TIME pretirement

5 Pre-Retirement Mistakes Even the Smartest People Make

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Abrams/Lacagnina—Getty Images

These are guaranteed ways to make it through the limbo of pre-retirement

Being in the home stretch leading up to retirement can feel great, but financial advisers say even the savviest people can miscalculate or overlook important components when it comes to their retirement plans. Unfortunately, the closer you get, the more harm those errors and omissions can do to your dream of a comfortable retirement. Here are the most common pitfalls you need to watch out for, according to financial planners:

Not creating a Social Security strategy. “One common mistake is not really thinking through when to start Social Security,” says Mike Wilson, owner of Integrity Financial Planning. In general, the breakeven age for Social security is in the low 80s, Wilson says. “If you think you’ll live past the breakeven age…wait as long as possible to start Social Security, because you’ll enjoy more dollars over a longer lifetime,” he says. But if your health is tenuous, claim your benefits early.

Married couples need to factor in the age of each spouse, expected lifespan and their respective work histories to figure out when to start claiming benefits. “If they haven’t already, create an account with the SSA,” Wilson says. “You’ve got to take some ownership and get involved in the process.”

Paying off your mortgage. Conventional wisdom says you shouldn’t enter retirement with mortgage payments hanging over your head, but if you took out a mortgage or refinanced recently, it’s possible that your interest rate is lower than what you would earn if you invested the money, says Rich Arzaga, founder and CEO of Cornerstone Wealth Management, Inc.

For instance, assume your nest egg is netting you a 7% return. If your mortgage interest rate is only 4%, it’s better to keep your money where it is because you’ll pay less to service that debt than you would earn by keeping it invested. (And you get to keep the mortgage interest tax deduction.) “You’re basically leveraging the money, you’re borrowing just like the banks do,” Arzaga says.

Taking your portfolio too conservative too soon. People in pre-retirement often make the mistake of retreating from riskier asset classes too early, says Chris Chaney, vice president of Fort Pitt Capital Group, Inc. Depending on when you retire, you could live another 20 or 30 years. “That’s a long time, and the inclination is to try and secure the cash flow and the value of their portfolio as much as possible,” Chaney says.

People assume they need to shift a big chunk of their portfolio to lower-yielding investments to safeguard it, but they forget about the flip side of investing risk: the creep of inflation. “You need an adequate amount in growth assets to be able to protect the purchasing power of your retirement assets against the corrosive effect of inflation,” Chaney says.

Skipping long-term care insurance. Paying out of pocket for long-term care can drain your nest egg. Living in a nursing home costs more than $80,000 a year, on average. Even assisted living or other forms of support can cost several thousand dollars a month.

When it comes to buying long-term care insurance, “The sweet spot where you get the highest benefit for premiums paid is 53 or 54 years old,” Arzaga says. If you’re in pre-retirement and above that age, it doesn’t mean you’ve missed the boat entirely, but it does mean you have a dwindling window of time to get an affordable policy. “Pre-retirement, the cost of insurance to cover that risk is a lot less expensive,” he says.

Not planning for a post-career life. “A lot of people don’t really think though how they’re going to occupy their time,” says Joseph Heider, president of Cirrus Wealth Management. “It’s a profound new stage of your life. and you want to make sure you’re ready for the change.”

Consider what activities or hobbies you’d like to pursue, and explore social groups and volunteer opportunities. If you’re thinking about moving, especially to a vacation locale, visit when the tourists have departed for the season.

MONEY Investing

3 Steps to Protect Your Retirement Portfolio Against a Wild Market

Stay calm and make these three moves to stay on track to your retirement goals.

If you haven’t reflexively jettisoned stocks from your retirement portfolio in the face of the market’s recent wild swings, congrats. Panic is never a smart financial move. But staying calm in periods of upheaval may be enough either. To really get your retirement portfolio in shape for the future—whatever it may bring—you need to take these three key steps.

1. Take stock of all your holdings. To choose the right path going forward, you need to know where you stand now. Start by toting up the current value of all your retirement investments and calculating the percentage that is in stocks and in bonds. This should be a pretty straightforward exercise. But if you own funds or ETFs that own a combination of stocks and bonds, you can figure out the percentage of each by plugging the fund’s name or ticker symbol into Morningstar’s Instant X-Ray tool.

You can do a finer breakdown if you like—small vs. large stocks, international vs. domestic, short- vs. intermediate- or long-term bonds, etc. But the main thing is to get an accurate overview of your current asset allocation, since the split between stocks and bonds will largely determine how your portfolio will fare in the future, regardless of whether the market declines or surges.

2. Re-assess your risk tolerance. Even if you’ve done a risk assessment within the last few years, it makes sense to do another given the market’s recent volatility. The reason is that many investors underestimate the true risk they’re taking in stocks when the market is surging, as it has done over most of the past six or so years. That miscalculation can lead investors to invest more aggressively than they should, a problem that becomes apparent when the market heads south and they realize they’re in over their heads and begin unloading stocks in a hurry.

So take this time to do a quick gut check. Specifically, you can complete Vanguard’s free 11-question risk tolerance-asset allocation questionnaire. This tool will help you estimate how much of your portfolio should be in stocks vs. bonds based on, among other things, how large a setback you feel you could handle without dumping stocks wholesale and how long you expect keep your money invested. More important, you will come away with an assessment your tolerance for risk that reflects the realities of today’s precarious market.

3. Get your portfolio in sync with your gut. The Vanguard risk tool will also recommend a specific blend of stocks and bonds that’s appropriate given your appetite for risk. You will then want to see how that suggested mix compares with how your retirement portfolio is actually invested today. Unless you’ve been rebalancing your holdings regularly, you may very well find that your portfolio has become much more heavily invested in stocks over the past five or six years, a natural consequence of the fact that stocks have outgained bonds by a margin of nearly seven to 1 since the market’s trough in 2009.

If for whatever reason you find that there’s a big disconnect between your portfolio’s asset allocation and the one recommended by the risk-assessment tool, you must decide how to reconcile the difference. One way to do that is calculate how each portfolio would have performed in a past severe downturn such as the 2008 financial crisis when stocks lost almost 60% of their value and bonds gained roughly 8% from the market’s high in late 2007 to its low in early 2009. You can then consider which you’d be more comfortable holding if the market spirals downward from here.

On the other hand, going with the portfolio that will hold up better under duress could leave you with a portfolio mix that can’t generate returns large enough to build an adequate nest egg. If that’s the case, you may want to sacrifice a little short-term security for a shot at loftier long-term returns with a higher octane blend, even if that means having to ride out some scary downturns. You can get an idea of how likely different portfolios are to give you a shot at a secure retirement by plugging different mixes of stocks and bonds into a good retirement income calculator that uses Monte Carlo simulations to make its projections.

There are other things you can do to get your portfolio in shape for a possible market downturn. For example, you might take this time to rid your portfolio of any investments that seemed to make sense at the time you bought them but on further reflection don’t really fit into your overall strategy (although beware that selling in taxable accounts could trigger a taxable gain). Similarly, you may want to consider unloading funds with high annual expenses, as annual charges that may have seemed insignificant while the market was soaring may represent an unacceptable drag on returns when the market stalls or declines. Once you’re confident you’ve got your portfolio where you want it to be, you may also want to go further and crash-test your overall retirement strategy to determine whether your retirement plans would hold up during a prolonged market slump.

The most important thing for now, though, is to go through the three-step process I’ve described above, and do so sooner rather than later. Because your options for containing the damage will be much more limited if the market’s recent unruly behavior turns into a full-fledged rout.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com. You can tweet Walter at @RealDealRetire.

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MONEY Savings

The Real Reasons Americans Aren’t Saving Enough for Retirement

$100 bill on target and darts on wall
Sarina Finkelstein (photo illustration)—Getty Images (4)

Retirement savers face challenges on multiple fronts.

When it comes to saving for retirement, most American workers are not only falling short, they don’t even know how behind they are. What’s more disturbing, research shows that savings trends are getting worse, despite a decades-long push to enroll workers in 401(k)s and other employer plans.

The retirement disconnect is highlighted in a new survey from the Transamerica Center for Retirement Studies, which includes responses from 4,550 full-time and part-time workers between the ages of 18 to 65+. Overall, some 59% reported they were “somewhat” or “very” confident that they will be able to retire comfortably.

To maintain this comfortable living standard, more than half think they’ll need at least $1 million saved by retirement, and 29% believe they’ll need $2 million. Those targets have increased in recent years, according to Transamerica—the typical savings goal was just $600,000 in 2011.

So how much have these workers got socked away? Overall, the typical worker savings account held $63,000. That’s up from $43,000 in 2012, but also far from what’s needed for a $1 million retirement. Even among baby boomer households, the group closest to retirement, the median account held just $132,000.

Given these relatively meager savings, you may well wonder how workers can still be so optimistic about their golden years. Part of the reason is the long-running bull market, which has led to a gradual recovery from the financial ravages of the recession. Some 56% of those surveyed say that they have bounced back fully or partially; 21% say they were not impacted by the downturn.

It’s also likely that many workers simply don’t understand what it will take to meet their goals. More than half (53%) say they “guessed” when asked how they estimated how much they need to save for retirement. Two-thirds acknowledged they don’t know as much as they should about retirement investment. And just 27% say saving for retirement is their greatest financial priority vs. “just getting by” (21%) and “paying off debt” (20%). The typical worker saves just 8% of salary, while most experts recommend 15% or more.

The Persistence of Wealth

This savings shortfall was a focus of studies presented at the Retirement Research Consortium held recently in Washington. Following up an earlier study that found that roughly half of Americans die with $10,000 or less in assets, professors James Poterba of MIT and Harvard’s Steven Venti and David Wise looked at possible reasons that the money ran out. Perhaps retirees spend their money too quickly, or perhaps they have few assets to begin with.

Analyzing Health and Retirement Study data for different generational cohorts, the researchers found that how much subjects had the first year their assets were measured showed the strongest determinant of the amount of the wealth they had at the end of life. For older Americans, 52% who had less than $50,000 at the end also had that amount when first surveyed. For the younger cohort: 70% of those with less than $50,000 in assets when last surveyed also had that skimpy amount when first observed.

By contrast, those who had significant balances at the start also held those balances at the end—confirming both the persistence of wealth and, at the same time, the lack of savings progress for most Americans. Poterba offered possible reasons for this trend, including that workers may simply choose not to save; at each income level, he pointed out, there are high and low savers, so earnings aren’t the only factor.

Still, lack of wage growth, the disappearance of pensions, and the decline in 401(k) coverage among private sector workers, especially low- and middle-income households, contribute to the problem for younger Americans. This last point was emphasized by John Sabelhaus, an assistant director at the Federal Reserve, in a discussion of Poterba’s paper. Data from the Survey of Consumer Finances show that low- and middle-income workers are losing retirement plan coverage, he noted. (A similar trend can be found in the Transamerica survey, which showed that just 66% of workers were offered an employer retirement plan in 2015 vs. 76% in 2012.)

What You Can Do

Both Poterba and Sabelhaus emphasized the importance of Social Security for Americans with few assets. Beyond that, the only solution is to save as much as you can. But there are behavioral hurdles to boosting the savings rate. In another study a team of researchers, including Gopi Shah Goda of Stanford and Aaron Sojourner of the University of Minnesota, found savers face two major mental blocks; some 90% of Americans hold one or both, which drag down retirement savings by an estimated 50%.

One of these mental blocks is procrastination—it’s hard to resist the immediate gratification you get from spending. The other hurdle, which is less obvious, involves financial literacy. Most people don’t grasp the power of compound savings. As Sojourner explained at the conference, the majority of people believe savings grow in a straight line. Only 22% understand that savings growth is exponential: as your savings compound, you earn interest on interest, which enables your savings to grow faster and faster.

In short, it can take a long time to save your first $1 million, but it’s a lot quicker to get to $2 million. If more Americans understood this, and acted on it, there would be good reason to be optimistic about retirement.

Want to fast-track your retirement savings? Check out MONEY’s Ultimate Retirement Guide

MONEY retirement planning

The 4 Questions You Must Get Right for a Secure Retirement

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Getty Images

To stay on track to a comfortable retirement, focus on these four essentials.

Given the flood of often confusing and conflicting information from financial services firms, market pundits and the media, it’s easy to lose sight of what really matters when it comes to retirement planning. No doubt that’s one reason only 32% of American workers surveyed by Personal Capital reported they are very or somewhat prepared for retirement. But there’s an easy way to improve your odds of a secure post-career life: Focus on the fundamentals, which can be boiled down to these four key questions:

1. Are you saving enough? How much is enough? Well, if you get started early in your career and experience no disruptions to your savings regimen, you may very well be able to build a nest egg well into six or even seven, figures by stashing away 10% of pay each year, especially if your employer is throwing some matching funds into your 401(k). But not everyone gets that early start and sticks to it. So I think a more appropriate target—and one cited in a Boston College Center for Retirement study—is 15% a year.

Of course, if for whatever reason you’re getting a late start on your retirement planning, you may have to resort to more draconian measures, such as ratcheting up your savings rate above 15%, putting in a few extra years on the job before retiring and scouting out innovative ways to cut expenses and save more. There are a number of free online calculators that can help you estimate on how much you should be saving to have a reasonable shot at a comfortable retirement. Don’t despair if the figure the calculator recommends is too high. You can always start with an amount you can handle and then increase it by a percentage point or so a year until you reach your target rate.

2. Do you have the right investing strategy? By the right strategy, I mean tuning out the incessant Wall Street chatter and the pitches for dubious investments and concentrating instead on building a well-balanced portfolio that jibes with your risk tolerance while also giving you a reasonable shot at the returns you need to achieve a comfortable retirement. Fortunately, that’s fairly easy to do. Start by gauging your true appetite for investment risk by completing this free 11-question risk tolerance-asset allocation questionnaire from Vanguard. Then, using the mix of stocks vs. bond funds the tool recommends as a guide, create a portfolio of broadly diversified low-cost index funds.

The portfolio doesn’t have to be complicated. Indeed, simpler is better: a straightforward blend of a total U.S. stock funds, total U.S. bond fund and total international stock fund will do. The idea is to keep costs down—ideally, below 0.5% a year in annual fund expenses—and avoid toying with your stocks-bonds mix except to rebalance every year or so (and perhaps to shift your mix more toward bonds as you near and then enter retirement).

3. Are you fine-tuning your plan as you go along? Retirement planning isn’t a task you can complete and then put on autopilot for 20 or 30 years. Too many things can change. The financial markets can take a dive, a job layoff might upset your savings regimen, a health or other emergency could force you to dip prematurely into your retirement stash. So to make sure that you’re still on track to retirement despite life’s inevitable curve balls, you need to periodically re-assess where you stand and determine whether you need to make some tweaks to your plan.

The best way to do that is to fire up a good retirement calculator that uses Monte Carlo simulations. For example, by plugging in such information as your current salary, retirement account balances, how your investments are divvied up between stocks and bonds and your projected retirement date, the calculator will estimate your chances that you’ll be able to retire in comfort if you continue on your current path. If your chance of success is uncomfortably low—say, below 80%—you can see how moves like saving more, investing differently or postponing retirement might improve your retirement outlook. Doing this sort of evaluation every year or so will allow you to make small adjustments as needed to stay on track, reducing the possibility of having to resort to more dramatic (and often more disruptive) moves down the road.

Read next: This Overlooked Strategy Can Boost Your Retirement Savings

4. Have you developed a retirement income strategy? If you’ve successfully dealt with the three questions above, you’re likely well on the path to a secure and comfortable retirement. But there’s one more thing you need to do to actually achieve it: Develop a plan for turning your retirement nest egg into reliable income that, along with Social Security and other resources, will provide you the spending dough you need to sustain you throughout a long retirement.

Typically, creating such a plan involves such steps as doing a retirement budget to estimate how much income you’ll actually need to maintain an acceptable standard of living in retirement; deciding when to take Social Security to maximize lifetime benefits; figure out how much of your retirement income you would like to come from guaranteed sources like Social Security, pensions and annuities vs. draws from savings; and, setting a reasonable withdrawal rate that will provide sufficient income without too high a risk of running through your nest egg too soon.

Clearly, you’ll also want to devote some time to non-financial, or lifestyle, issues, such as thinking seriously about how you’ll live and what you’ll do after retiring, whether you’ll stay in your current home or downsize or, for that matter, even relocate to an area with lower living costs to stretch your retirement budget. But if you want a realistic shot at a secure and comfortable retirement, you need to answer the four questions above.

Read next: Why Social Security Is More Crucial Than Ever for Your Retirement

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com. You can tweet Walter at @RealDealRetire.

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MONEY Small Business

Better IRAs for Small Business Employees Are on the Way

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Luca Sage—Getty Images

Automated payroll deductions will make it easier for workers without access to a company 401(k) to save for retirement.

If you work for a small business that doesn’t have a retirement plan, help is on the way.

Roughly half of the U.S. states are working to create government-sponsored automatic individual retirement account (IRA) plans that would enroll workers without access to employer-sponsored retirement plans.

California, Illinois, Oregon and Washington state have taken the lead, passing legislation to launch Secure Choice Pension programs. California and Illinois both aim to begin enrolling workers in 2017.

Employees would contribute through payroll deductions to Secure Choice Pension accounts. The plan’s investments would be professionally managed, but no employer contributions would be required.

There is a regulatory sticking point, though: Will the plans be governed by the Employee Retirement Income Security Act (ERISA), the federal law that sets standards for private-sector pension plans?

Although IRAs are not covered by ERISA, the payroll deduction feature of Secure Choice Pension plans raises the question. Concerns about regulatory burdens for employers – and their possible fiduciary responsibilities under the plans – led states to include clauses in their enabling legislation stating that these pension plans would not proceed if they were deemed to be ERISA plans.

Now, the White House is getting behind the Secure Choice Pension initiative. President Barack Obama recently directed the U.S. Department of Labor to clear the path for states to create Secure Choice Pension plans by clarifying the ERISA issues. If new Labor Department rules are finalized before Obama leaves office at the end of next year – and that is a major unknown – some states will start offering their new retirement plans as early as 2017, and the ball could get rolling in many more states.

Obama’s move is a clear sign that his national auto-IRA initiative – which he has been asking Congress to approve since 2010 – is dead, and that the administration hopes to help at least a handful of states launch Secure Choice Pension plans before Obama leaves office. Regulatory red tape and foot-dragging could prevent that from happening.

“We’re being told that this is on a fast track, with a proposed regulation by this fall, and a final regulation by the end of this year – but that seems optimistic,” says Dan Reeves, chief of staff for California state Senator Kevin de León, sponsor of the California legislation.

Workers Struggle to Save

A quick execution of new rules is exactly what workers struggling to save for retirement need.

Ownership of various retirement plan accounts has been falling sharply. Just 40% of households owned any type of retirement account – IRA, 401(k) or traditional pension – in 2013, down from 48% in 2007, according to the Federal Reserve Board’s triennial Survey of Consumer Finances released last September.

The Center for Retirement Research at Boston College estimates that at any given point, only half of U.S. private-sector workers participate in a retirement plan. The largest coverage gaps can be found at small employers, who don’t want to deal with the cost or regulatory burden of administering 401(k) plans.

The states argue that fiduciary liability can be taken on by the boards governing the plans, and by third-party financial services companies that are hired to run them. California, the first state to pass Secure Choice Pension legislation, has been waiting for clarification on these issues for nearly three years now.

Labor Department officials have expressed concern about letting the plans proceed without the regulatory protections of ERISA, and the Obama administration preferred to focus on its own national auto-IRA plan.

“The (Department of Labor) has always viewed its job under ERISA as policing employers,” says Joshua Gotbaum, a guest scholar at the Brookings Institution who is the former director of the Pension Benefit Guaranty Corporation, the federally sponsored agency that insures private sector pensions. “So they have resisted moving from policing employers to policing financial service providers. That’s a necessary step in order to get to any Secure Choice plan.”

The nature of the new Labor Department rule will be critical to the success of Secure Choice Pension plans. The regulators could simply state that a payroll deduction plan isn’t subject to ERISA; a much better outcome would be a more expansive approval that gives states a range of options.

The Department of Labor declined to comment.

Says Gotbaum, “What I hope they’ll do is declare that these are multi-employer 401(k) plans, that they can even be defined benefit plans and that the employers won’t be considered fiduciaries just by participating.”

 

MONEY IRAs

This Overlooked Strategy Can Boost Your Retirement Savings

cup game with one cup revealing stacks of coins
Andy Roberts—Getty Images

Many high-income investors use a "backdoor" strategy to save in a Roth IRA, but there's another workaround you may not have considered.

The “backdoor Roth IRA”—a technique that allows investors barred from contributing to a Roth because their income is too high to fund one by opening and immediately converting a nondeductible IRA—has gotten considerable attention lately. Some people are concerned that a future Congress might eliminate the strategy; others worry that simultaneously funding and converting a nondeductible IRA might violate the “step transaction” doctrine. But while the backdoor route remains viable, at least for now, high-income investors may want to consider an alternative that can often get more money into a Roth.

The backdoor Roth IRA has been effective for many investors whose income prevents them from contributing to a Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible to do a Roth.) But the strategy can get complicated if, like many affluent investors, you already have pretax money in traditional IRAs. The reason is that even if the nondeductible IRA you just funded has no investment gains and thus consists entirely of after-tax money, you would still owe income taxes when you convert the account to a Roth. Why? Well, in the eyes of the IRS, you’ve got to take into account the money in your other non-Roth IRA accounts, even if you’re converting only a specific account.

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Here’s an example. Let’s say you have $100,000 in pretax dollars you transferred from a previous employer’s 401(k) into a rollover IRA and that you decide to contribute $5,500 to a nondeductible IRA (the max for anyone under 50) with the intention of immediately converting to a Roth. Even though you may think you own no income tax on the conversion since that $5,500 contribution was in after-tax dollars, the IRS looks at it differently.

From its point of view, you have $105,500 in IRA accounts (your $100,000 rollover IRA plus the $5,500 nondeductible IRA), 95% of which ($100,000 pre-tax divided by $105,500 total) consists of pretax dollars and thus is taxable, while 5% is nontaxable after-tax dollars ($5,500 after-tax divided by $105,500). So when you convert your $5,500 nondeductible IRA to a Roth IRA, the IRS assumes that 95% of that amount, or roughly $5,225, is taxable pre-tax dollars and 5%, or $275, is nontaxable after-tax dollars. If you’re in the 28% tax bracket, that means you owe about $1,463 in income tax (28% of $5,225) when you do the conversion. In short, you must come up with $6,963—$5,500 plus $1,463 in taxes—to get $5,500 into a Roth IRA.

If you participate in a 401(k) that accepts IRA money—and has investment options and fees you consider acceptable—you may be able to get around the conversion tax by rolling your $100,000 IRA into the 401(k). That would leave you with only your nondeductible IRA consisting of nontaxable after-tax dollars, which means you would owe no tax converting it to a Roth.

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But if moving your IRA money into a 401(k) isn’t an option—or if you would like to get more than $5,500 into a Roth IRA—there’s another option: Namely, take the money that you would have used to fund the nondeductible IRA and pay the tax to convert the nondeductible IRA—$6,963 in this example—and use that money instead to pay the tax to convert as much of your rollover IRA as possible to a Roth IRA. Assuming once again that you’re in the 28% tax bracket, $6,963 would be enough to cover the tax to convert nearly $25,000 ($24,868, or $6,963 divided by 28%) of your rollover IRA to a Roth IRA. Result: you end up with nearly $25,000 in a Roth instead of $5,500.

What you’ve really accomplished by doing the straight conversion instead of funding-then-converting a nondeductible IRA is tilt your mix of traditional IRA and Roth IRA money more toward the Roth side. If you had taken the backdoor Roth IRA route, you would have ended up with $100,000 in your rollover IRA and $5,500 in a Roth IRA. By doing a conversion with the nondeductible contribution and what you would paid in tax to convert the nondeductible IRA to a Roth, you end up with roughly $75,000 in a traditional IRA and about $25,000 in a Roth IRA.

Read Next: Quiz: How Smart Are You About Retirement Income?

At first glance, it may seem that you’re better off with the $105,500 total balance you would have by going the back-door Roth route rather than the smaller $100,000 in IRA balances you would end up with by doing a straight conversion instead. But in terms of after-tax dollars you could still come out ahead down the road by having the slightly lower total balance but more dollars in the Roth IRA. Whether you do or not depends largely on the tax rate you face when you withdraw money from your IRA accounts. If you face a higher marginal tax rate at retirement—say, 33% instead of 28%—then you’ll end up with more money after taxes by having more of your IRA funds in the Roth IRA. If you drop to a lower marginal tax rate—say, from 28% to 15%—then you’ll have more after-tax dollars with a smaller Roth—that is, the combination of the back-door Roth IRA and traditional IRA. If you stay at the 28% marginal rate, or even drop slightly to 25%, the straight conversion comes out ahead, although the edge will likely be relatively modest.

Of course, it can be hard to predict what tax rate you’ll face in the future, which is why I think it’s reasonable to diversify your tax exposure by having some money in both traditional and Roth retirement accounts (not to mention taxable accounts with investments that generate much of their return in capital gains that will be taxed at the lower long-term capital gains rate). Roth IRAs also have other advantages that can make them a worthwhile choice, including giving you more flexibility in managing your tax bill in retirement.

Keep in mind too that any pretax dollars you convert are considered taxable income, which, combined with your other income, could push you into a higher tax bracket. If you find that’s the case, you may want to limit the amount you convert to avoid a higher tax bill and possibly undermine the benefit of a Roth.

Bottom line: If your income prohibits you from doing a Roth IRA and you have no non-Roth IRAs, the back-door strategy can be an effective way to get money into a Roth. But if you already have other IRAs and you would like to get more money into a Roth IRA than you can squeeze through the back door, the conversion strategy I’ve laid out above may be a better way to go.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com. You can tweet Walter at @RealDealRetire.

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MONEY 401(k)s

The Hidden Reason Your 401(k) Fund Choices Are So Bad

Martin Poole—Getty Images

When a fund company both manages your 401(k) plan and chooses the investment options, guess who gets the best deal?

It’s common for mutual fund companies to be paid to administer 401(k) plans for employers while also being paid to select and manage investment funds in the plans. It’s also a clear conflict of interest—one that typically gets resolved in the fund company’s favor, new research shows.

When making plan changes, fund companies add more of their own funds and delete more from outside firms, according to the Center for Retirement Research at Boston College. This bias brings more poorly performing funds onto the menu, researchers found. What’s more, these poorly performing funds tend to remain sub-par. That proves to be a long-term drag on participant returns, since few investors take action to avoid or work around the poor choices they are offered.

Fidelity, Vanguard and most other big fund companies serve in a dual 401(k) capacity by setting the investment menu while also managing funds inside the plan. In all, fund companies manage 56% of the $4.7 trillion in defined contribution plan assets. This is a vast storehouse of Americans’ retirement security—one that, given our savings crisis and public pension ills, must be protected.

A similar conflict of interest between investment advisers and clients is getting a thorough airing this week in Washington. The Department of Labor will hold hearings all week, trying to sort out whether financial advisers working with retirement accounts should be held to the standard of fiduciary, meaning the adviser must put the client’s interests first. The Labor Department believes such a law would keep brokers from putting clients into high-fee retirement savings products. The industry argues it would increase their liability risk and regulatory costs, and discourage brokers from serving small accounts.

The conflict over the dual role of fund companies is not about the fiduciary status of advisers. But the problem persists because employers, who do have a fiduciary role, often fail to take action. That leaves many investors stuck with lousy 401(k) funds, which take a bite out of their retirement accounts. For example, plan administrators remove just 13.7% of their own underperforming funds from the menu every year, the research shows. But they remove 25.5% of underperformers from other fund groups—meaning more of their own poor performers remain. Meanwhile, they are far more likely to add their own sub-par funds compared with choices from another fund company.

The upshot is that 401(k) plan investors must look critically at any changes in their investment options. You can’t blindly accept a substitution on the menu. Look carefully at fees and past performance along with how a fund fits into your portfolio. One good place to start is BrightScope, which can show you the fees and choices of 401(k) plans from comparable companies.

If you find that your plan costs are high—1.5% of assets or more—and your options stink, consider a workaround. You almost always want to contribute enough to get any employer match. But once you have done that, you may find that your spouse has a better plan and you can divert more family savings there. You may find that your company offers a self-directed brokerage option in your 401(k), allowing a more hands-on approach and greater ability to watch fees. You may also be better off contributing additional money to an IRA.

Don’t look for the inherent conflict of a fund company that both manages funds and chooses the funds on your menu to disappear anytime soon. Given the fiduciary discussion in D.C. this week, this issue is nowhere near resolution. As ever, your retirement security is mostly up to you.

Read next: Here’s What to Do If Your 401(k) Stinks

MONEY retirement planning

The 4 Most Important Parts of Your Retirement Plan Statement

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Dimitri Vervitsiotis—Getty Images

Forget the mumbo jumbo. Focus on these key parts.

Planning a successful retirement is important to us all. However, the amount of information on and offline can leave us feeling overwhelmed. One of the key places to find out where you stand is your quarterly retirement plan statement. The statement contains information that allows you to track your progress and where you need to pick up any slack. Here are the four most important parts.

1. Your Retirement Income Projection

The retirement plan projection is the most important part of our statement. The portion includes contributions made by the participant (you), employer matching contributions and vesting information. It also gives you a snapshot of where you are in comparison to where you want to be when you retire. For instance, you may see that you need to increase your contributions to reach your retirement goals.

2. An Asset Allocation Summary

The asset allocation summary is another important part of your statement. In this section, you will find a breakdown of the investments (cash, stocks, bonds, mutual funds, exchange-traded funds (ETFs), etc.). Think of your portfolio as a pie. Each slice represents an investment with outcome expectations. For example, a small-cap growth mutual fund may provide you with a higher return over time. In exchange for the chances of a higher return, you are also assuming higher risk. Asset allocation allows you to diversify your portfolio among high return/high risk, moderate return/moderate risk, and low return/low risk investments according to your long-term goals. It is important that you monitor this section and rebalance your investments periodically to keep them consistent with your goals.

3. Fees

Fees are often overlooked when it comes to reviewing your portfolio. There are a couple of important fees to be aware of.

  • Transaction fees: These are usually commissions that are charged on the purchase and/or sale of a security. These are usually avoided if you are buying the fund directly from the fund company.
  • Expense ratio: These are fees that are charged by the mutual fund or ETF company. These fees include the marketing, management, administrative fees and other operating costs of the fund.

4. Disclosures

The disclosure section is also an important section of the account statement. This is where you will find miscellaneous items. The firm is responsible for providing you with information that is required by federal and state securities regulators. This section also defines the various terms and codes that you will find throughout your statement. Any legal information or disclosures regarding your retirement plan may also be summarized in this section. It is important that you pay attention to this section for any changes to your plan.

As employers shift the responsibility of retirement planning onto employees, it is important that we familiarize ourselves with our retirement plans. Performing a retirement statement analysis every quarter will give you the ability to take control of your investments to reach your retirement goals. Although it may seem intimidating in the beginning, over time, it will give you the tools that will help you to enhance your financial situation.

Read next: Here’s How Many Bank Accounts You Really Need

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MONEY Debt

Parent Education Loans Can Ruin Your Retirement

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Nikki Bidgood—Getty Images

Here's what you need to know before taking out a parent PLUS loan.

Parent education loans can help your child attend the college of her dreams—and sink any dreams you had of ever retiring.

The grim reality is that the federal PLUS loan program allows parents to borrow far more than they can comfortably, or even ever, repay.

PLUS loans let parents (and graduate students) borrow up to the full cost of an education. There is only a basic credit check and no underwriting to determine whether the borrower has the income or ability to repay the loans.

The vast majority of parents do not borrow nearly as much as Democratic president hopeful Martin O’Malley and his wife, who said they have borrowed $339,200 to educate the first two of their four children, or Republican presidential candidate Scott Walker, who has borrowed between $100,000 and $120,000 for his two sons who are still in college, according to recently filed financial disclosure forms.

But even much smaller amounts can prove difficult to repay for some parents. An analysis by financial aid expert Mark Kantrowitz in 2012 found that monthly PLUS loan payments ate up an average 38% of monthly income for borrowers in the lowest 10% of incomes. One in five parent borrowers had a child that received a Pell Grant, which are reserved for the poorest students with household incomes of $50,000 or less.

Check out the new MONEY College Planner

An article published by investigative site ProPublica last year highlighted a woman living on Social Security disability payments who had $45,000 in parent PLUS loans for her child. (The average Social Security disability recipient gets about $14,000 a year, while the maximum possible benefit is just under $32,000.)

Parent PLUS default rates are still far below those for undergraduate student loans – 5% of parent borrowers in 2010 defaulted within three years compared to 15% of student borrowers. But the parent rate has nearly tripled over the past four years, suggesting a rising tide of floundering borrowers.

Repayment Plans

The Obama administration in recent years expanded income-based repayment programs for struggling student borrowers, typically reducing payments to 10% or less of their incomes. The lowest-income student borrowers do not have to pay anything, and forgiveness of remaining balances is possible after 10 years for those in public service jobs and 20 years otherwise.

There is no similar help for parents. The income-contingent repayment plans available are not as generous, and there is no forgiveness. As with student loans, parent PLUS loans are extremely difficult to erase in bankruptcy and the government has extraordinary powers to collect, seizing tax refunds, getting wage garnishments without going to court and taking a portion of defaulted borrowers’ Social Security checks, which are off-limits to other creditors.

In general, PLUS loans that total less than the parents’ annual incomes can be paid off within 10 years, Kantrowitz said. If the parents were within five years of retirement, they should limit total education debt to 50% of their income, he said.

That does not mean taking on that much debt is smart. College graduates presumably will benefit from higher incomes as the result of their education. Their parents will not. Parents also have fewer working years ahead of them, which means any financial setback such as a layoff can make a heavy debt load overwhelming and kill any shot at a comfortable retirement.

“I would never recommend parents borrow six-figure debt for their children, even if they can afford to repay the debt,” Kantrowitz said, adding, “Parents don’t always make the smartest financial decisions.”

Read More: MONEY’s 2015-16 Best Colleges rankings

MONEY retirement planning

When It’s Time to Cut Financial Support to Your Parents or Adult Kids

A new study finds many households are risking their retirements by spending thousands of dollars to help out other other family members.

Family financial ties grew strong during the Great Recession, and by many measures the bond holds fast. Yet the level of support that working households offer aging parents and adult children may be setting back the retirement plans of millions.

During the depths of the financial crisis in 2009, MONEY reported on the changing nature of family values. Expensive vacations, shopping for sport and big new houses were out; relationships, time together and sharing was in. These shifting values were borne of necessity for many, and it was not clear how long the new values would stick.

But while spending has rebounded, surveys in the years since have confirmed that family financial ties remain strong. A quarter of boomers and a fifth of Gen X and Millennials currently support family members, according to a new survey from TD Ameritrade. This support averages $12,000 a year and comes on top of caregiving chores, which one third of financial supporters also provide.

Read Next: Millennial’s Guide to Moving Out of Your Parent’s House

On average, mothers receive the most support, $13,000 a year while fathers received $8,500 and adult children get $10,000, the survey found. For the most part, this support is offered unconditionally—64% of financial supporters say they are “very glad” to offer help to a parent and 53% feel the same about supporting an adult child.

Financial supporters would offer more if needed. One in three would delay retirement to help an adult child and 69% say they will stay with it until their child finds a decent job. Yet if push came to shove, and there was not enough money to support both, an aging parent would win out over an adult child, the survey found. Financial supporters are twice as likely to say it is more acceptable to support a parent than an adult child and, if forced to choose, four times more likely to support a parent.

Most say their support is not causing hardship. Only 22% say they are digging into savings while 30% say are making modest lifestyle sacrifices. But they may be doing more damage to their own financial security than they know. On average, financial supporters have a $22,000 balance on their credit cards and $75,000 in outstanding mortgage debt. A third say they have already delayed retirement and half say if they had to retire unexpectedly they could no longer offer the same level of financial support. Only one in five has discussed any of this with an adviser.

Read Next: How to Avoid Paying for Your Kids Forever

Generous financial support can be its own reward, drawing families closer in times of need. But the long-term impact may be difficult to see. Many who plan to work longer may not be able to. Nearly half of retirees left the workforce unexpectedly because of disabilities, other health issues or problems at work, an EBRI survey found. So what seems like an easy fix is anything but certain.

Cutting support for a loved one is not easy or fun. But it may be easiest with adult children because they have a lifetime to recover from college loans or a slow start in their career. With parents, cutting support may be in order if you examine where the money is going and see that not all of it is well spent.

In the end, any support decisions should be made with your own financial security in mind, and that means looking ahead to what you expect from your retirement and whether you have a cushion against unexpected developments like a job loss or health issues.

Read next: How to Avoid Paying for Your Kids Forever

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