On this episode of "On the Money" we discuss financial planning tips for new parents and answer caller questions on IRA Rollovers, Social Security, Roth vs. Traditional, and Required Minimum Distributions
8:38 – Financial Planning Steps for New Parents
10:41 – Retirement Planning For New Parents
“The key principle is: you need to make sure you are putting yourself in a good financial position. It is only natural being a parent to want to provide everything for their children and I think a lot of times that leads to parents over-spending, not saving for retirement, and not saving up an emergency fund.
It’s like the airplane announcement where they say you need to put your own mask on so that you don’t pass out and then are unable to help your children. If you don’t do some of these things, you could be looking at 20 or 30 years down the road having to depend on your children, and nobody wants that.”
- David Ruedi, CFP®, RICP®
13:01 – Set Up An Emergency Fund
Anyone who is a parent can agree, children are unpredictable. One minute you’re running around the house, the next minute they are crying and maybe you’re running to the ER.
- Ryan Repko
Read more about Emergency Funds
13:41 – Make Sure You Have The Right Insurance
It is easy to get your children on your health insurance. One thing you have to remember though, is that your child is now its own independent person, so they have their own deductibles and out-of-pocket maximums. Now you may want to expand your emergency fund to account for these extra expenses.
- Ryan Repko
18:34 - Estate Planning for New Parents
“You should really have a plan in place so if something happens to you there is not this big unknown about what happens to your child.”
- Ryan Repko
19:45 - Caller IRA Rollover Question
Caller: I will be turning 59 and ½ in November, currently my retirement savings are in a 401k. I want to roll over the 401k into a traditional IRA to avoid the fees I’m being charged on the 401k, but I’m not 100% sure on the withdrawal requirements.
“Because you are over the age of 59.5 you can withdraw as much or as little as you want until age 70 ½ when you have to take out a minimum amount – required minimum distributions.
401ks actually operate pretty much the exact same way – the advantage of a 401k is you can actually take withdrawals starting at age 55 if you separate from service. That doesn’t apply to you since you are 59 ½ - so I don’t see any downside to moving to the IRA.”
- David Ruedi, CFP®, RICP®
Caller: Vanguard Is Still A Top Notch Place To Do This?
“I can’t think of a better place. I have never received any negative feedback that made me regret recommending them.”*
- Paul A. Ruedi
23:08 - Caller Question on Social Security
Caller: I’m 75 years old, working a part-time job. If I continue working will my Social Security benefits increase?
“It depends – the benefit you receive from social security is going to be based on your 35 highest earning years of compensation, adjusted for inflation. So if you had less than 35 years of earning I think it can go up regardless of what you are earning. If you had 35 years of full-time work where you made more than you are making now, it probably won’t increase.”
- David Ruedi, CFP®, RICP®
28:54 - Caller Question on TSP Accounts
Caller: I am saving 15% in a traditional TSP, and was told it would be a good idea to start contributing 5% to the Roth portion of the TSP. Does that sound like a reasonable thing to do? I’m 57 and would like to retire at 65.
“There’s no right answer here. If someone could tell me precisely what their tax rate is now and what it will be in the future, I could tell them which way to go definitively. I don’t think anyone who is sane would say they know with certainty what their future tax bracket will be.
I find for retirees taxation is very favorable – so I think you will find, like many people, you will be in a very low tax bracket the early years of retirement.
How much you put in a Roth vs Traditional IRA does not move the needle very much at all. The most important thing to think about is how you are allocated (stocks vs bonds) in your TSP account.”
- Paul A. Ruedi
42:57 - Caller Question on Required Minimum Distributions
Caller: If the stock market tanks and you are taking out your required minimum distribution per year, do they recalculate that if all of a sudden your assets are worth half of what they were?
“The next year it will go down – your RMD is based on the end of the year balance from the previous year. So yes, there is an adjustment for it.”
- Paul A. Ruedi
Disclosure:
* Neither Ruedi Wealth Management, nor any of its advisors have any financial relationship with Vanguard. This recommendation is purely based on their reputation in the industry.