It's official: I'm LOST!

[ARB57]

I'm just now sure what to do next.

While I'm not certain that I won't return to the workforce, for the purposes of this discussion, I'd like to assume that I won't (i.e. early retirement.) I'm monitoring some health issues.

I'm 55, and at least until now, have been among the world's most conservative investors. I take that back. I've not really been an investor at all - just a fairly disciplined saver. Literally everything that I have is in CD's and money markets. I don't want to be terribly aggressive, but know that, in order to generate some income and deal with inflation, I need to be more aggressive than I've been (2% CD's aren't going to cut it.)

Approximate value of my accounts: $1,360,000

Here's the damage: I have 2...401K's from previous employers. Collective value about 115K (fixed income/money market.) I'm assuming that I should roll these over. Vanguard? Ameritrade? Other? Thoughts?

I have $148K in an IRA CD (6% - matures in 2011) and $142K in another IRA CD (5.15% - matures in 2015.)

I have the following taxable CD's: $100K (6.25% - matures in 2014) 95K (6.25% - matures in 2014) 100K (6% - matures in 2011) 100K (5.75% - matures in 2011) $75K (5.15% - matures in 2016) 100K (5.15% - matures in 2015)

$385K in assorted money market funds (earning next to nothing...about 1%)

The world's smallest pension (about $160 a month...began receiving payments a few months ago.)

5K in a checking account.

My monthly expenses are about $3500 a month. Once I exhaust COBRA in a year and purchase individual insurance (pre-existing condition,) my expenses are likely to be closer to $4000 a month. That said, I'd love to have more like $5500 a month at my disposal (a little travel here and there etc.)

I do not own my home at present - just renting (and am fine with that.)

Based on what I've given you all...any thoughts? Investment mix etc.?

Thanks!!!!!

 

[Dawg52]

As Financedude suggested in another thread, perhaps 15-20% in a balanced fund like VWINX. If it goes to pot, we can blame him. But it really is a decent fund for part of your money. I wouldn't go much more than than since you have been so conservative your entire life.

Best of luck.

 

[haha]

Based on what I've given you all...any thoughts? Investment mix etc.?

Thanks!!!!!

If I have understood your data correctly, you are probably not a $5500/mo guy. Familiarize yourself with Firecalc, and let it tell you the news.

Ha

 

[ARB57]

Thanks - appreciate it. While I know that my risk tolerance is an important component....pretend it is YOU. What would you do, if in a similar situation?

Thanks.

 

[JBmadera]

Thanks - appreciate it. While I know that my risk tolerance is an important component....pretend it is YOU. What would you do, if in a similar situation?

Thanks.

Get Jim Otar's new book, Unveiling The Retirement Myth, read it and put his principles into practice as best you can.

At the end of the day nobody is going to care more about you than YOU.

good luck!

 

[Dawg52]

Thanks - appreciate it. While I know that my risk tolerance is an important component....pretend it is YOU. What would you do, if in a similar situation?

Thanks.

The problem is you would like to w/d $66k a year on a $1,360,000 portfolio. That is a 4.85% w/d rate, far above the recommended 4% max that is usually suggested to give you a 100% success rate.

Run your numbers through Firecalc as Ha suggested. You can play with the asset allocation to see what it would take to get you there. I have a feeling it will be a strong tilt to stocks which would be something I wouldn't be comfortable with in retirement. I'm only have 25% in stocks(also much lower than most here recommend) and roughly the same age as you. I would probably consider a part time job to help bridge the income gap.

OK, I just ran your numbers though Firecalc and inputed 18k for SS at age 62 and inputed 75% to stocks and got about a 92% success rate. I doubt you want to go with an allocation to stocks that high. Again, I would have to get a part time job if I needed the income you suggest or cut expenses and go with a bare bones budget.

 

[clifp]

I must say for somebody who has invested primarily in CD's you done pretty darn well. I am particularly impressed with the pile of 6%+ CDs you've accumulated and more than a little jealous.

I agree that you need some equities and as the 200K in taxable CD mature in 2011 it would seem like an excellent opportunities to start tipping your toe into the water with a low cost Vanguard Index fund.

 

[LOL!]

5% sustained withdrawal rate from your portfolio should only be a temporary solution. But are you expecting from Social Security benefits? You should find out how much they might be and use those numbers in your runs of FIREcalc and in your reading of the Otar book.

 

[Zero]

ARB57, it looks like you have a knack for scoring some nice CD rates. It's unlikely that the ones maturing in 2011 will have any good replacements.

It appears that in 2011 you will have $115,000 and $385,000 doing not much except collecting the MM rate plus $348,000 of CDs maturing.

That is $848,000 and a large portion (60%) of your portfolio, so I think the suggestions above are very good ones, get Otar's book and give it a good read. Then you can decide for yourself if the following is something you would do.

But you asked, "if it were you?", so here is my take.
1. Decide on your tolerance for risk and choose an asset allocation. At 55, I (not necessarily you) would choose a 60 equity/40 fixed income allocation.
2. I (n n y) would invest the equity portion in index ETFs, and use CDs for fixed income.
3. I (n n y) would leave the non-expiring CDs as my fixed income portion.
4. I (n n y) would diversify the equities as 50% US market VTI, 30% World xUS VEU, 10% small cap VBK, and 10% REIT

So I'd take the $840,000 in expiring CDs and MM accounts and:
1. Buy VTI = $420,000
2. Buy VEU = $250,000
3. Buy VBK = $85,000
4. Buy VNQ = $85,000
and
5. Keep CDs = $525,000 = 40% net worth

That's what I would do, but I don't suggest it to anyone else. It matches my style, but YMMV and MLW.

 

[jebmke]

The problem is you would like to w/d $66k a year on a $1,360,000 portfolio. That is a 4.85% w/d rate, far above the recommended 4% max that is usually suggested to give you a 100% success rate.

I have never seen 4% proposed as a 100% success rate -- even for a 65 YO much less someone retired early at 55.

 

[DeborahB]

I have never seen 4% proposed as a 100% success rate -- even for a 65 YO much less someone retired early at 55.

Well... it all depends on how much you earn on your money, doesn't it?

 

[chinaco]

Welcome to the board.

It sounds like you have a health problem... sorry to be so direct... but do you think it will affect your lifespan... that is definitely a factor that needs to be considered to answer your $5500/mo question.

You did not state if you have a spouse... that is another factor related to the overall plan and certain decisions.

+1 on the Otar book. It can be downloaded for free for a few more days. Here is the link. otar retirement calculator


You will need to click the free download link.

Read it before you make any decisions. It describes the most common options with the results of some back testing.

He has some suggestions for a solution for your $5500/mo question... As well as how to work through the investment issues to generate the income.

 

[Independent]

I've got the same comments as others - you've got great CD rates, don't forget Social Security, try a few things in FIRECalc.

If it were me, I'd look at some variable spending plans. If I "need" $48k per year but "would like" $66k, I'd make the $18k difference a variable that I only spend if I'm in a good scenario.

I'd also spend some time thinking about taxes. With so much money in taxable investments, I'd be worried that I'm paying taxes on interest that isn't really income but is just keeping me even with inflation.

As a very conservative investor, I like TIPS because they protect against unexpected increases in the inflation rate. But your CDs are currently doing a lot better.

 

[Zero]

I have never seen 4% proposed as a 100% success rate -- even for a 65 YO much less someone retired early at 55.

If you run FireCALC for a 55 yo with $1,000,000 and a $40,000 withdrawal for 40 years, it will not give you 100% but if you add SS of $18,000 starting in 7 years it will be 100%.

 

[Dawg52]

I have never seen 4% proposed as a 100% success rate -- even for a 65 YO much less someone retired early at 55.

I should know by now to stay out of financial discussions. My point was 4% is the normal w/d rate most people look at when discussing a fairly safe w/d rate with long term future success.

But you are correct and thanks for pointing out my mistake.

 

[Zero]

I should know by now to stay out of financial discussions. My point was 4% is the normal w/d rate most people look at when discussing a fairly safe w/d rate with long term future success.

But you are correct and thanks for pointing out my mistake.

Funny but I thought 4% gave 100% also. Now, it looks like 3.593% is the 100% mark, and that just doesn't have the same ring as before. Saying safe withdrawal rate is 3.593% sounds nerdy.

 

[Lsbcal]

Thanks - appreciate it. While I know that my risk tolerance is an important component....pretend it is YOU. What would you do, if in a similar situation?

Risk tolerance is critical in setting your AA. Many responding to your post (includes me) will want to have a higher equity allocation then you'd ever want. Mine is 60/40 for instance. My guess is you'd be nervous with 30% stocks.

In addition to getting familiar with FIRECalc as others mentioned, I'd strongly recommend going with Vanguard since they have good fixed income offerings at very low ER's. You would do well to look on the VG site for the short allocation quiz as a start.

When I was forced into ER at 55 Vanguard offered a free review of everything. It was free if you moved a certain amount to them. It was very helpful to talk to a CFP. Of course, all the recommendations had a VG theme but just the discussion was helpful. Maybe here is a place to start: https://personal.vanguard.com/us/whatweoffer/advice/overview?Link=facet

 

[ARB57]

Terrific input all. Thank you. One poster asked if I was married. Answer: no. Just me. Another poster asked if my health issues might have a bearing on my life expectancy. Hard to say...for what it's worth, based on the specific health issues and my family history, I think that a 20-25 year retirement is much more likely than a 40 year retirement.

Also, I was quite liberal in my expense calculations. I said that I was at $3500 a month now, expected to be at $4000 in a year (health insurance) but would LIKE to have $5500 to work with. In reality, it looks like my expenses are only about $2800 now....likely to rise to $3300 in a year. If I could generate something more in the range of $4200 a month...that would be very comfortable. That changes things considerably.

Bottom line: I've simply got to do something with some/much of the 115K in my 401k's, 385k in cash...and the CD's coming due this year (all totaled about 850K.) That's going to mean some equity exposure (probably Vanguard Index funds.) I see interest rates rising down the line...but not anytime soon.

Keep the feedback coming. Thanks again. If it were YOU (and I know it's not,) what would you do?

 

[obgyn65]

Hello ARB57 - I would also think of annuitizing some of my savings, especially when the CDs expire.

Keep the feedback coming. Thanks again. If it were YOU (and I know it's not,) what would you do?

 

[REWahoo]

With your record of risk aversion and in the absence of unclemick: Psst, Wellesley.

 

[REWahoo]

Hello ARB57 - I would also think of annuitizing some of my savings, especially when the CDs expire.

ARB, before you head down this road, you need to do a lot of homework. This insurance product could work great for you or it could be something you really regret buying. Most annuities are a lot like the lyrics in the song Hotel California, "You can check out any time you want, but you can never leave."

 

[NW-Bound]

Darn! I have been waiting patiently for this...

YouTube - Eagles Hotel California

 

[DeborahB]

ARB, before you head down this road, you need to do a lot of homework. This insurance product could work great for you or it could be something you really regret buying. Most annuities are a lot like the lyrics in the song Hotel California, "You can check out any time you want, but you can never leave."

I am very wary of annuities. I can't really explain it but I am. Every time I hear a presentation I feel like there are a lot of "gotcha's". One is the $12K commission the broker got for selling a $100K annuity to my SO (against my advice). There's a lot of motivation to sell annuities.

I used to be in the biz - selling financial planning, mutual funds, etc. for a couple of years (commission sales was just NOT for me). It was so long ago that I've forgotten most of what I knew then. But I have heard at least one annuity presentation lately (thanks to SO's interest...).

If it smells bad, it probably is. Just my two cents on annuities. I like control of my money.

I wish I could find a nice high-yielding product with no risk whatsoever to recommend!

 

[SecondCor521]

Well if you were me, you'd probably be at an 80/20 allocation at your age.

If I try to put myself into your shoes, where I intellectually realize that I need to be more aggressive in my asset allocation to meet my needs, I think I would do it gradually and see how it felt for a while before tweaking it further.

In other words, if I were currently at a 0% equity allocation and Firecalc runs suggested that 40% was something more what I needed, I wouldn't go there right away. I might shift to 10% or 20% equities for a while and confirm that I was OK with that before shifting further.

The reason I say this is that many folks shift their allocations too aggressively and then, when things get volatile, shift their allocations conservatively again rather rapidly. This is a pretty good way to lose money.

I like Vanguard, so what you might do is look at some of their moderate risk funds (balanced funds, target retirement funds, etc.) and pick one of them.

2Cor521

 

[Koolau]

I'm gonna come at this at a totally different angle, if you don't mind.

IF IT WERE ME, here is what my thought process would be:

It's much easier to control income and expenses than it is to control investing results. For income, I would be looking for some sort of PT w*rk, but that would be after trying to get my expenses down. After you run the numbers through FIRECALC, see how much you have to spend (with a near 100% "safe" withdrawal rate) and then adjust your spending accordingly. It may not be all that much fun, but it can be very effective. You may not be able to control your health care expenses much, but there are many, many ways to cut expenses.

Are you willing to move (maybe even to another state) to avoid going back to w*rk?

Are you willing to move to a smaller place?

Could you cut back on (just a for instance) cable TV?

I could go on, but the point is, if someone put a gun to your head and said, you must cut your expenses - or else - I'll bet you could do it. It wouldn't be fun, but you could find ways and I'll bet they would occur to you in rapid-fire succession given the "or else" situation. Well, your "or else" here, fortunately, is not a gun to the head, but whether you have to go to w*rk! I consider that a much better "threat" to have pointed at your head.

At some point, you need to decided what you want. Do you want to be retired or do you want to spend more money. Many here have decided that they want to be retired and they will make the sacrifices (such as lower spending) to make it work. Honestly, I don't consider your proposed level of spending "outrageous". It's just that FIRECALC will tell you it's not a very safe level of withdrawal. You need to either become comfortable with more equities or find a way to limit your withdrawals.

None of this is "advice" on my part. I went through this decision making process myself and came out on the side of retiring (and no PT w*rk) but limiting my withdrawal to significantly less than 4%. The downside is that I can't spend as much as I might like. Only you can decided what works for you. Fortunately, we have some good estimating tools at our disposal to play "what if" games. Play the games for a while and then see what YOU are comfortable with - that would be my "advice" at this point.

Best of luck. One thing for certain: You have a "problem" that many would envy. I hope you can step back and look at it that way from time to time. I know it doesn't change your situation but I'm guessing you will be even more thankful that you have as many choices as you have.

Oh, and don't forget, YMMV.