BusinessWeek Logo
March 10, 2008 Issue Posted February 28, 2008, 5:00PM EST

Plus

Ryan Snook

How to Retire Early, Then Change Your Mind

Call it the Social Security do-over. If you retire early and take a reduced monthly benefit, you can change your mind, reapply, and get the bigger payments that go to those who wait to collect benefits.

The catch? After filling out Form 521, you must send the government a check covering the benefits you've been paid (without interest or adjusting for inflation). "Everyone is free to do this," says Laurence J. Kotlikoff, economics professor at Boston University and head of financial-planning software company ESPlanner.

He ran numbers for a couple who retire at 62, have $300,000 in savings, and an additional $100,000 each in retirement assets. They want their money to last until they're 100. If they apply for benefits at 62, each gets $17,921 a year.

Fast-forward eight years. Had they waited until age 70 to file, they would get $31,005 each, for a total of $62,010 a year. To get those higher payouts at this point, the formula requires them to pay $118,957 each. Yes, that's a big check. But to get that same payout by buying the cheapest commercial annuity would cost 40% more. When you include earnings from the couple's other assets and factor in their 30-year time horizon, Kotlikoff calculates that their annual aftertax spending can go from $58,765 to $70,420.

—By Christopher Farrell, Edited by Suzanne Woolley

Is a Roth Right for You?

To Roth or not to Roth? Some retirement investors can get a break from Uncle Sam by converting an Individual Retirement Account (IRA) to a Roth IRA.

With a conversion to a Roth, participants pay tax on the amount they're switching over but avoid taxes when they withdraw funds at retirement. That's why converting makes the most sense for folks in lower tax brackets, such as younger workers or even recent retirees. "With equities this low, there is less of a tax impact now to do a conversion," explains Mary Erl, an adviser at Nestegg Financial Advisors in Gurnee, Ill. There are caveats, though: To be eligible, your modified adjusted gross income must be $100,000 or less in the year you make the change. Also, you must pay the income tax in that year.

Converting can be a smart estate-planning strategy since Roths don't have to be tapped starting at age 70 1/2, as traditional IRAs do. But making the switch can be tricky, so it's a good idea to run your plan by an investment adviser or a tax pro.

—By Lauren Young, Edited by Suzanne Woolley

E*Trade's New Fees

After slashing expenses in 2004 amidst a price war over index fund fees, E*Trade Financial (ETFC) appears to be dropping out of the competition for lowest-cost provider. As of May 1 it will effectively raise the expense ratios on two of its four index funds—the E*Trade S&P 500 Index (ETSPX) fund and the E*Trade International Index (ETINX) fund.

Since 2004, E*Trade account holders have benefited from a "fee waiver"—actually a subsidy of fund expenses—of 0.41 basis points. That waiver cut overall fees to 0.09% on both funds. But E*Trade now plans to pare back its subsidy. Because the firm has yet to notify shareholders, a spokeswoman would say only that E*Trade's expense ratios will stay below the 0.18% and 0.27% that Vanguard charges, respectively, on its 500 Index fund (VFINX) and Developed Markets Index fund (VDMIX). (Vanguard does not subsidize those expense ratios.)

Although E*Trade's overall business recently took a hit because of exposure to subprime mortgages, the firm says that did not spark the change: "It would be inaccurate to portray this as cause and effect," the spokeswoman says.

"E*Trade's (ETFC) New Fees" (Personal Business, Mar. 10, 2008) cited incorrect expense ratios for the Vanguard 500 Index fund and Vanguard Developed Markets Index fund. The correct figures are 0.15% and 0.22%, respectively.

—By Anne Tergesen, Edited by Suzanne Woolley

Reader Discussion

 

BW Mall - Sponsored Links