When the Subject Is a Retirement Plan Decision, You Want Objective Advice
Q. I am a retired government employee with a 457 deferred-compensation plan. Unlike a 401(k) fund, this money can’t be rolled over into an individual retirement account. I am receiving conflicting advice on how to take distribution, either as a lump sum or as a systematic withdrawal over a period of time. My financial planner recommends taking a lump sum, paying the taxes upfront and reinvesting in other mutual funds, saying I will be ahead in the long run. Everyone else advises taking the systematic withdrawal so the tax bite is less drastic, but my principal would be gone at the end.
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A. If you were comfortable with your financial planner’s objectivity, you probably would be able to blow off all your friends’ opinions. After all, if they were so smart financially, wouldn’t they be doing a heck of a lot better than they are?
But something’s got you wondering if you’re getting the best advice. Perhaps your planner hasn’t explained her thinking to your satisfaction or shown you the assumptions she’s made to come up with the answer she has.
Or perhaps you suspect a conflict of interest, such as the one that would arise if your planner stands to make a commission from the mutual funds she’s recommending. Or maybe you just hate paying taxes-- which could eat up nearly half of your distribution if you take it in a lump sum.
There’s no easy answer.
These 457 plans are the odd ducks of the retirement planning world. Some have pretty good distribution options that allow you to keep your money in the plan earning a good tax-deferred return as long as possible. With others, the payout structures are less advantageous. The best choice for you depends on the details of the plan, your tolerance for risk and how much money you think you’ll need through your retirement.
How about getting a second opinion from someone qualified to give it? A certified public accountant with experience in retirement planning could run the numbers for you and describe your options. CPAs by nature and vocation love to play with numbers, and unless you get one of the rare birds who now accepts commissions for selling investment products, you don’t have to worry about conflict of interest.
The CPA’s analysis will cost you a few bucks, depending on how many variables are involved, but you’re much more likely to have a distribution plan you can live with.
It Always Takes Two
Q. I was confused by your Jan. 24 response to the henpecked husband who wanted to separate his assets and earnings from his wife’s. I thought couples could do that--sort of a postnuptial agreement, as opposed to a prenuptial agreement.
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A. You’re right, but the key word here is “agreement.” The husband in question was hoping to impose a financial separation on his wife, who was chewing him out for hiding money from her. Both prenuptial and postnuptial agreements require that both parties are willing to agree to a financial division that’s different from that prescribed by California law. Spouses must understand what they’re giving up and consent willingly to the new division of finances. It can’t be imposed by one on the other.
Prenuptial and postnuptial agreements are actually quite common in marriages in which one spouse wants to preserve an estate for children from a first marriage. Presumably, the spouse who is giving up a full share of community property gets something in return, either money, assets or the knowledge that the stepkids won’t be staring daggers during family gatherings.
Read what follows for another case in which a postnuptial might make sense.
Two Want Separate Funds
Q We have a bit of an odd situation. We are a husband and wife amicably separated but not legally divorced. We are living separate lives and accruing separate retirement funds. But from the way we read your previous columns, it looks as if each of us could lay legal claim to the other’s funds, right? How best can we save for retirement in that case?
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A You are in an interesting gray zone. Normally, couples have the right to share retirement funds accumulated during the marriage, and retirement funds are among the assets that should be equitably divided in a divorce. Once you separate, however, the clock usually stops ticking on your ability to share in each other’s retirement funds. The value of the funds to be divided is generally determined on the day of separation rather than the day of the actual divorce.
You’ll notice all the weasel words in the above response. Nothing is absolute in the world of law. If, for whatever reason, you’re not willing to actually divorce and you don’t want to divide your retirement funds the way California law usually dictates, you might consider a postnuptial agreement that clearly spells out who gets what. You each should have a lawyer to review the document, and a judge will review it for fairness. It will cost you some money, but then so would a divorce. At least this way, your finances will be out of legal limbo.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
