How should I invest my savings?

[ShokWaveRider]

I have found that at least with my credit union, you can negociate your return. I go a 2.75 for 1 year that matures next Feb. I typically negociate with $500k and get good results.

SWR

[eytonxav]

I'm not sure whether it was indicated if any of your portfolio is 401K/IRA? What percent is tax deferred? That may lead you to some other options (REITS, preferred stocks, CMOs, etc) that pay higher interest/dividends.

Also, I agree with dm, downsizing to a smaller home may enable you to make a move much sooner and with less anxiety. I currently have a $400K+ home and a $60K mortgage, and am considering downsizing to enable total ER in the next year or so.

Doug

[cute fuzzy bunny]

Downsizing worked for me.

Pocketed an extra $250k, picked an area good for ER (low costs, quiet, plenty of stuff around to do, centrally located), a lot less house to clean, a lower maintenance home.

I paid cash for the new place (partially from the HELOC on my old house, sort of a temporary mortgage) and took some of my cash reserve. Since I paid cash, no contingencies and a 3 week closing period enabled me to cut about $15k off the sales price. Cleaned it up and moved all my furniture in the next day, then took about a month to finish moving and cleaning up the old house. Put the old one up for sale when I was fully "out" and it looked good. Sold in no time.

No hassle for me to move "overnight", no people thumping around the house looking at it while I was still living in it, no "keeping the place neat" for prospective buyers. Plus it looked freakin huge empty.

My cost for that transaction was a couple hundred bucks in deductible HELOC interest, $150 for the moving truck, a couple hundred bucks in gas driving back and forth the next month, and lots of elbow grease.

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:P I have a 15-year 5.375% mortgage with 13 years left. I have not paid it off only because it gives me a bit of a tax break and the rate is pretty decent. What worries me about the bond funds is that with interest rates going up inevitably, their NAVs will come down so I will have a negative hit to my portfolio right away. I have technology, small and medium cap, international stock mutual funds which have shown gains in the last 12 months but I am beginning to get concerned about them now. What kind of return can I expect form the balanced index fund and which one would be a good one to look at?

Hi Dante,

I agree with dm. If you love living in your house, keep it. If ER is more important, consider selling the house.

In your case I think that paying off your mortage is a no-brainer. (Assuming that you want to keep the house).
Think of it this way, would you buy a 15 year bond, with near zero risk of default at 5.375%? I would, especially given that you conservative and are sitting on $670,000 yeilding 2.3%.

I wouldn't worry so much about where interest rates are heading, or timing the market. Think about your portfioio in the aggregate, not how each component is peforming. If you're concerned about the direction of rates, or the market, then dollar cost average into your new investments. Same goes for the mortgage, if you're not sure whether or not you should pay it off now, pay off half.
Another thing that you can do if you're worried about rates is to add more weight to the short term bonds. Then, over time, move towards intermediate term bonds.

Whether to use individual Bonds or Stocks instead of mutual funds is a personal decison. There are some advatages to buying Bonds directly, it really depends of how much effort you want to put in.

Like many here, I like the Vanguard funds. They offer a vast selection of managed and index funds, and have the lowest cost in the industry.

I'd consider using the following funds:

Total Stock Market Index
(.9% 3 year, -.28% 5 year, 10.89% 10 year.)

Index-500
(-.85% 3 year, -1.54% 5 year, 11.26% 10 year)

Total Bond Market Index
(5.05% 3 year, 6.66% 5 year, 7.03% 10 year.)

International Index

Short Term Corporate Bond Fund
(4.19% 3 year, 5.63% 5 year, 6.09% 10 year.)

Balanced Index (60% stock, 40% bonds)
(3.05% 3 year, 2.92% 5 year, 9.71% 10 year)

Lifestrategy Conservative Growth (25-50% stock, 30-55% bonds, 20-45% short term securites.)
(3.9% 3 year, 4.16% 5 year.)

REIT Index
(15.63% 3 year, 14.23% 5 year)


Here's an example of a specific portfolio that you can dollar cost average into over the next 12 months.

1 year from now.
Cash - 30%
Short Term Corporate - %20
Total Bond Index - 20%
International Index - 5%
Total Stock Market Index - 25%

2 years from now
Cash - 15%
Short Term Corporate - 20%
Total Bond Index 25%
International Index - 10%
Total Stock Index - 30%

3 years:
Cash - 5%
Short Term Corporate - 10%
Total Bond Index 30%
International Index - 10%
Total Stock Index - 40%
REIT Index - 5%

You get the idea. You can sub. CDs for the Bond portion.
If you have an IRA/401K, keep the highest yeiding portion of your portfolio there (the bonds).

I would not own any sector specific stock funds (Technology), unless you're doing this with a small portion of your portfolio for entertainment (gambling) value.

Quote:

I'm not sure whether it was indicated if any of your portfolio is 401K/IRA? *What percent is tax deferred? That may lead you to some other options (REITS, preferred stocks, CMOs, etc) that pay higher interest/dividends. * Also, I agree with dm, *downsizing to a smaller home may enable you to make a move much sooner and with less anxiety. *I currently have a $400K+ home and a $60K mortgage, and am considering downsizing to enable total ER in the next year or so. Doug

Quote:

Wow! *Nice job with putting that much away. *I'm suprized no one has mentioned selling the house and using the equity to pay cash for a smaller one. *I would think that you could still get a pretty nice place in the Chicago area for 200k. * With what you have saved you could be investing serious time with that young son of yours. It just show's that lifestyle is a relative thing. *For some a double wide on a couple of acres in the country is their dream. *For others it would be a nightmare. To maintain a 800K dollar house and the lifestyle that goes with it is something you will just have to add up and see how much its going to cost to maintain. Two years ago I moved from an affluent area in St. Louis to a little town about 15 miles away. *I got a larger home with a bigger yard. *My taxes were much cheaper and the biggest difference was I didn't feel like I had to have the new Mercedes and bigger boat. *I sold the Mercedes and got a Jeep because that was the type of cars that were around here. *I know your not supposed to try to keep up with the Jones's but you do want to fit in. *

Hi dm,

My utilities (gas, electricity, water) were $2800 in 2003. Property tax is about $9100, insurance is $900. Average monthly cost: $1067. We love the area - it is the Kenilworth-Winnetka-Glencoe part of the Chicago northshore with one of the best school districts and with maximum real estate value appreciation. The median price here is similar to mine and teardowns on 60X130 lots are being purchased by developers for $600K or more and replaced with new construction.

You mentioned the most important thing to me - spending more time with our second grader. Which is why I am interested in opinions from folks posting in this forum. My idea of RE is: I can afford to give up my job - don't have to leave home for 12 hours anymore. And can be self-employed working out of the house so that I can spend more time with my son.

Two issues though: 1. Haven't homed in on a venture yet (maybe too risk-averse) and 2. Opportunity cost of salary+bonus.

Wonder if you were in a similar situation (probably better) as me and if you had to deal with similar considerations .

[dm]

I'm also 47, but my kids are 20+. The biggest regret I have was I missed alot of their growing up. I was working day and night. They got to spend their summers at the club and lake but I wish I would have spent more time with them.

I also played with the idea of doing something on my own but the fact is I make OK money. I did buy and sell some land from time to time. Everything seems high right now and I have a contract on the last three lots I own. I am retireing next year. I do plan on possibly doing some consulting, but I would get to chose the projects. It would just be for some extra toy money.

If you like where your at and can afford it by all means stay. I was planning on holding on to those lots I had but things have went up so fast I felt I should sell now.
I'm just afraid if rates start going up I may miss my chance. Of coarse these lots are not in the same league as your location. But I did make over 500% in two years.

Quote:

I'm not sure whether it was indicated if any of your portfolio is 401K/IRA? *What percent is tax deferred? That may lead you to some other options (REITS, preferred stocks, CMOs, etc) that pay higher interest/dividends. * Also, I agree with dm, *downsizing to a smaller home may enable you to make a move much sooner and with less anxiety. *I currently have a $400K+ home and a $60K mortgage, and am considering downsizing to enable total ER in the next year or so. Doug

I have about 17% in 401K and IRA (nontaxable) accounts. Half of that amount (401K) is in PIMCO Opportunity Fund managed by T Rowe Price.

Remainder is in a Schwab account in 6 mutual funds: DODGE & COX STOCK FUND, NB FOCUS FUND INVESTOR CLASS , OAKMARK GLOBAL FUND, OBERWEIS EMERGING GROWTH PORTFOLIO, ROYCE TOTAL RETURN FUND, RS INTERNET AGE FUND.

Should I consolidate the 6 funds into 1 or 2? Should I sell them and buy something else?

Quote:

. *I found I could always do better within 100 miles of home (this includes Chicago in my case). * John Galt

Does this mean that you are a neighbor? I live in Winnetka. Are you close by?

LaSalle Bank is probably the most aggressive one around here with rates but even they are around 2% now. If you know of a local bank where I can do better than the Ford MoneyMarket or GE Interest Plus rates, would love to know about it.

[wabmester]

Quote:

Any suggestions on how I can stay ahead of inflation without putting the principal at risk will be greatly appreciated.

The safest investments on the planet are treasuries. Over the last 50 years, long-term treasuries have had an average real yield (i.e., yield above inflation) of 2.51%. Of course, buying a long-term treasury at current rates may or may not give you that real yield, so what's a risk averse investor to do?

TIPS. Guaranteed real yield of around 2.5% for long-term issues today. No gambling involved. No need to hope for historical returns. No need to worry about inflation, the stock market, terrorism, global warming, or Alan Greenspan.

[eytonxav]

Quote:

I have about 17% in 401K and IRA (nontaxable) accounts. Half of that amount (401K) is in PIMCO Opportunity Fund managed by T Rowe Price. Remainder is in a Schwab account in 6 mutual funds: DODGE & COX STOCK FUND, NB FOCUS FUND INVESTOR CLASS , OAKMARK GLOBAL FUND, OBERWEIS EMERGING GROWTH PORTFOLIO, ROYCE TOTAL RETURN FUND, RS INTERNET AGE FUND. Should I consolidate the 6 funds into 1 or 2? Should I sell them and buy something else?

There are many folks on here that can provide advice into how to allocate your portfolio and certainly I am not advocating putting a large percent of your portfolio into the following, however, REITS/preferred stocks are a reasonable choice for tax sheltered accounts as their interest/dividends is up in the 7-8% range. TIPS and CMOs are also good candidates for going into tax deferred accounts. Some of the mutual funds you are in look like good ones, and I'm not suggesting you change any of those, but just wanted to offer a thought on how to boost tax sheltered yield and remain relatively conservative.

One other question relative to your moving forward with your plan; will you walk away with any healthcare coverage from your corporate job? This will be a significant expense item to cover in the future, especially considering that costs typically increase >10%/yr. The healthcare issue caused me more concern than anything else when I elected to take an early retirement package last year.

Doug

Quote:

There are many folks on here that can provide advice into how to allocate your portfolio and certainly I am not advocating putting a large percent of your portfolio into the following, *however, REITS/preferred stocks are a reasonable choice for tax sheltered accounts as their interest/dividends is up in the 7-8% range. TIPS and CMOs are also good candidates for going into tax deferred accounts. *Some of the mutual funds you are in look like good ones, and I'm not suggesting you change any of those, but just wanted to offer a thought on how to boost tax sheltered yield and remain relatively conservative. * One other question relative to your moving forward with your plan; will you walk away with any healthcare coverage from your corporate job? *This will be a significant expense item to cover in the future, especially considering that costs typically increase >10%/yr. *The healthcare issue caused me more concern than anything else when I elected to take an early retirement package last year. Doug

Please recommend any specific REITs or preferred stocks if you would and I will check them out. Do they fluctuate a lot with the market too?

Have not looked at TIPs - again, if you know of a specific one, I will look int it. Afraid I don't know CMOs.

Re health care coverage, excellent point. I am in a slight ly different situation in that I am reluctant to quit unless I have a personal venture thought through and lined up that I can jump into - early retirement to me is "freedom from the need to be employed in my kind of job". What has held me back is that as yet I have not had a business plan robust enough to make the switch and secondly, concern about how much cash flow I would give up if I left the job. And the HC coverage is a significant factor - I was told by someone that for me to get comparable coverage for the two of us and our second grader, even though there are no preexisting conditions, premium could be $500/month.

Are you planning on any kind of post-ER business activity?

Do you know of a forum or thread where people who are working in companies are thinking about leaving and considering self-employment and are therefore discussing venture possibilities (on a small scale like consulting, home based business or small business?

[Bob_Smith]

Quote:

Have not looked at TIPs - again, if you know of a specific one, I will look int it.

TIPS are US Treasury Securities. You can buy direct from the treasury here: (http://www.treasurydirect.gov/indiv/indiv.htm), or on the secondary market. They stopped selling 30 year treasuries, so the only place you can get those is on the secondary market and the most recent ones mature in about 27-28 years. I just purchased some on the secondary market through my Vanguard brokerage account that yield a little over 2.5% - they are at about 2.3-2.4% now. They recently started issuing 20 year TIPS that you can buy at auction. The process is very easy. You can also invest in TIPS through mutual funds, and Vanguard does have a TIPS fund. Here is a link to information about TIPS that might help: http://www.treasurydirect.gov/indiv/...ips_glance.htm. Good luck!

[bobbee25]

If TIPS are 2.5%, how can they be good for a 4% SWR ?

[JWR1945]

bobbee25

Quote:

If TIPS are 2.5%, how can they be good for a 4% SWR ?

Because there is a draw-down of principal. Most Safe Withdrawal Rate studies are based upon a hypothetical portfolio's ending with a final balance of zero (at least once among many possible outcomes).

The most frequently mentioned time period is 30 years. Using 30 years is helpful for analyzing the data. (It is a short period for many readers of this board.)

It you have a cash equivalent that matches inflation exactly (i.e., at a zero percent real interest rate), you can safely withdraw 3.33% of the initial balance (plus inflation) every year for 30 years.

Anything that always does better than matching inflation [without any dips!] has a 30-year safe withdrawal rate higher than 3.33%.

Have fun.

John R.

[wabmester]

Quote:

It you have a cash equivalent that matches inflation exactly (i.e., at a zero percent real interest rate), you can safely withdraw 3.33% of the initial balance (plus inflation) every year for 30 years. Anything that always does better than matching inflation [without any dips!] has a 30-year safe withdrawal rate higher than 3.33%.

JWR, how'd you come up with this number? I ran FIREcalc using 0% TIPS for 30 years, and it gave me a 52.3% success rate.

What does your hypothetical instrument do in years of deflation?

JWR can speak for himself, but once again I am
compelled to stick my rather prominent nose in.

If you withdraw 3.33% (fixed) every year, it will last
30 years. Can not be otherwise. It is mathematics.

John Galt

[wabmester]

Quote:

If you withdraw 3.33% (fixed) every year, it will last 30 years. *Can not be otherwise. *It is mathematics.

Ah yes, arithmetic. * Try this simple math. * You start with $100K and you want to withdraw an inflation-adjusted 50% each year for two years.

Year 1 inflation is -10% (i.e., deflation). * Year 2 inflation is 10%. * Net inflation for the 2-year period is 0%.

Year 1: *you have $90K after inflation adjustment and you withdraw $45K, leaving $45K

Year 2: you have $49.5K after inflation adjustment and you want to withdraw $50K (50% of initial + net zero inflation). * Whoops, you're short $500.

[charlie]

I ran FIREcalc too and found that you get 100%
success for 25 years using the CPI and 0 expense
ratio. For this case, the average remaining balance
was $41,809. It appears that you are on a very
steep slope the last 5 years, as would be expected.
for 28 years the success was 90.2% with $26,725
remaining and for 29 years the success rate was 72%
with 21,667 remaining (all assuming $100k initial
investment.)

Using Vanguard's TIPS fund, which currently has 1.6%
REAL yield, the success rate was 97.7% with an average
balance of $82,121 remaining. The only failing years
were '31, '32 and '33 during the depths of the great
depression when there was actual deflation.

I think this exercise just proves again that you can't
safely extrapolate a logical math approach to the
future as JRW suggested. Thanks for setting the
record straight, wab.

Cheers,

Charlie

[charlie]

CORRECTION!

I blew it on the Vanguard calculation. After running
FIREcalc again, the answer was 100% success for
30 years with $73,000 average balance remaining.

Cheers,

Charlie