I quite enjoyed James Kwak's recent exercise in retirement planning. Plugging in various possible savings rates and investment returns, Kwak explores what retirement might look like for a hypothetical youngster who expects to retire as a 65-year-old in 2051.

One of the major lessons of Kwak's piece is the impossibility of investing out of the hole created by a low savings rate. Even with rates of return, and starting to invest at the tender age of 22, investing at the national savings rate of 2.4%-3.6% (the estimate varies according to the time period selected) won't lead to anything more than a supplemental portfolio. Forget about a nest egg that can replace Social Security for meeting basic needs, or combine with Social Security to make for a dream retirement. It ain't happening.   More 

Most financial planners and CPAs know the tremendous tax benefit a Roth conversion (in 2010) could bring about for wealthy Americans. Relative few, however, pay attention to a valuable option embedded with a Roth conversion.

What option?

According to the tax law, if one converts on Jan. 1, 2010, he gets until Oct. 15, 2011, to change his mind and reverse. This option to change mind is quite valuable if it is exercised properly.   More 

Last week, we had a lot of discussion at Behavior Gap about financial plans versus the process of financial planning and the idea that a financial plan as a stand-alone product is pretty much worthless. But the process of planning is incredibly valuable. It's this sort of iterative process of refining and tweaking over the years that becomes incredibly valuable. Really, it's the planner and not the plan that's the valuable piece.

Thinking about it over the weekend, I realized that one of the reasons why we need to understand this distinction is due to the traditional plan environment. Let's consider a long-distance trip, like a cross-country drive. Almost always, before you set out on the journey, you know the destination, so it's a simple process of defining point A, where you start, and point B, where you want to go, then making a plan to get there. The problem with financial planning--and I think this is a general statement--is I can't remember the last time a client sat down and had a clear picture of what retirement would look like (e.g., the destination).    More 

An arcane, outdated IRS Code once again creates an income tax nightmare for financial planners (and by extension our clients) concerning conversion of tax-deferred accounts to Roth IRAs. The rules for this conversion are ripe for errors, as the tax code is not specific or detailed in scope. Financial planners are urged to use extreme caution and begin planning now. Bringing competent CPAs on board as part of the decision team is strongly advised. The dilemma: to convert or not convert. Traditional IRAs, SEPs, Simple IRAs, and 401k plans to Roth IRAs.

Beginning January 2010, clients may receive all the benefits of a Roth IRA--no income requirements, tax deferral, and low balances in accounts due to the market meltdown (the recent market upswing withstanding). Further, the IRS Code provides for income tax to be paid over the next two years (2010 and 2011 and 2012) in a 50%/50% equal split for conversions. Tantalizing, yes, but does it make sense?   More 

Reader DrH writes in response to my post Why It's Hard to Save Enough:

"Another absurd statement is that you "need" 80 or 90% of pre-retirement income to live on. We're living comfortably on less than half of what we used to earn--the biggest budget category decreases, in order, are taxes, retirement savings and charity."

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