Frequently asked retirement questions

When you leave a job, one option for

When you leave a job, one option for your employer-based retirement account is to move the funds into an IRA rollover account. (Credit: iStock)

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Time to clean out the inbox and answer the most frequently asked reader questions.

 

I'm 43 and have just changed jobs. I have about $10,000 in my old 401(k), and I am not sure what to do with it. Help!

When you leave a job, there are three options for your employer-based retirement account:

--Leave the money in the old employer's plan.

--Roll the old plan into a new employer's plan.

--Move the funds into an IRA Rollover account.

To determine which option is best for you, you need to do a little homework.

If the new employer's plan is a good one (a low-cost plan with decent investment options), roll the old plan directly into the new one. Doing so will make the overall management of your retirement assets easier.

But if the new plan is an expensive one with limited options, consider opening an IRA Rollover account with a no-load mutual fund company or a discount brokerage firm.

The process requires you to take two steps: requesting and completing rollover paperwork from the old plan provider, and then opening a new IRA Rollover account.

If you are unsure about the paperwork, a representative from the new firm will walk you through it. While some plans will offer to issue a check directly to you, stick to direct rollovers, which can help avoid any unintended fees and taxes that could result if the money is not deposited within 60 days of issue.

 

I am a 28-year-old freelancer and am finally earning enough to start saving for retirement. I opened a Roth IRA, but have no idea how to invest. My father suggested I use a target fund. Is that the best choice? I'm a little nervous about the stock market, even though I'm youngish.

Some years ago, the mutual fund industry realized that investors wanted a turnkey investment vehicle, especially for smaller transactions.

The solution was the target date fund, a slight variation on an asset-allocation fund, but with a target retirement date driving the percentages allocated to stocks, bonds and cash.

The use of target date funds has exploded after the Pension Protection Act of 2006 allowed them to be used as a default option for 401(k) plan sponsors. The shift meant that target date funds became the default investment option for new retirement plan participants.

Investors liked these funds, because the fund company automatically shifts the allocation (and reduces risk) as the worker nears his or her desired retirement age.

While the concept of target funds is appealing, it is important to know that what a fund company thinks is appropriate age-based risk may not match your personal risk tolerance.

In this case, the investor would presume that the Vanguard 2050 fund (90 percent stocks, 10 percent bonds) or the Fidelity Freedom 2050 (86 percent stocks and commodities, 14 percent in bonds) would be appropriate for him.

But as he noted, he is leery of the stock market, so those funds may be too risky for him. If he wants to use a target date fund, he should consider one with an earlier target date.

The 2020 funds have a more balanced allocation.

 

I'm 66 years old and recently retired. I am fortunate enough to receive a pension and Social Security, which mostly cover my needs. I also have retirement accounts totaling $400,000. What rate of return can I assume for these funds?

Instead of thinking about rate of return, your plan should focus on a safe withdrawal rate, which is sometimes referred to as "the 4 percent rule."

For you, this would mean that you could safely withdraw 4 percent of your $400,000 ($16,000) annually without depleting your nest egg.

In the past few years, the 4 percent number has come under scrutiny. A research paper in the Journal of Financial Planning determined that 1.8 percent was the real safe withdrawal rate, while another study in the Retirement Management Journal said risk tolerant retirees could count on 7 percent. In my mind, using a withdrawal rate of 3 to 3.5 percent is a good way to determine how much to pull from your retirement funds annually.

Keep those questions coming!

Jill Schlesinger is editor-at-large for CBSMoneyWatch.com. She welcomes emailed comments and questions.

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