Ways to Make Sure You Can Pay for the Golden Years

"Both my husband and I are nearing retirement age and are concerned about having enough money for our golden years."

That's what Rebecca Raines of Alexandria wrote to me. But the Raineses aren't alone, as many of us know. Retiring these days is complicated. There are a lot of issues to figure out.

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To help people answer some of the concerns and questions about retirement, I hosted an online discussion recently with Jan Cullinane, co-author of "The New Retirement: The Ultimate Guide to the Rest of Your Life."

Time ran out, but Cullinane agreed to answer additional questions. Here are some:

Q I am 48 years old and have most of my retirement savings in traditional IRAs. Should I consider transferring these funds to a Roth IRA?

ASingletary: Just so you know, there are two types of IRAs (which, according to the tax code, stands for Individual Retirement Arrangements), traditional and Roth. Contributions to a traditional IRA may be deductible depending on your income and whether you participate in an employer-sponsored retirement plan. Roth IRA contributions are not deductible, but retirement distributions are not taxed the way distributions from a traditional IRA are.

Cullinane: The ability to compound earnings over a number of years and then distribute those earnings tax free using a Roth IRA is a powerful device for accumulating retirement savings. The downside to converting a regular IRA to a Roth IRA is that you will be taxed on the amount converted in the year of conversion. Holders of a regular IRA can convert it to a Roth IRA as long as their modified adjusted gross income (essentially total income with certain adjustments) does not exceed $100,000 (either joint or single, but not married filing separately) in the year of the conversion. However, the amount converted is fully taxable that year. (There is no such thing as a completely free ride!)

So, the decision to convert is based on a comparison of the cost of paying the tax now with the benefit of receiving tax-free distributions after retirement -- which involves the number of years the funds will grow in the Roth IRA before they are distributed, the rate of earnings on the invested funds and the expected tax rate in retirement compared with the tax rate on the conversion today. In general, the longer it is until your retirement distributions start, the more likely it is that a conversion makes sense. Since you are only 48 years old (assuming your income level qualifies), the odds are that it would make sense to convert your regular IRA to a Roth IRA, particularly if you expect your tax rate in retirement to be comparable to (or greater than) your current tax rate.

What are the relative merits of investing in a traditional IRA versus a Roth IRA?

Cullinane: To see which one could be better for you, check out the calculator at www.finance.cch.com(click on "Financial Calculators," then scroll down to "Roth vs. Traditional IRA"). This site allows you to enter your information (age, age of retirement, your tax rate, annual contribution, etc.) and compare how much money you'll have in retirement both pre- and post-tax with both a Roth and traditional IRA.

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'The Most Important Financial Number'

Anyone who uses credit ought to know what a credit score is. And surveys show that most people do.

But many still don't know what information is used to come up with their credit scores, according to a new survey by the Consumer Federation of America (CFA) and Fair Isaac Corp., developer of the FICO credit score used by most lenders to evaluate consumers looking for credit.

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If I were to tell you that as your income goes up your credit score will increase, would you agree?

If you answered "yes," you need to do some credit score basic training.

And you wouldn't be alone.

Almost one-half of consumers questioned in the CFA and Fair Isaac survey didn't know that increasing one's income will not increase one's credit score.

The fact is, credit scores reflect only your own past credit history and not your income, marital status, occupation or other personal characteristics.

"Despite all of the news coverage about credit scores over the past year, many consumers still do not understand important facts about these increasingly influential numbers," said Stephen Brobeck, CFA's executive director.

How would you answer this question: True or false, a married couple has a combined credit score?

It's false. You might be able to marry for money, but you can't marry your way into a good credit score. Debt that is jointly owed can affect your credit score as an individual. However, couples don't have a combined credit score.

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UK retail sales fall 1.4% in May

16 June 2011 Last updated at 16:04 The ONS said spending had been hit by worries over high fuel prices and job uncertainty UK retail sales fell 1.4% in May, official figures have shown, reversing the rise seen in April when sales were boosted by the royal wedding.

In April, sales had risen 1.1% on the previous month, reflecting a "spike" due to one-off factors, the Office for National Statistics (ONS) said.

However, May's sales figures were worse than analysts had expected.

The ONS said that food and fuel now accounted for more than half of all spending.

As well as the royal wedding, the warm weather, the timing of Easter and a run of bank holidays had helped to lift sales in April.

However, the ONS said that May's figures showed consumers were now cutting back because of the tough economic climate, worries about rising fuel prices and job uncertainty.

Various sectors had fared differently, with smaller retailers doing slightly better than larger ones, Joe Grice from the ONS said.

Food expenditure was down 3.5% in May - "a pretty direct result of the royal wedding and the April special effects," said Mr Grice.

This was the biggest monthly decline in food store sales since June 2008.

'Absolute stinker'

The figures chimed with warnings from major food retailers earlier in the week.

Tesco had said that UK sales were subdued, blaming high fuel costs and the "cautious consumer environment", while Sainsbury's also warned that rising fuel costs were reducing the amount of money people had available to spend.

Joe Grice of the Office for National Statistics reacts to the figures

Brian Hilliard, chief UK economist at Societe Generale, called the data "an absolute stinker".

"We were all expecting a pullback after the exceptionally strong month of April, but surveys hadn't prepared us for something quite this bad," he said.

"The basic story is clear: the consumer is not prepared to put their head above the parapet and the outlook is very soft.

"But the feature for growth this year is that we shouldn't be relying on the consumer. It's disappointing, but it's not the centre of anyone's forecasts on growth this year," he added.

Pressure

The British Chambers of Commerce (BCC) also said the figures were disappointing.

"On the basis of these figures we reiterate our forecast that GDP (gross domestic product) is likely to grow by only 0.3% in the second quarter of 2011, much less than the OBR [Office for Budget Responsibility] and other analysts are predicting," the group's chief economist David Kern said.

The Office for Budget Responsibility said in its March forecast that it expected the economy to grow by 0.4% in the second quarter.

Mr Kern also said that now was not the right time to raise interest rates.

"Given the pressures facing businesses and consumers, and with the government's fiscal austerity programme continuing to bite, it would be a mistake to raise interest rates in the near future."

Indebted households

Nida Ali, economic adviser to the Ernst & Young Item Club, said the figures reflected subdued consumer sentiment as real incomes were continuing to fall.

On Tuesday, ONS data showed that Consumer Prices Index (CPI) inflation remains at 4.5%, more than twice the Bank of England's target of 2%.

At the same time, research from Incomes Data Services suggests that pay settlements in the public sector are running at zero, while the median settlement in the private sector is 3%.

"Households remain heavily indebted and are eager to reduce, rather than add to their debt burden," Ms Ali said.

"These circumstances are unlikely to change in the near future and we would expect to see weak out-turns for retail sales in the coming months."

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Can't Be Sure of Credit Status, Even With a Scorecard

Humorist Mason Cooley once said, "Every path to a new understanding begins in confusion."

That quotation applies to e-mails I received from confused readers who recently ordered their credit scores to gain a better understanding of where they stood.

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In one case, a husband and wife paid for and got all six of their credit scores (one for each of them from the three major credit bureaus). The scores ranged from a low of 602 to a high of 712.

But when a mortgage lender pulled the credit scores not long after the couple did, some of their scores were significantly lower, ranging from 598 to 649.

"Why are our scores from the mortgage company different [from] the ones we pulled online?" the husband asked. "Shouldn't they be the same scores I pull from the three credit bureaus?"

A reader from Los Angeles wrote that his wife purchased her credit score online from TransUnion. The score she received was 864. Three days later, after applying for a home equity loan, the score the lender got from TransUnion was 775, a drop of 89 points.

"It doesn't seem plausible," the reader wrote.

There's nothing amiss here. Here's why.

Most of the credit scores you buy or get free online are not the exact ones used by lenders. The gold standard is what's called a FICO score, named after Minneapolis-based Fair Isaac Corp., which devised a mathematical model to predict the credit risk of consumers based on information in their credit report. FICO is the model most widely used by lenders.

Only in the past several years have consumers been able to purchase their credit scores, three-digit numbers that are generated using information from their personal credit files. The higher your score, the better credit risk lenders think you are. A high score often translates into better rates on the money you borrow.

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Car Buying Doesn't Have to Be Combat

I recently received an e-mail from Ryan Bachman, an operations manager at an automobile dealership in Louisville, who sincerely wanted to know the answer to some questions about car buyers.

Bachman, who hopes to become a fourth-generation owner of a car dealership, wondered why the relationship between car buyers and car sellers is so adversarial.

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• Car Resources: Find tips, resources, car reviews, special features and answers to your car-buying or selling questions.

For example, he was annoyed at me for encouraging consumers to demand to see the invoice for the car they want to buy.

"It bugs me that consumers feel it's their right to see the invoice price and to know exactly what profit you are making," said Bachman, who works at his father's dealership. "If we sell every car at invoice or under invoice, we obviously would not be able to stay in business."

Bachman then asked three questions that I think deserve an answer:

• Is there any other retail industry where customers know (or even care) how much profit the business is making on their purchase? Imagine purchasing a house, a TV or a gallon of milk and demanding to know what the seller paid for the commodity.

• Why is the perception of the car industry so different?

• Why does the word "profit" carry such a negative connotation?

These are good questions. Of course not everyone who sells a used or new car is an agent of Satan. There are many honest, hardworking people in the industry. Yet it is also true that there are lots of tricks to this trade, and an uninformed consumer can end up paying hundreds of dollars more for a car than is necessary.

Having said that, let me address the first two questions, which really ask the same thing.

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VIDEO: Fruit and food hit hard by inflation

14 June 2011 Last updated at 10:07 Help

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Watchdog targets landbanking firm

8 June 2011 Last updated at 15:55 The FSA has secured a number of injunctions for against unauthorised businesses Investors ploughed hundreds of thousands of pounds into plots of land that had little chance of being built on, the City watchdog has said.

Now the Financial Services Authority (FSA) has taken action against an unauthorised landbanking scheme which collected £3.9m from UK consumers.

But some victims are unlikely to get their funds back.

In the last year, the FSA has secured seven injunctions against unauthorised landbanks.

Action

The High Court has issued a winding-up order against Plott UK Ltd.

The business had been marketing plots of land as an investment opportunity. It promised investors a return of between 200% and 300% on their investment.

However, at least one of the sites was in a designated area of outstanding natural beauty, and so was highly unlikely to ever get planning permission to be built on.

Many customers invested a minimum of £10,000, with some investing hundreds of thousands of pounds. Plott collected £3.9m between May 2009 and April 2011, the FSA said.

The regulator was able to take action as Plott was operating an unauthorised collective investment scheme.

Freeze

Another operation, called European Property Investments UK Ltd, took over Plott's business once the FSA action against Plott began. It accumulated £639,000 in nearly two months from April.

The FSA was able to freeze £180,000 in the firm's account, but the rest was transferred out before the freezing order was obtained.

Meanwhile, the High Court issued an injunction that means the business will be breaking the law if it sells land or operates the collective investment scheme.

"Consumers are much better off not putting their money into these schemes since, by the time we can catch up with the operators, most of the money has disappeared and investors are left with land that has a value which simply does not reflect the money paid for it," said Tracey McDermott, of the FSA.

"In our experience, operators of unauthorised landbanking schemes do not work in isolation, they often work together and their schemes are evolving.

"Once the dust has settled, we hope to be able to repatriate remaining funds to customers of both companies, but it is likely that some people will not get any of their money back."

Investors are not covered by the Financial Services Compensation Scheme because the businesses were unauthorised.

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