over time your husband will realize that tomorrow will indeed come. If he doesn't wake up soon, he either will be working until he drops or living in a trailer down by the river. All the best to you both!