A: Not likely. When you write to Prudential with a question, they normally lob it to a local insurance agent, who in your case tried to make a meal of you. Had he been smart enough to answer your question and offer some options, he might have won an invitation to talk further-and maybe even made a sale. Instead, he gave you yet more reason to do your retirement planning with USAA.
Ironically, your question isn’t even complicated. Assuming current interest rates, your policy’s cash value at 65 would be $22,566, Prudential says, That would buy an annuity paying $153 a month for life (with up to 10 years of payments to a beneficiary if you die within that first decade). Not too exciting. Your $153 won’t go very far in 2008.
What’s good about this policy, had Pru bothered to tell you, is its average rate of return over the next five years-estimated at 6.4 percent tax-deferred, according to James Hunt of the National Insurance Consumer Organization. That’s pretty competitive today. Hunt thinks you should keep on paying your $320 annual premium and let the policy’s value build. If You hold until death, there will be no taxes on the gains. If the premiums are a burden, you could convert to a paid-up $10,597 policy and still earn interest tax-deferred.
Any other stonewalled policyholder should write to Robert C. Winters, Pru’s chief executive officer, at 213 Washington St., Newark, N.J. No company should make you agree to a sales call before giving you information about a policy you bought and paid for.
Q: I’m a 40-year-old divorced mother of two teenage girls. As part Of my settlement from my ex-husband, I received money from his profit-sharing plan. Some went toward bills, but I rolled $40,000 into an Individual Retirement Account invested in a one-year certificate of deposit. The bank is suggesting that I switch to tax-deferred annuities or mutual funds. What do you think? I need income from this money and will also use it for college. Between my salary and child support, I net $1,713 a month, almost half of which goes for my mortgage. JEANNIE HARLEY, FT. LAUDERDALE, FLA.
A: You’re spending that money in your mind without a mention of retirement. Maybe you’ll meet your true P. Charming, but most women today have given up on Cinderella. Financial planner Harold Evensky of Evensky, Brown & Katz in Coral Gables, Fla. (who’s worried about you) hopes that you’ll hoard your $40,000 against the hazards of old age. Because your marriage lasted at least 10 years, you’ll be eligible for social-security benefits from your ex-husband’s account. But that’s not a princely income. You hope to work until 65, but what if you can’t?
Any money you take from your IRA will suffer an awful haircut. You’ll pay income taxes on every withdrawal plus a 10 percent penalty as long as you’re under 59 1/2. Can you get a second job instead? Can you sell your house and buy something cheaper-maybe a condominium? Only 30 percent of your income should be going for housing, not almost 50 percent. And you probably can’t afford to pay half of the cost of your daughters’ higher education-something they need to know right now. Plenty of kids finance their own degrees or certificates themselves.
As for how to invest your $40,000, Evensky says no to a tax-deferred annuity; the IRA is itself tax-deferred, so you don’t need another layer of shelter. And no to an annuity that pays a current monthly income; it won’t defend you from inflation. He suggests the Vanguard mutual-fund group in Valley Forge, Pa.: 30 percent in a bond fund (for money you might have to withdraw), 50 percent in the index funds that follow the U.S. stock market and 20 percent in the index funds that follow the world markets. And leave it there.
Q: I have four IRAs (one with an S&L, three with mutual funds) and a tax-deferred pension annuity. I’ll be 70 1/2 this month. Do I have to start withdrawing money from each of them or can I take the required amount from just one? HOPE SMITH, RICHMOND, VA.
A: Bye-bye, shelter. Uncle wants to collect some tax, You have to make annual withdrawals at a rate that will empty your IRAs over your expected lifetime, the joint lifetimes of you and your spouse, the lifetimes of you and another beneficiary or any shorter period. For a guide to these calculations, get the Internal Revenue Service’s free Publication 590, Individual Retirement Arrangements.
As to life expectancy, your IRA may give you a choice. Either figure it once and use that for all subsequent withdrawals, a strategy that pulls more of your income into your earlier retirement years. Or recalculate life expectancy annually; that pushes more income into later years, perhaps to help a surviving spouse. Once you decide to recalculate annually, you can’t change your mind.
You have to figure the proper withdrawal for each IRA separately. But it’s OK to total the amounts and take the money from just one. This saves you from having to pull out of your best investment. Planner Susan O’Grady of Equipoise Wealth Management in Denver says to use your low-performing IRAs first. No notice is required to the IRAs you don’t touch. Because your annuity also is part of a pension plan, you have to start withdrawals from that, too. It’s not lumped with the IRA; you have to handle it separately.
