48 and finally focusing on retirement!

[Live Free]

Better late than never, I guess.

I'm not even sure where to start on my first post here. My DH and I are both not financially savvy folks. The truth is we just have never taken the time to focus on retirement and have had our heads in the sand about getting educated about and developing a sound plan to get us to a secure retirement. I'd like to relay a bunch of excuses on why we wasted so many years w/out a plan, but the truth is that there really are no good excuses. We are both 48 and employed with megacorps. Two kiddos - one a sophomore in college and the other a highschool freshman.

Back in 2008, when the stock market took a huge nosedive, I did something really stupid - I moved the majority of my holdings in my 401K (with Vanguard) into Cash Reserves - after the market hit an all time low. That has been the one and only move I've made with my 401K in the 26 years I've had it. I haven't done anything since I moved it into Cash Reserves five years ago, missing out on the huge market gains since I sold at the bottom.

Now I want to learn about investing and develop a retirement plan and stumbled upon this site as well as a few others. I am highly motivated to figure out a plan. Over the last few weeks I've been reading, trying to learn the lingo (holy moly there is alot of lingo!) and absorb. I went to the library this week and borrowed Millionare Teacher and think I understand the basics:

- LBYM
- Invest in low fee index funds (both stock and bond index funds).
- Don't fall into the buy high/sell low emotionally driven idiotic investing like I did in the past!
- Rebalance at regular intervals

So, while a have a ton of questions, I'll start with just this one. HOW/(When?) do I go about getting back into the market?

Here are my current 401K funds:

$204K in Vanguard Prime Money Market Fund
$23K Vanguard Dodge and Cox Stock Fund
$30K Vanguard Institutional Index Fund Institutional Plus Shares
$8K Vanguard PRIMECAP Fund Admiral Shares
$13K Company stock
Total: $277K (rounded)

Do I just research low fee index funds available within my vanguard 401K options, call up Vanguard and move all the money into the funds (plan will be to do 60% stock index - 40% US, 20% international) and 40% bond index fund) at one time? With the market up like it is now? (I know, I know, you can't time the market). Do I just move $20K at a time over the next year? (Isn't that like dollar cost averaging?)

Not sure if the answer to the question is dependent on any other factors? I need to do the same with my DH's account. He hasn't made changes to his account in years, and has no idea if the funds he is in are low fee or the right funds. He is basically relying on me to figure this out and then explain it to him and he'll make the changes.

My DH has a 401K with Fidelity with $240K in the following funds:
$9K in Blended Funds Investment Target 2030 Fund
$61K in S&P 500 Equity Index
$111K in Domestic Bond Index
$7K in Actively Managed Large Cap Eq Fund
$32K Fixed Income Fund
$19K in Company Stock

This is all so confusing. Outside or our (substantial) mortgage (owe about $310K), we are debt free - no CCs, car payments, etc. We do have about $300K+ in home equity, but have minimal (~$20K) in 529 plans for the kiddos. We've been paying as we go for older DS' college, but it is hard. He has been told he will have to commute to local university for last two years to decrease costs and is ok with that. We have depleted, significantly, our emergency cash fund to pay for college. I don't track our monthly costs (that is also something I am starting to do as part of my new retirement planning!), but figure we only have about 4 months of cash available if things went south so my primary focus over the next 6 months is to rebuild that by lowering my 401K contributions to just the company match (6%) versus the current 10% allocation. Will ask DH to do the same.

We have no IRAs or any other savings/investments.

Anyway, thanks in advance for any thoughts on best approach to moving forward with an actual PLAN for retirement and how to fix my Vanguard 401K.

I hate working, so a plan is desperately needed!

[Gatordoc50]

Welcome! I would focus first on overall structural goals while deciding on how about getting more equity exposure. I generally like the idea of investing up to the match in your 401ks, then maxing out Roths and then going back to the 401k with anything left. If you can do this, it's not necessary to have a huge emergency fund as you can tap the Roth contributions if necessary. One way to increase your equity exposure would be to change your contributions going forward into your 401k to 100% equity. The same could be done with the Roths. Just some ideas for starters.

[IlliniProgrammer]

Hi Live Free!

Quote:

So, while a have a ton of questions, I'll start with just this one. HOW/(When?) do I go about getting back into the market?

You start now, but you ease back in. I'm going to give you some fairly conservative advice here.

I'd stick $50K from the Money Market fund into one of Vanguard's Domestic Small-cap value funds, and $50K into one of Vanguard's International Small-cap value funds. I would not buy everything right away. I'd plan on investing $10K/week over ten weeks. I might even go slower like $5K/week. If the market starts scaring you, slow down.

I'd be prepared to lose 25-40% of your investments in one of those funds. I think the US stock market has had a great run over the past five years. I'm not sure that will continue. In fact, we could see a 20-30% pullback. So don't invest unless you're willing to lose $30K on the $100K you're sticking in.

I'd be a little more willing to buy stocks in high-quality international jurisdictions like Canada, UK, Switzerland, Germany, Australia, Japan, and South Korea.

In terms of your overall savings, the bad news here is that barring a pension, you don't have anywhere near enough saved for retirement. The good news, however, is that you're doing better than most Americans. The average 55-year-old American has a $250K 401k. (This 401k will provide them with only $10K/year in retirement income.)

Your husband also has an extremely conservative portfolio. You should talk to him, too.

Quote:

I don't track our monthly costs (that is also something I am starting to do as part of my new retirement planning!), but figure we only have about 4 months of cash available if things went south so my primary focus over the next 6 months is to rebuild that by lowering my 401K contributions to just the company match (6%) versus the current 10% allocation.

That's a good idea. Invest in the 401k up to the match, allocating at least half of your savings to stocks, use the balance of your savings to get yourself up to an EIGHT month emergency fund (you have a mortgage to pay), and once you are done there, max out your IRA and then 401k.

[Katsmeow]

Welcome to posting. The good news is that you do have a nest egg that is better than that of most people. It is also good to be focusing on this now. And I agree that changing your investments is a good idea. I know a lot of people will focus on that so I want to focus on your finances apart from investments.

I do understand the pay as you go way of paying for college. We currently have a son living at home commuting to a nearby state university. I don't know how many other kids you have. One thing that we did to reduce costs for the first half of college was to send him to a community college where his credits were transferable to the university he is now attending. Doing this cut his tuition cost by about 2/3 for the first half of his college courses. Don't know if that option is available to you, but it is one to think about.

I'm a great believer in keeping track of spending and setting a plan. My favorite budgeting program is You Need a Budget.

Personal Budget Software - Finance Software for Windows & Mac

It is a great program for tracking spending and budgeting. The main thing I like about budgeting is that each month you allocate - or budget - every dollar. You assign it to something (part of that something might be an emergency fund or other savings - you don't have to actually spend it). The beauty of it is that as you go through the month if something comes up that you didn't anticipate so that Home Repair calls for spending more than you had budgeted, you then having to move something from another category. If I decide to eat out and go over the dining out budget, that's fine but then I need to reduce another category by a commensurate amount. It really helped us with our planning and budgeting.

A good way to get a handle on spending is to go download all your credit card transactions and your bank transactions for, say, this year. For most people that is the vast majority of your spending. Then you can see where you have been spending in the past and you can better plan for the future.

Once you have a handle on what you are spending you can better determine what you can cut and can come up with a better plan.

[REattempt]

Welcome, you on the right path. Good luck!

Recommendation for a good book:

http://www.amazon.com/gp/aw/d/1118073762

For a good RIA that is fee based that can help:

http://www.evansonasset.com/

[Live Free]

Quote:

Originally Posted by IlliniProgrammer I'd be prepared to lose 25-40% of your investments in one of those funds. I think the US stock market has had a great run over the past five years. I'm not sure that will continue. In fact, we could see a 20-30% pullback. So don't invest unless you're willing to lose $30K on the $100K you're sticking in. .

Ouch! This really gets to the heart of it. We've had a five year good run and it makes you wonder if the good run can keep going. I like the slow- going approach, maybe I can even extend it over two years.

Quote:

Originally Posted by IlliniProgrammer That's a good idea. Invest in the 401k up to the match, allocating at least half of your savings to stocks, use the balance of your savings to get yourself up to an EIGHT month emergency fund (you have a mortgage to pay), and once you are done there, max out your IRA and then 401k.

Good advice. I didn't mention in my original post that I work on contract (as does DH), and while I've/we've survived in that world for 25+ years, you never know. I have seen many in my shoes that have been let go much more often of late. Scary.

[Live Free]

Quote:

Originally Posted by Katsmeow I do understand the pay as you go way of paying for college. We currently have a son living at home commuting to a nearby state university. I don't know how many other kids you have. One thing that we did to reduce costs for the first half of college was to send him to a community college where his credits were transferable to the university he is now attending. Doing this cut his tuition cost by about 2/3 for the first half of his college courses. Don't know if that option is available to you, but it is one to think about.

This is actually an option available to us, though now that my oldest is away at school almost half way done with his sophomore year, not sure this is an option for him now. Definitely for our younger child and we'll see if that works. We should have taken this route with our older son for a lot of reasons - not just financial ones. But that's a whole 'nother post.

Also, thanks for the software recommendation. I'll check it out. I have also heard good things about using Quicken software as I believe it has a budgeting component as well as investment and tax tracking. I'll admit it - I'm a bit afraid to look too closely at our monthly spending - especially our eating out expenditures. Ignorance can indeed be bliss, especially when you are the (reluctant) family cook!

[M Paquette]

Quote:

Originally Posted by REattempt For a good RIA that is fee based that can help:

Be careful out there. Many "fee based" advisors out there do charge a fee, but they also promote some investments which charge significant investments and provide incentives back to the advisor. One of the fund families promoted by the linked advisor does this. The fee-based advisor also typically does not have a fiduciary obligation to the advisee. There may be a hidden conflict in dealing with such agents.

Fee-Only vs. Fee-Based Financial Advisers: What
What is the Difference Between a Fee-Only Financial Advisor and a Fee Based Financial Advisor?

The gold standard to look for is a "fee-only" advisor with a fiduciary duty or obligation to you, the advisee.

[ETFs_Rule]

Avoid all actively managed funds! Passively managed funds (AKA index funds, ETF's) CONSISTENTLY outperform actively managed. Study after study has shown this.
"Don't fall into the buy high/sell low" -- Don't attempt to time the market in the first place! Instead re-balance. As the market declined in 2008 - 2009 you should have rebalanced for every 5% in decline, shifting money from bond ETF(s) to stock ETF(s), taking advantage of the fire sale. Do the same thing as the market goes up and your stock / bond ratio changes. This time you are moving money from stock ETF's to bond ETF's.
We don't know if the market is going to go up to 20,000 before the next correction of X% or if it will begin correcting tomorrow. Ask 20 analysts and you will get 20 different answers. Regardless of what they are predicting, it's been said that economists have predicted 10 of the last 3 recessions. Based on PE ratio alone, stocks are not over priced. Sounds like you are trying to time the market, which might work or it might backfire.

Quote:

Be careful out there. Many "fee based" advisors out there do charge a fee, but they also promote some investments which charge significant investments and provide incentives back to the advisor. One of the fund families promoted by the linked advisor does this. The fee-based advisor also typically does not have a fiduciary obligation to the advisee. There may be a hidden conflict in dealing with such agents.

If you can't do it yourself, which is painfully easy, then you want to hire a "fee-only" fiduciary Registered Investment Adviser for a one time paid consultation. Basically they will help you figure out how much risk you want to take (60% stock / 40% bond? 70% stock / 30% bond?), then select a portfolio of stock and bond ETF's. In reality you could select SPY and BND and do just fine. Don't pay 1% or 2% per year to some asset manager who will simply re-balance your portfolio.

[RobLJ]

[QUOTE=Live Free;1378181]Better late than never, I guess.



So, while a have a ton of questions, I'll start with just this one. HOW/(When?) do I go about getting back into the market?

Here are my current 401K funds:

$204K in Vanguard Prime Money Market Fund
$23K Vanguard Dodge and Cox Stock Fund
$30K Vanguard Institutional Index Fund Institutional Plus Shares
$8K Vanguard PRIMECAP Fund Admiral Shares
$13K Company stock
Total: $277K (rounded)

Do I just research low fee index funds available within my vanguard 401K options, call up Vanguard and move all the money into the funds (plan will be to do 60% stock index - 40% US, 20% international) and 40% bond index fund) at one time? With the market up like it is now? (I know, I know, you can't time the market). Do I just move $20K at a time over the next year? (Isn't that like dollar cost averaging?)

Not sure if the answer to the question is dependent on any other factors? I need to do the same with my DH's account. He hasn't made changes to his account in years, and has no idea if the funds he is in are low fee or the right funds. He is basically relying on me to figure this out and then explain it to him and he'll make the changes.

My DH has a 401K with Fidelity with $240K in the following funds:
$9K in Blended Funds Investment Target 2030 Fund
$61K in S&P 500 Equity Index
$111K in Domestic Bond Index
$7K in Actively Managed Large Cap Eq Fund
$32K Fixed Income Fund
$19K in Company Stock"

You can always ease back in by dividing your big money market by 12 and buying monthly into a Total Market, and International Index. That's if you fear a correction and fear regrets.
If not, just decide how you want to allocate it between these (might consider also a small-value fund) and invest in two or three consecutive months, one for each fund.
Just a variation on dollar cost averaging.

[Katsmeow]

Quote:

Originally Posted by Live Free This is actually an option available to us, though now that my oldest is away at school almost half way done with his sophomore year, not sure this is an option for him now. Definitely for our younger child and we'll see if that works. We should have taken this route with our older son for a lot of reasons - not just financial ones. But that's a whole 'nother post.

Well our son started CC when he was younger than most so that was one reason we had him stay at home. But, we were sure glad we had done so when he had that one bad semester with awful grades. It was much easier to handle realizing he had thrown away $2000 of our money as opposed to the about $10k it would have been living in a dorm at the university...

Quote:

Also, thanks for the software recommendation. I'll check it out. I have also heard good things about using Quicken software as I believe it has a budgeting component as well as investment and tax tracking. I'll admit it - I'm a bit afraid to look too closely at our monthly spending - especially our eating out expenditures. Ignorance can indeed be bliss, especially when you are the (reluctant) family cook!

Knowledge will set you free. There are times I've sort of been afraid to look at it as well...but it sort of like recording the calories I eat. If I don't record that piece of cake I can sort of fool myself but my hips still know the truth...

About Quicken. I recently started using Quicken again (I had used in the past). I like it for tracking investments and it has a nice lifetime planner feature. However, for budgeting, there is no comparison between Quicken and YNAB. I see Quicken as a supplement to YNAB with YNAB being way more important to budgeting.

Quicken is basically old style budgeting. You tell it how much you want to spend and it dutifully puts it in the budget. But, it doesn't ask you to allocate every dollar and it doesn't really tell you if you have budgeted more money than you have available to spend. YNAB makes you make the hard choices and is very explicit about if you are spending more money than you really have available. If you try to spend $200 more in a category this month than you really have then YNAB is going to tell you pretty clearly that you have spent more than you have and it is going to be clear you need to reallocate. If you do that with Quicken, you aren't really going to get that.

It is sort of hard to explain what I mean. Perhaps the best way is to say that in YNAB there is a tighter integration between the budget and what you actually have and what you actually spend. I know YNAB has a free trial so you might look at that (don't know if Quicken has one or not)

[Surewhitey]

It's hard to recommend the market in general right now. Vanguard is as good as any to be with, at least. They also have target funds that make it easy based on date of retirement. They adjust these automatically as you get closer to "the date".

Our successes came as much from our lifestyle vs. investment. We always lived on one salary after getting married and saved most, if not all of the other. We also gave our daughter budgets for college and wedding and she learned how to budget with those figures, pocketing anything left over.

We have worked over the past 5 years to get everything simple in our lives so the decision to not work wasn't a shock to the system. DW quit mega corp first, we took 8 months to reset in a tropical place. I went "back" for a year and she did 15-20 hrs on something she wanted to do vs. the old 50+ hrs. Then I joined her 8 months ago.

We are now back in the tropical spot and doing more good things, living simple & enjoying the heck out of it. We have options to go back, but for now, we're good.

We live on 2-3% of our NW, so we stick with a very conservative choice on investments...

[Live Free]

Quote:

Originally Posted by Surewhitey We are now back in the tropical spot and doing more good things, living simple & enjoying the heck out of it. We have options to go back, but for now, we're good.

Sounds like heaven.

Thanks for the feedback.

[REorDie]

I like to keep my investments simple and follow Jack Bogle advice (the founder of Vanguard). You don't have to do things complex.

I'M:

40% low cost total stock market index fund
10% low cost total international stock index fund
45% low cost total bond market index fund
5% iBonds <== this is my allocation for emergencies

I'm 50% stock /50% bonds because I plan to RE in the next 1-3 years. When I was 10+ years from RE I was 75%-80% stock.

When I'm out of balance with my allocations instead of transferring money I put new money to what is under allocated. So, if transferring money into the stock market at its all time high is scary for you then just allocate new money to it.

Nothing wrong with tilting. Many people tilt in value, small cap value, emerging markets, REITS, etc. But I and Jack are happy with total market returns.

[Live Free]

Quote:

Originally Posted by REorDie When I'm out of balance with my allocations instead of transferring money I put new money to what is under allocated. So, if transferring money into the stock market at its all time high is scary for you then just allocate new money to it.

Good idea. I actually did this already. All new contributions will go to low cost stock index fund to better balance overall AA.

I am looking at the choices within our 401Ks and will do some transfers of the money market assests into low cost index equities (US and intl) as well, but I really am not comfortable doing a full rebalance all at once. I'm just trying to figure out how much and how often until I'm fully rebalanced. I appreciate the perspectives on that given by posters here.

The other priority is to get my DH out of his "actively managed" funds into low cost index funds.

[REattempt]

Quote:

Originally Posted by M Paquette Be careful out there. Many "fee based" advisors out there do charge a fee, but they also promote some investments which charge significant investments and provide incentives back to the advisor. One of the fund families promoted by the linked advisor does this. The fee-based advisor also typically does not have a fiduciary obligation to the advisee. There may be a hidden conflict in dealing with such agents. Fee-Only vs. Fee-Based Financial Advisers: What What is the Difference Between a Fee-Only Financial Advisor and a Fee Based Financial Advisor? The gold standard to look for is a "fee-only" advisor with a fiduciary duty or obligation to you, the advisee.

Just a little bit of work you would have discovered this on the website:

Evanson Asset Management (EAM) is a fee-only advisor and receives no compensation other than from our clients.

[IlliniProgrammer]

Quote:

Originally Posted by ETFs_Rule Avoid all actively managed funds! Passively managed funds (AKA index funds, ETF's) CONSISTENTLY outperform actively managed. Study after study has shown this.

That's largely true, but not 100% true. With a T-stat of 2.2, Vanguard Windsor (VWNFX) has outperformed the market with an alpha of 2.6% over the past 20 years. The Sequoia Fund (SEQUX) has achieved an alpha of 5.6% with a t-stat of 2.5. The odds of that happening randomly are about 1 in 200.

Quote:

"Don't fall into the buy high/sell low" -- Don't attempt to time the market in the first place! Instead re-balance. As the market declined in 2008 - 2009 you should have rebalanced for every 5% in decline, shifting money from bond ETF(s) to stock ETF(s), taking advantage of the fire sale.

I did that in 2009, but doing that when it seemed like the world was ending was easier said than done.

It seemed just as likely back in early March 2009 that the DJIA was heading for 3000 as it was that it was heading for 16000 today.

The fact that the playbook has worked in the past doesn't mean that it will feel like it will probably work in the future. I think what we can reasonably ask investors to do is to make adjustments towards the ideal portfolio and focus on exactly what they're getting for every dollar invested- dividends, earnings, etc. The one thing that helped me buy at the bottom was that I was picking up these REITs and MLPs paying 10% and 15% dividends/distributions.

[ETFs_Rule]

Quote:

Originally Posted by IlliniProgrammer That's largely true, but not 100% true. With a T-stat of 2.2, Vanguard Windsor (VWNFX) has outperformed the market with an alpha of 2.6% over the past 20 years. The Sequoia Fund (SEQUX) has achieved an alpha of 5.6% with a t-stat of 2.5. The odds of that happening randomly are about 1 in 200.

You're cherry picking by going all the way back to a time when active managers actually had some advantage because the Internet age had not kicked in (the 90's). With the Internet it's harder than ever for active managers to beat their benchmarks. For example VWNFX has actually underperformed VOE (mid-cap value index) by over 50%. Sorry. They've done studies that by cherry picking the best past performing actively managed funds, this is still not going to give you any advantage.

Quote:

I did that in 2009, but doing that when it seemed like the world was ending was easier said than done. It seemed just as likely back in early March 2009 that the DJIA was heading for 3000 as it was that it was heading for 16000 today.

You're supposed to rebalance every 5% in market movement or 5% in portfolio allocation swing. There's no guess work.

[IlliniProgrammer]

Quote:

You're cherry picking by going all the way back to a time when active managers actually had some advantage because the Internet age had not kicked in (the 90's). With the Internet it's harder than ever for active managers to beat their benchmarks. For example VWNFX has actually underperformed VOE (mid-cap value index) by over 50%. Sorry. They've done studies that by cherry picking the best past performing actively managed funds, this is still not going to give you any advantage.

The problem is that the stats say otherwise. There are a few funds that statistically outperform even after taking out the effects of cherry picking. Incidentally those funds tend to have higher fees so the manager collects most of the alpha. At the end of the day, most investors should stick to index funds, but it's technically incorrect to categorically state that ALL actively managed funds consistently underperform.

Quote:

You're supposed to rebalance every 5% in market movement or 5% in portfolio allocation swing. There's no guess work.

Again, that's easier said than done when the market is plummeting. In theory, it works. As a human being, you are more likely to completely withdraw your money from that strategy and stick it in cash if you're not doing the rebalancing manually.

During a market crash, it's better to do this stuff by hand, and to focus on what you're actually getting for a $1000 investment. How much earnings? How ridiculous of a possibility is it for this company to go BK and the stock's value go to zero?

This is a great idea in a 1960s/1970s Sharpe-Lintner and Burton Malkiel world, where market returns are normally distributed, the worst crashes are 25%, and investors can just put their money into some investment machine and never look at their portfolio value until retirement. In practice, investors tend to get the urge to sell at the worst times and buy at the worst times. A much better request is to simply ask investors not to sell when the market goes down and to consider buying or at least reallocating their next dollar. That's doable for a reasonably disciplined person. Sticking their hard earned, hard-saved cash into the market as it plummets, without thinking about what they are buying, why it can't go to zero, why it has to recover, etc etc is just a huge ask for any human being.

If it were 1975 and Vanguard were mailing out quarterly statements on index funds, I'd be agreeing with you. When people are screaming at you to sell on CNBC, investors will pull their money out of this system rather than automatically reallocate cash to stocks (CNBC is a horrible channel BTW, aside from maybe Suze Orman and very occasionally Jim Cramer offering a good nugget of advice). I only ask that they don't sell and that they look for cheap safe, boring stocks to buy.

1.) During a crash, the money you have in cash or money market funds is the only part of your porfolio that feels safe.
2.) Parting with that money for an asset that's dropped 30% in two weeks, when your portfolio has lost 20% of its value, is a pretty tough sell.
3.) Parting with that money to buy a natural gas pipeline paying a previously 6%- now 12% dividend- with no debt and a lot of cash on its balance sheet- is a bit easier of a sell to the average investor.

So my only point is yes, reallocating automatically is a great idea in most situations. When there's a crash, however, investors will want their money out of the market. I'd much rather see them STOP reallocating from cash into the market rather than sell after a crash. Then, when they get some rest and get a grip (bounces rarely happen overnight), start hunting for irrationally beaten down stocks they feel comfortable just collecting dividends from. Hang onto those until the market starts to look a little less panicked, then sell and rebalance.

If you had done that in '09, you would have made out not all that much worse than auto-rebalancing.

[ETFs_Rule]

Quote:

Originally Posted by IlliniProgrammer The problem is that the stats say otherwise. There are a few funds that statistically outperform even after taking out the effects of cherry picking. Incidentally those funds tend to have higher fees so the manager collects most of the alpha. At the end of the day, most investors should stick to index funds, but it's technically incorrect to categorically state that ALL actively managed funds consistently underperform.

See my original post. I never said all. I said the odds are stacked against you. A lot of people THINK they have an actively managed fund that is outperforming when in fact they don't or the fund is simply taking more risk, which anyone can do on their own. Studies have shown that good past performance does not lead to any future advantage.