Talking retirement: A conversation between Vanguard experts and Facebook fans
August 20, 2014
Two retirement experts at Vanguard, Maria Bruno and Colleen Jaconetti, recently spent their lunch hour answering our Facebook fans' questions. Here are a few highlights.
Can I contribute to a 401(k) plan and my Roth IRA every year?
Maria Bruno: The answer depends on your income. There are income limitations on Roth eligibility. For example, if your modified adjusted gross income for the year is more than $129,000 (or $191,000 if you're married filing jointly), you can't contribute to a Roth. That said, you may be able to fund a Roth using a "backdoor" strategy. We talked about this question in a recent webcast—here's the link. If you're able to fund both accounts, I encourage you to do so!
I recently joined a company with a matching 401(k) plan that I'm contributing to. I also have a Roth IRA. I have been maxing out for 10 years. Should I roll my 401(k) into my Roth IRA periodically or just let it build by itself?
Colleen Jaconetti: The goal is to pay taxes when you think your rate will be the lowest. It's good to have both Roth and traditional retirement savings for tax diversification, since it provides flexibility in retirement. You'll want to check your 401(k) plan's rules, however, because they may not allow you to roll money out of the plan. Also, you may find your plan already has a Roth contribution option.
I'm 47 years old and in good health. What's the best strategy to maximize my small retirement fund? How aggressive should I be, and what mutual funds are likely to yield the best results?
Maria Bruno: This is a good time to reevaluate since it sounds like you still have time to build your retirement nest egg. Given that you may have about 20 years to accumulate assets, it's feasible to have an asset allocation that's more heavily weighted toward stocks (at least 60%). Just make sure that you're comfortable with the potential short-term market volatility and that you're broadly diversified in your stock and bond portfolios. I also recommend that you take full advantage of any savings opportunities you may have, like an employer-sponsored retirement plan or an IRA. Rather than focusing on investing too aggressively and taking on a lot of risk, increase your saving rate—this can be one of the most powerful (and certain) ways to accumulate wealth.
What's Vanguard's stance on recent research that suggests retirees should increase their stock allocation during retirement?
Colleen Jaconetti: When setting your asset allocation, we believe you should have the highest percentage of stocks that you feel comfortable with—and feel you'll be able to stick to regardless of market ups and downs. Unless your time horizon, risk comfort level, or financial goals change, your asset allocation should stay pretty consistent. Your time horizon often decreases as you age because you usually need to start spending your savings. In that case, your allocation to stocks should probably decrease, since you'll have less time to recover from a downturn.
How do I do a "backdoor" Roth IRA contribution?
Maria Bruno: It's great to hear that you're considering all of your retirement savings options. In this short clip from a recent webcast, we discuss how to make a backdoor Roth contribution and deal with any potential tax implications.
What type of bond funds would be appropriate for a long-term investor? Do you recommend high-yield funds or a mixture of short-, medium-, and long-term bond funds?
Colleen Jaconetti: Generally speaking, when it comes to bonds, we recommend broadly diversified, low-cost, investment-grade, intermediate-term duration funds. You can accomplish this by purchasing intermediate bond funds or through a combination of short-, intermediate-, and long-term bond funds. Two other things to consider: Do you want exposure to international bonds? Also, if you're in a high tax bracket and you're purchasing bonds in a taxable account, you may want to look at municipal bond funds.
In which account should I hold bonds and stocks to minimize taxes?
Maria Bruno: It's generally a good idea to shelter tax-inefficient investments (like actively managed funds or taxable bond funds) in tax-advantaged accounts. Following this framework allows you to prioritize taxable bonds in your tax-advantaged accounts, giving you the opportunity to capture the yield premium that taxable bonds offer over municipal bond funds (which you might hold in your taxable accounts).
What if you're not quite 55 but may unexpectedly be forced to retire a year from now? What should you do with your lifetime of savings?
Colleen Jaconetti: I'm sorry you're facing that situation. The most important thing to do with your savings is to stay invested. Beyond that, it really depends on how much you have saved and whether you can afford not to return to the job market in some capacity. If you do have to retire early, your retirement time horizon will shorten, so you may want to revisit your asset allocation.
I'm 55 and I'd like to retire at age 60. I hope to have more than $500,000 in pensions and a $70,000 mortgage at that time. Will I be okay?
Maria Bruno: While I can't give you a definite answer, I can give you some things to think about. For example, consider your pensions and how much income they'll replace. If you can, pay down your mortgage while you're working and continue saving. If you plan to retire at age 60, there will be a gap until you're eligible for Social Security and Medicare, so consider how you'll cover medical costs in the interim. In fact, even when Medicare starts, you may want to consider adding a supplemental medical policy. Keep in mind that as life expectancies increase, you'll want to plan for a long retirement while meeting your short-term spending needs. Now would probably be a good time to talk with a financial planner to understand your options. Good luck!
- Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.