"Get Your Finances Ready for Retirement" -Transitioning to a Retirement Portfolio
Monday, July 14, 2008SUSIE GHARIB: Baby Boomers are closing in on the home stretch of their careers with retirement on the horizon. So how do you go from living off your paycheck to living off your retirement income? Continuing our series "Get Your Finances Ready for Retirement," Joe Collum looks at transitioning your portfolio goals for the golden years.
JOE COLLUM, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tim Czerniec isn't quite ready for the rocking chair yet, but the 61-year-old feels financially secure enough to step away from his job as chief financial officer at Barry University after 38 years at the Miami Shores school. When the retirement parties are over, Tim Czerniec and his wife Gloria will be gradually moving from living off a paycheck to living off their retirement income. They expect to need about 85 percent of their pre-retirement income to maintain their current standard of living. For them that will mean a budget of $13,000 per month or $156,000 per year. Most of their assets are in his 403(b) plan, the equivalent of a 401(k) plan for employees of non-profit institutions. With the help of his UBS stockbrokers, Steve Gold and Annick Iwanowski, Tim plans to roll that money directly into an individual retirement account, or IRA. By doing that, he will incur taxes and will be able to invest his funds any way he wants.
TIM CZERNIEC, RETIREE: Move it out of where it is into direct investment management so that I can benefit by it -- my wife and I can benefit by it, over a period of -- hopefully until I'm very old.
COLLUM: A critical issue for all retirees is how best to invest their nest eggs once their paychecks stop. Often that means switching to a less-volatile mix of investments. Gold and Iwanowski helped the Czerniecs put most of their portfolio into fixed-income investments, better known as bonds.
STEVE GOLD, UBS FINANCIAL SERVICES: Because you're going to be stepping down, it's going to be prudent to start taking less risk, also taking into consideration the current economic environment, and we moved to a portfolio that I can tell you today is more around 70 percent fixed, 30 percent equity.
COLLUM: But the Vanguard Group's John Ameriks says many retirees will need to remain more invested in stocks before moving into safer income-producing holdings.
JOHN AMERIKS, INVESTING ANALYST, VANGUARD GROUP: As you get into retirement, that fund allocation is about 50 percent stocks at the point of retirement, and then it drops to about 30 percent stocks once you're about seven to eight years into retirement.
COLLUM: Many retirees are in for a rude awakening when they begin transitioning their portfolios from the accumulation phase of their working years, to the distribution phase of retirement, when they start withdrawing funds from their individual retirement accounts and 401(k) plans. IRA expert Ed Slott says the biggest and most unpleasant surprise is likely to be the tax bite.
ED SLOTT, IRA EXPERT: Remember, none of this money has been taxed. We were all told we had this goody-goody tax break up front, we got a tax deduction but it's kind of like your deal with the devil, in any deal with the devil, there's a day of reckoning and that's the taxes.
COLLUM: For that reason, many financial advisers urge new retirees to avoid tapping tax-deferred accounts as long as possible. But Slott expects the nation's huge national debt to lead to higher taxes in the future. He recommends retirees cash out their IRA portfolios first.
SLOTT: I really believe taxes are going to have to go up. Somebody has got to pay these bills. And if you believe that, it might pay to take some of that taxable money down now while I believe taxes are relatively low
COLLUM: Experts say the financial decisions people like the Czerniecs make going into retirement have big implications. That's because if you don't make the right moves, tax penalties and lower investment returns could mean less income for the rest of your life. Joe Collum, NIGHTLY BUSINESS REPORT, Miami.
GHARIB: Of course, the ideal mix of stocks and bonds in a portfolio depends on an individual's financial situation. So consult with a qualified financial adviser before re- allocating your portfolio.
