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SECURING YOUR FUTURE: A SELF-HELP GUIDEBUSINESS WEEK and leading financial planners clear a path through the thicket of choicesLife would be much simpler if there were one formula that everyone could use for retirement investing. But there isn't--and so we labor over asset-allocation ratios, scour mutual-fund reports, and endure guilt-inducing financial sales pitches. Alternatively, we hire a planner to do the work or put our fate in the hands of, um, a trusted stockbroker friend. BUSINESS WEEK has another idea: a self-help guide to retirement investing that can get you well on your way to a sensible plan. Once you figure out how much you'll need to save--a task made easy by personal computers and the Internet (page 88)--you'll be set to select among model portfolios from the tables below. We developed these models with the help of Alpha Group, a network of eight of the nation's leading financial-planning firms, collectively managing $1.4 billion. Together, we also selected a complementary group of mutual funds, suitable whether your portfolio is $20,000 or $2 million. Each fund is a leader in its class, widely available, and inexpensive: None levies a sales charge, and our model portfolios cost only half the fund industry's typical expense rate of 1.3%. Assemble your own portfolio by picking funds from the table as needed. If your employer's plan has a good stock-index fund, use it, and when your account grows large enough, supplement it with our actively managed equity funds. If you're self-employed and building an investment plan from scratch, pick an entire portfolio. Likewise, if you're retired and figuring where to stash your nest egg, our table offers a full plan or a way to bolster your current holdings. ''GOLD TO LEAD.'' Buying funds such as these through a brokerage account offers clear advantages to a variable annuity. This increasingly popular tax-deferred savings vehicle is essentially a fund or menu of funds put inside an insurance policy. The problem is that the lure--tax-deferred investment growth--is outweighed by high fees and commissions, penalties charged for taking out your money early, and higher taxes down the line. When you begin withdrawals, your annuity earnings are taxed not at lower capital-gains rates but at the higher rates imposed on ordinary income. ''I've run scenarios upside down and backwards, but it just doesn't work out,'' says Harold Evensky of Evensky, Brown, Katz & Levitt, a Coral Gables (Fla.) financial-planning firm. ''You end up turning gold to lead.'' You can set up various accounts for retirement savings at banks, insurance companies, and brokerage firms. But discount brokers, with their low transaction costs and diverse products, may be the best way to go. Deena Katz, a partner at Evensky, Brown, thinks full-service brokers, insurers, and more limited mutual-fund companies should be avoided because they're either riddled with commission schemes, have other sales incentives to steer you toward their own mutual funds--which may not be the best ones for you--or offer a shorter list of investment choices. She suggests turning to such discount brokers as Charles Schwab (800 694-9449), Waterhouse Securities (800 934-4410), and Quick & Reilly (800 533-8161), which have a wide range of products and many offices nationwide. Fidelity Investments' brokerage arm (800 544-8888) has a smaller office network but is also a good choice because of the extensive list of mutual funds it carries. The sections below detail how and when to use the retirement-savings accounts that are best for you, depending on your situation. If your employer offers a 401(k) or some other savings plan, you'll want to implement your retirement-savings program very differently than if you're self-employed and doing it on your own. And if you've already retired, you'll have another batch of questions, including perhaps the most pressing one: How will I ensure I'll have the cash flow I need to live on? For answers to that and more, look for the situation that most closely fits your life.
Do you, like Banapour, feel underwhelmed by the investment options in your company's retirement plan? Unfortunately, you won't be able to liberate your savings until you and your employer part. Yet you can set up special accounts on your own to supplement your employer's plan. You may want to do that even if you like the investment choices you have at work but find yourself bumping up against the $9,500 annual ceiling on pretax contributions. To get the most from all your retirement accounts, the trick is to fund them systematically. Think of all the options as a cascading series of savings pools that you want to fill each year according to your ability and in the right order. First, regardless of how cheesy your employer's plan may be, keep funding it to the annual maximum of $9,500 as long as your contributions are matched. If your employer gives you, for example, 50 cents for every dollar you invest in your 401(k), that's free money. Take it. Once you've grabbed every free buck, keep saving in your 401(k) with unmatched contributions. But as soon as you've saved as much that way as you can--or if your employer's investment options are wholly uninspiring--your next step is to open an IRA. Do this even though none of your contributions ($2,000 a year maximum, plus $2,000 for a spouse) will be deductible from current income, as they are for IRAs funded by people who don't have employee-sponsored retirement plans or who earn less than $50,000. Do it because your savings will compound without being taxed until you begin taking withdrawals, which you needn't do until age 70 1/2. Do it also because it gives you a chance to invest in better funds than those available in your 401(k). Finally, do it even though you may be able to contribute more in aftertax dollars to your company plan than the $9,500 pretax limit. Yes, your money would grow there under the company plan's tax shelter, but you'll be putting still more money in an account you have limited control over. What should you do next? If you've put all you can into your 401(k) and you've maxed out your annual IRA contribution, your next move is simply to open a regular investment account with a discount broker. In this account, you needn't trade stocks and bonds--though those are available to you--but you will be able to purchase and hold mutual funds, such as those in our table, which complement the funds in your IRA and 401(k). For example, if your 401(k) offers a good growth-stock investment option, don't attempt to duplicate that in your brokerage account. Try instead to fill the gaps in your employer's plan. The difference between qualified retirement plans and this regular brokerage account is that you'll be obliged to pay taxes each year on any dividends or capital gains generated by the funds in the account. To minimize the tax bite, Jane King, president of Fairfield Financial Advisers in Wellesley, Mass., suggests sticking to stock funds that don't turn over their holdings very often. One fund in our table that trades infrequently and generates little in annual capital gains is Dodge & Cox Stock, which holds its shares for an average of 10 years before selling. Another low-turnover choice is Schwab 1000, a stock-index fund that, like all funds that track indexes, sells rarely. Little trading activity also lowers the fund's commission costs. Those savings, plus lower taxes, let your gains compound more swiftly.
Well, Ms. Green, remember this acronym: SEP-IRA, or Simplified Employee Pension-Individual Retirement Account. With a SEP-IRA, the self-employed can put aside as much as 15% of their earnings each year, to a maximum of $24,000. And you can do this even if you or your spouse works for a company with its own retirement plan, as does Ms. Green, an office manager at a semiconductor maker. The key is having a profitable business, whether it's a full-time occupation, as the janitorial service is for Mr. Green, or a consulting practice you maintain alongside a corporate career. Setting up a SEP-IRA is little more difficult than opening a regular IRA. In fact, the main complication to a SEP-IRA is the wickedly circular calculation the Internal Revenue Service demands before you'll know how much in taxable earnings you received from your business in the prior year and how much you can contribute to your retirement account. One depends on the other. Randi K. Grant, an accountant at Miami's Morrison, Brown, Argiz & Co., says popular income-tax software programs such as TurboTax crunch the numbers in a snap, so if you have a computer or an accountant does your taxes, don't drive yourself nuts doing it by hand. ASSET POOL. Once you've set up a SEP-IRA, the more important issue will be how to allocate your savings among different investments. Here is where our table on page 62 comes in. For smaller portfolios of $25,000 or less, no more than four mutual funds are needed. Indeed, the smallest accounts can get by with a short-term bond fund and a large-company index fund, such as the Solon Short Duration Three-Year Bond and Schwab 1000 funds in our table. As your business grows and your retirement account swells along with it, so should the number of funds in your portfolio. You also should view the funds in your SEP-IRA as one piece of a financial puzzle that might also include funds you've rolled over from a previous job into an IRA or investments held in your spouse's 401(k). ''You want to look at these as a whole pool of assets,'' says King, and choose funds to suit the whole, not any one account. All told, you need no more than 9 or 10 funds of the kind our table shows for portfolios of $1 million or more. For the self-employed whose businesses soar, Keogh plans make a better choice because they allow higher levels of pretax annual savings--25% of earned income, up to $30,000 a year. That can be especially helpful to older businesspeople who find themselves trying to catch up on their retirement savings with a limited number of years to do it in. For the self-employed with plenty of free cash flow, Keoghs ''are still a license to steal,'' says Cincinnati financial planner Michael Hengehold.
Like many retirees, Beiring left the corporate fold with a multimillion-dollar nest egg--in his case, a pile of P&G stock. At first, he played the options market, deriving extra income by selling covered calls, which works well in a flat or falling market. But soon, P&G shares began climbing, and Beiring was forced to sell stock to make good on the options contracts he had sold. ''I had all this money in my hands, and I couldn't sleep at night,'' he says. That's when he decided to find a financial planner to help him reallocate his holdings among an array of mutual funds and corporate bonds. ''I'm not an expert,'' he says. ''I was happy to turn it over.'' COSTLY COUNSEL. If you have retired--or are planning to soon--you might do the same. But be prepared to pay. Some planners charge as much as $2,500 for an initial plan and then 1% of your assets annually. For a $1 million portfolio, that's $12,500 in the first year and $10,000 or more thereafter. Likewise, bank trust accounts and brokerage ''wrap'' accounts often cost at least 1% of assets. All fees are negotiable--it never hurts to ask for a discount--but the point is, truly customized planning doesn't come cheap. Still, investing your retirement savings is not, despite what some planners will tell you, brain surgery. ''None of what we do is beyond the ability of a person who has been able to bank a million bucks in their lifetime,'' concedes Hengehold, Beiring's adviser. If you do decide to manage your own savings, the first thing you must do is get control of the money. That means having however much or little you've built up in your employer's plan paid to you in a lump sum and moving it via what's called a trustee-to-trustee transfer into a custodial-rollover IRA. To do that, first open a rollover IRA at a discount broker. Then, tell your employer you plan to move your retirement savings into an IRA, and supply the account number. Employers typically will prepare a check made out to the IRA trustee ''FBO''--For the Benefit Of--the employee. This could take as little as five days, but some slowpoke employers need nudging. Once you get the check, mail it or carry it to the broker's office with your account application and instructions to place the proceeds in a money-market account within 60 days after the check was issued. (Wait too long and the government will consider the check a retirement distribution and tax you on it.) After the check clears, you can move funds from the money-market account into a variety of mutual funds, such as those on page 62. When you retire, you'll also have the chance to take the money directly. But you'll be obliged to pay taxes on it. And, even though tax law lets you spread that pain over the first five years of your retirement, you'll still wind up worse off. Planners say that strategy rarely leaves you with more money than if you keep sheltering your savings from taxes while letting it grow in an IRA. Focus next on setting up your other investments. First, place your nest egg in a money-market account at your broker. If your federal tax rate is 28% or higher, a tax-exempt fund is very likely the best choice. Next, choose one of the mutual-fund portfolios outlined in our table. How do you draw on your account? Planners suggest that you estimate how much you will want to withdraw in your first two years of retirement. That's the amount you think you'll need for all of your early retirement expenses that won't be covered by pension payments, Social Security, or income from rental properties or, perhaps, a part-time job. Keep that much in your money-market account. Also, don't opt to reinvest the interest, dividends, and capital gains your mutual funds will distribute. Instead, direct those cash flows into your money-market account. Each year, you can evaluate your spending and decide whether you're flush enough to plow those earnings on your nest egg back into mutual funds or whether your spending is higher than you estimated. Eventually, you'll probably also need to cash in some stock- or bond-fund shares to pay for a vacation home, make gifts to kids, meet unexpected expenses, or simply to refill your cash account. In those cases, says Minneapolis planner Robert Markman, peruse your funds and sell some of those that have done best. ''You can wander the fields of your portfolio and ask: 'Which fruit is ripe and ready for picking?''' he says. ''Once or twice a year, you pick some to eat.''
By Robert Barker in New York RELATED ITEMS
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Updated July 11, 1997 by bwwebmaster
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