Don’t be afraid to retire if you have ample savings
Q: I am a widow about to turn 60, with $4.5 million worth of investments, not including my house, which is paid off. I have no other debt. I could live comfortably on income of $65,000 per year before taxes, but I’m afraid to retire, even though I dislike my work, because my parents grew up during the Great Depression and made me irrationally anxious about financial security. Can you help me feel more confident about retirement?
A: Almost everybody who reads today’s column - myself included - would love to have your problem.
If you held your $4.5 million strictly in cash - in a mattress, say - you still would have enough money to meet your needs until your late 90s, even if you increased your withdrawals by 3 percent each year to offset inflation.
If you put your $4.5 million into virtually risk-free investments, such as U.S. Treasuries or FDIC-insured certificates of deposit, you would qualify for the old-age section of the Guinness Book of Records long before you spent your last dime.
Next patient.
Q: I have been making contributions regularly to a traditional IRA. Most years I don’t qualify to contribute to a Roth, with its tax-free status, because my income is too high. When I am forced to withdraw money from my traditional IRA starting in about 20 years, I will be taxed at ordinary income-tax rates. If I were to stop contributing to the IRA and put the same amount in a regular brokerage account, at least I would benefit from the lower tax that applies to any long-term capital gains on my investments. What do you think of that plan?
A: It’s true that long-term capital gains are taxed at substantially lower rates than ordinary income, but that could change. Judging from the rhetoric, it appears that if the Democrats keep control of Congress and gain control of the White House, the capital-gains tax advantage could disappear. The tax has been a political football for decades, and has bounced all over the place.
It’s also possible that when you are ready to withdraw money from your IRA, you will be in a lower tax bracket.
Even if the tax picture remains unchanged, there still can be advantages to a traditional IRA that you shouldn’t overlook. The tax on dividends that flow into your IRA is postponed until you withdraw the money, but with a regular brokerage account you would be taxed in the year you receive them.
The same holds true for capital gains. If you sell stock at a profit in your regular account, you would pay tax for the year you realized the gain. If you accumulate capital gains in an IRA, you can use the entire proceeds to invest, tax-deferred, in something else. Under some circumstances that could allow you to build more wealth than with a regular account.
Of course, if it’s your habit to buy only stocks that pay no dividends, and to never sell a stock, a regular brokerage account might be more to your benefit. If you keep full records of your market transactions, go back to when you opened your IRA and figure out what the difference would have been, after taxes, if you had made the same transactions in a regular account.
By the way, keep in mind that despite your high income, you will be able to convert funds in your traditional IRA to a Roth IRA starting in 2010. The income limit for conversions disappears that year. You will, however, have to pay any taxes due on the amounts you convert.
LOWER-PRICED AGENTS
The promised list of real estate agents who say they will list properties for a total commission of less than 5 percent is ready for distribution. There are about three dozen agents listed so far, but more keep streaming in. If you want to see a copy, e-mail me, and I will send the list to you as an e-mail attachment.
The list does not constitute an endorsement of any agents. No effort has been made to determine the accuracy of the information provided, or to find out whether the agents listed are honest and competent. You should consult such sources as the Better Business Bureau, the local Board of Realtors and the various consumer-protection agencies. If you decide to do business with an agent, be sure to get a written statement of the full terms of the transaction.
Moneybag appears three times a month in the Sunday Chronicle. Send questions to moneybag@sfchronicle.com or to Arthur M. Louis, Moneybag column, 901 Mission St., San Francisco, CA 94103.
