MM for now. Then what?

[Badger]

Both my parents are now gone and I have received an inheritance of $350k. Although not spring chickens my wife and I will retire in a year at 63 so we have a few years left. When we combine SS, small pensions, and what we have saved (now mostly in TRPrice 2010 and 2015 retirement funds) I figure we will have the same income as we have presently (I ran firecalc). The house is paid, the children are grown, and we have TriCare health insurance.

It has taken 3 years for our investments to get back to where they were after all the ups and downs and I am not interested in investing the inheritance so that it will be on a wild ride in the future. For now it will be placed in a MM account until I can get a better idea of what would be appropriote for us to do.

Investing in stocks seems like it is often manipulated by the big boys and bonds don't appear to be a good bet at the moment. I have tried to understand investing but as you can see by my resorting to retirement funds I'm am not too confident in selecting either funds or stocks and I could sure use some guidance.

Vanguard Wellesley appears to be a popular and more conservative investment that can provide dividends. I sure would appreciate some good suggestions for me to explore.

Cheers!

[Green Retirement]

Investing is not the most important or hardest part of retirement planning. Wall Street makes it confusing on purpose.

50% S&P 500 Index fund - 50% Short-term Treasury Direct. Withdraw 4.5% of your assets each year and place it into a money market account to pay for your annual expenses, and re-allocate your assets once a year so that your assets remain divided 50/50.

What you need to concentrate on is your retirement budget. Take your net worth, multiply it by 4.5%, add in your annual Social Security income. That is your annual budget. Create a retirement budget that does not exceed that amount and you can enjoy a worry-free retirement. Now start dreaming.

[Bestwifeever]

What about a TIPS fund or TIPS themselves? I think that would remove the risk of losing value.

[Animorph]

I would have no problem keeping 3 to 6 years pretty much in cash just before retirement. Spend it first, down to the level you want permanently. That gives you a buffer during the critical first few years of retirement. I'm normally 100% equities and I'm retired, though DW is not yet, so you may prefer even a longer cash buffer.

Otherwise, or with any surplus, I'd just add it to your portfolio at your desired allocation levels, just as if it had been there for years. If you can't stand doing that, then do it in periodic chunks. The TRP funds should be fine for this.

[Green Retirement]

BestWifeEver:
Good point. If you allocate into short-term treasuries you are basically doing the same thing and protecting yourself against inflation. Plus, I don't trust the Govt's CPI, since it doesn't include food and energy. And, most importantly, you get a higher yield on regular treasuries as opposed to TIPS.

[LOL!]

If you don't trust stocks and bonds, then you are limited to CDs. Nothing wrong with having a ladder of CDs if you have a ton of money.

If your pension is indexed to inflation and since your SS is indexed to inflation, you may not need the inflation-fighting slug of stocks that everyone else does.

As written previously, you could purchase TIPS and hold them to maturity. You could also search out and buy an inflation-linked single premium immediate annuity.

Another possibility is to spend down the inheritance while delaying SS benefits until age 70. An oft-mentioned strategy is to collect the benefit of the lower-paid spouse sooner while delaying the SS for the higher paid spouse until age 70 or so.

In any event, I don't think you need Wellesley or Wellington or any of those mental crutches of hiding equities behind bonds in a balanced fund.

[Alan]

Quote:

Originally Posted by LOL! If you don't trust stocks and bonds, then you are limited to CDs. Nothing wrong with having a ladder of CDs if you have a ton of money. If your pension is indexed to inflation and since your SS is indexed to inflation, you may not need the inflation-fighting slug of stocks that everyone else does. As written previously, you could purchase TIPS and hold them to maturity. You could also search out and buy an inflation-linked single premium immediate annuity. Another possibility is to spend down the inheritance while delaying SS benefits until age 70. An oft-mentioned strategy is to collect the benefit of the lower-paid spouse sooner while delaying the SS for the higher paid spouse until age 70 or so. In any event, I don't think you need Wellesley or Wellington or any of those mental crutches of hiding equities behind bonds in a balanced fund.

I think this is pretty good advice. You have exposure to stocks and bonds in your target retirement funds. If you invest the $350K inheritance in a CD ladder, that will be very secure and provide a nice income stream. If both you and spouse are eligible for SS consider having the one with the lower SS taking it when they retire and the other holding on to full age or to age 70. The spouse can then claim 50% of the higher SS plus has more of an inheritance should he/she live longer.

Plenty for you to think about and research

[lhamo]

Why not just go with 30-year treasuries? Current rate is 4.73. If you stay at a 4% withdrawal rate or less, you are good to go. No fuss no muss. And no worries about changing rates, since you most likely will not need to sell them before maturity.

[Green Retirement]

lhamo:
Good point. 2 reasons why not.

1. The historical average return on 10 Year Treasuries is 6%. The difference btw 4.73% and 6% is $530 per month less income on a $500k bond investment.

2. When we go through a period of high inflation, and everything is cyclical so we eventually will, you will see your standard of living begin to drop dramatically. Your low yielding bonds will be worth much less, so if you need to sell them, you will take a big hit to your principal.

[Peter]

Quote:

Originally Posted by Green Retirement BestWifeEver: Good point. If you allocate into short-term treasuries you are basically doing the same thing and protecting yourself against inflation. Plus, I don't trust the Govt's CPI, since it doesn't include food and energy. And, most importantly, you get a higher yield on regular treasuries as opposed to TIPS.

The CPI does in fact include food and energy. It's the so-called 'core rate' that excludes them, but this isn't how TIPS are indexed.

Also the total rate you get with TIPS can be either higher or lower than straight treasuries, since inflation is added to the coupon rate. In times of high inflation you will likely do better with TIPS.

Peter

[Green Retirement]

Peter:
Thanks for correcting me on the Core v.s CPI. indexing for TIPS. Right now Regular Treasuries are yielding higher than TIPS, but in the long run, I bet they will both yield roughly the same.

[ESRwannabe]

The recent stock market crash has been a very good learning experience for me. Going into the crash I had most of my networth in stocks and still do, and I actually feel more comfortable about it than I did before the crash. So, what I learned is this:

1) Keep enough cash on hand that you can wait out a brutal crash without needing to draw down from stocks. As I am far away from retirement I have my w2 income to live on and am adding to, not spending my investments. However, when I do start living off my investments I could see myself keeping one year in cash and an additional two years in a short term treasury fund.

2) Diversify your stocks globally. While all regions of the world will probably go down together, the come back up will often differ. You can see that this time, in that emerging markets stocks recovered very quickly. It also gives me peace of mind to know that my money is not all tied up in one country/region.

3) If you are stock heavy make an effort to include dividend growth type funds in your portfolio. There will still be dividend cuts from these during a crash but it will probably not be as severe as other types of funds (like purely market cap weighted funds). Be sure not to mistake high yield funds for dividend growth funds. Dividend growth funds usually do not have a high yield. They are generally comprised of old blue chip companies like coke, ibm, j&j, and so on.

4) If you can create a stock portfolio with a dividend yield of 3% or 4%, then you will most likely have no need to sell shares in order to meet your withdrawal needs. Dividend cuts do happen but my experience is that they are not as volatile as share price. So, I make an effort to keep my dividend yield at least 2%.

[Badger]

Thanks for all the quick responses and dialog. I have about 2.5 years in cash to suppliment future SS, small pension, etc. for expenses and plan on increasing it to 3-4 years as a buffer once retired next year.

CDs laddering may be an option for a portion of the inheritance in the future but they look mighty lightweight at the moment. A TIPS fund appears to be the most favorable for security. I won't have to hold to maturity as if buying directly and I can keep the earning invested. Are there downsides to TIPS funds?

Vanguard Inflation Protected Securities (VIPSX) seems to be a good place to start looking. Any other fund suggestions will be appreciated. What is the general concensus on purchase - lump sum or spread out over a year?

Cheers!

[LOL!]

Sure there is a downside to VIPSX. It has lost 10% in 6 months in the past. If you are willing to lose 10% in 6 months, then that opens up a world of investments. I always buy VIPSX after it has dropped and sell when it recovers.

So are you willing to buy bonds and/or bond funds? You said you were not in your OP.

BTW, I bonds do not lose value and are inflation-protected. However, you are limited in the amount of I bonds that you can purchase each year.

[Nords]

Quote:

Originally Posted by lhamo Why not just go with 30-year treasuries? Current rate is 4.73. If you stay at a 4% withdrawal rate or less, you are good to go. No fuss no muss. And no worries about changing rates, since you most likely will not need to sell them before maturity.

That'll be an awesome strategy when inflation (and 30-year Treasuries) are at 15%.

I was at a Schwab investment dinner in 2003, seated next to a guy who'd started to buy 30-year Treasuries at the peak of the oil crisis in 1974 and on into the early '80s. Now that they were maturing (and he was in his early 80s himself) he wanted to replicate a bond portfolio with that yield. The Schwab guys were clustered around him like flies on... well, they were clustered around him pretty thickly and enthusiastically.

Quote:

Originally Posted by Badger Thanks for all the quick responses and dialog. I have about 2.5 years in cash to suppliment future SS, small pension, etc. for expenses and plan on increasing it to 3-4 years as a buffer once retired next year. CDs laddering may be an option for a portion of the inheritance in the future but they look mighty lightweight at the moment. A TIPS fund appears to be the most favorable for security. I won't have to hold to maturity as if buying directly and I can keep the earning invested. Are there downsides to TIPS funds? Vanguard Inflation Protected Securities (VIPSX) seems to be a good place to start looking. Any other fund suggestions will be appreciated. What is the general concensus on purchase - lump sum or spread out over a year?

You pay taxes on TIPS' imputed interest every year, not when you redeem them. For that "phantom tax" reason the conventional wisdom is to hold TIPS in a tax-deferred account. But in a fund that may not be as much of a concern, especially if they're trading TIPS at a profit.

Another DCA-from-hell option would be to start buying I bonds, but you'd only be able to do $5K/year paper and $5K/year electronically per SSN. So at $20K/year it'd take about 20 years to put your $350K (plus interest/dividends) in I bonds.

If you're going to put the funds entirely in one mutual fund then give it all to them now and let them figure out how quickly to fully invest it. One caveat is to do it as early in the tax year as possible so that you don't buy a bunch of shares just before a taxable distribution.