Q: My husband and I are in our early 70s and have lived mostly on income from Social Security, pensions, and payments on a mortgage we own on the sale of our home (46 percent of our total assets). The balance of our investments, mostly traditional and Roth IRAs, is divided among stocks, bonds, CDs, and savings accounts. Most of our required minimum distributions (RMD) is going back into non-IRA savings. In view of the fact that so much of our assets are in the mortgage we own, is the distribution of our other investments reasonable, or would you advise more in equities? The markets have been so volatile we've become uncomfortable with most mutual funds.
J.G., via e-mail
A: Your discomfort with the market is not unfounded. But you cannot ignore that the stock market has been one of the most robust avenues for savers to grow their long-term portfolios and for retirees to fight inflation, says Michael J. Ebel, a certified financial planner in Ann Arbor, Mich.
So how do you address your concern about market volatility and still take advantage of potential market gains? The answer begins with the old adage of developing an asset mix that appropriately balances risks and returns.
Fixed income, such as Social Security benefits, pension, mortgage income, CDs, and savings, accounts for the lion's share of your total income and portfolio picture. While Social Security has inflation protection, the pension income may not, and certainly the mortgage does not. Depending on your health, it's prudent for you to plan for another 20 or more years.
Therefore you should consider adding equity mutual funds to your portfolio, Mr. Ebel says. Look for ones with a long-term track record of low expenses, solid returns, and an eye toward minimizing market risk. How much to add? Ebel suggests that a minimum of 30 percent of your overall portfolio should be in mutual funds.
You don't have to do this overnight. An initial strategy might be to begin using those RMDs each year to ease into a more balanced mix. No doubt, your efforts will do much to better balance overall investment risk and lead to a more suitable portfolio that will last for years, Ebel says.
Q: Is there any way I can open a Roth IRA while I'm living and working in Japan? I work for a Japanese company that doesn't offer any retirement plans for foreign teachers. While I file a US tax return, I do not have to pay anything because I earn less than $80,000.
P.B., via e-mail
A: Unless your employment situation changes, your choices don't appear to include a Roth IRA, says Michael Penn, a certified public accountant in Dearborn, Mich. The key here is the fact that you have no "taxable compensation" in the eyes of the IRS, Mr. Penn says. Unfortunately for you, Roth IRAs require such compensation.
Though you won't gain any tax breaks from purchasing a nonqualified annuity, you could use one of them to fund a retirement program, he says.