Microbusiness Mentor

How much “asset” (liquid and otherwise) do you need to retire?

I have been thinking about this question especially when I keep reading articles about how people can no longer retire and the economic uncertainties, etc.

I have a pretty boring and conservative plan – pay off mortgage, save for child’s college, save for retirement – I get the WHAT – but the HOW is where I get confused – how I would go about getting there.

Don Current tells me that I am on the right track!

Boring and conservative may not make you rich quick, but it will make you rich consistently. You should be saving 10 to 15% of your pre-tax income for retirement. You should be placing it in good solid mutual funds that have a strong history of performance over time. And THAT is the key… over time. Yes the market is bad now, but history tells us that over the long haul, it’s the best investment you can make. You also want to diversify your retirement savings. Prior to retirement, make sure you have it spread equally between mutual funds in four categories – Growth, Growth & Income, International, and Aggressive Growth. If you want to go more conservative go with Balanced in place of Aggressive Growth, but the farther you are from retirement, the more important that Aggressive Growth category is, because that’s where the action happens.

I am hitting 40 soon and do not know “how far” I actually am from retirement. That may be one of the reasons why I feel like I am working with an unknown target. I can just say “I want to retire at 60″ and set my own targets.

Last year I made my asset allocation more conservative due to market fears, which I know is not the best thing to do, people were saying that was the best time to buy cheap. I may now reallocate the assets based on your advice for aggressive growth and trust that statistics will be on my side.

Don also suggested that I needed to know how I much I need to live on each year of retirement, and divide that number by .06 (in other words, need to get a 6% return on invested $). This then allows me to live off the interest without touching the principle, barring hyperinflation or other extenuating circumstances.

I think the fact that I am 38 and already worrying about retirement shows how brainwashed I have been by the media hysteria of how many baby boomers are getting into trouble as they head into retirement and realizing that they need to head back out and make a living – they can no longer afford to retire!

I also had a question about Roth conversions, and specifically: Is it worth the tax liability to convert to Roth IRA?

I have been reading about Roth IRA conversions and how it makes sense, but then I asked my CPA and he felt that in my case it was not worth the tax liability to convert.

Wray Rives, CPA told me that my CPA has a point! Wray said:

The upside to a Roth conversion is your future earnings in the IRA will be tax free when you begin withdrawing them at age 59 1/2 or later. Withdrawals from a conventional IRA are taxable in the year you take the distribution.

The downside is the money you take out of the conventional IRA to put into a Roth is taxable. The government has given you something of a concession in that you can spread the tax burden out over 2 years 2011 and 2012, but you do basically have to pay the tax up front.

I had done what Wray had suggested – I asked my tax adviser who has no financial conflicts of interest since he would not earn a fee converting my IRAs and he had told me that he did not feel it was worth the tax in my case to convert at this point.

But this doesn’t mean that I can’t open up (prospectively not as a conversion) a new Roth IRA! I went online and opened a new Roth Ira for year 2010!

What about you? Are you already planning for retirement? And those of you who are converting versus not converting – why are you NOT converting if you have the option?