Money Makeover column in the LA Times

[Spanky]

Yep, I can attest to that, it's wonderful

That's great that one can contribute to a 401K plan and participate in a defined pension plan. I guess the pension plan of the gas utility company in southern cal must be very generous and it's salary for a technician is also quite attractive as evident in the amount of his cashed-out pension.

 

[RockOn]

My, my! What nitpicking! These folks have saved a third of their income over the years. They both work and both contribute to 401(k)s, so getting to a million in 401ks/IRAs would be pretty trivial for them over 30 years of working. My spouse and I are there after working only 20 years. You just have to max out every year and get a little match from your employer. You certainly don't need dubious after-tax contributions.

They live on sub-$70K a year now and can expect $33K in SS and $5.4K in pension income in about 7 years. As for the Lexus, that was just them dreaming. They also dreamed of buying RV.

Anyways, folks reading this thread should read the article to see how well this couple has done. The responses in this thread paint the wrong
picture.

Im not saying 1.7M isn't great, it is. They are doing great. But when Kessel tells them they are going to die with too much money, to give away more money, to be freewheeling, that they whould start withdrawng $94k and their portfolio will earn 8.8% and grow to $9.4M. That is about the worst advice I have ever heard.

 

[Alan]

Im not saying 1.7M isn't great, it is. They are doing great. But when Kessel tells them they are going to die with too much money, to give away more money, to be freewheeling, that they whould start withdrawng $94k and their portfolio will earn 8.8% and grow to $9.4M. That is about the worst advice I have ever heard.

I agree. We don't know the full extent of the interview, but this does sound pretty crappy advice summarized like this.

 

[Rustic23]

I believe DW and I will be able to give away more money, and which ever of us die last can give it away in their will!

 

[jazz4cash]

It doesn't add up to me. $1.7M at age 56 isn't close to over the top for a Southern Cal lifestyle IMHO. At a ultra safe 2.5% withdrawal rate (a 4% SWR invested in the stock market at these valuations is risky, I don't care what anyone tells you) is only $42,500 per year until SS kicks in. I wouldn't be wasting the money. Telling them to expect 8.8% a year means being very lucky and having atleast 80% in stocks. What kind of advice is that, am I missing something? 40 year life expectancy, at least a few more bear markets in their lives. Who wrote that article?

This is the piece that confused me also. I think OP is correct in challange these assumptions.

Another amusing element is all the credit given to frugal lifestyle and then the admissions that there are two inheritances in the mix and the Bob Brinker windfall is responsible for a significant piece of thier portfolio, but they slough that off as luck. I don't really see how many folks would find this couple's scenario helpful

 

[jazz4cash]

What boggles my mind is $888K in 401Ks and IRAs. I wonder if that is even possible, given that these have not existed forever. Maybe so for those with substantial $$$ in them through the 1990's, but I have no idea.

My ex-megacorp was an early adopter of the 401k. I think it was around 1983-4. We were able to roll-in funds from the ESOP plan that was replaced by the 401k. According to last years annual summary there are several employees/retirees with over 1M and one person has >5M.

 

[W2R]

My ex-megacorp was an early adopter of the 401k. I think it was around 1983-4. We were able to roll-in funds from the ESOP plan that was replaced by the 401k. According to last years annual summary there are several employees/retirees with over 1M and one person has >5M.

Amazing! Thanks, jazz4cash and everyone, for explaining this and broadening my horizons. Most people I know seem to have far less.

 

[packrat44]

In the fall, Steve will receive a $430,000 pension payout, which Kessel recommends he take in a lump sum.



I find it disturbing that a CFP would recommend a client take such a large pension payout in a lump sum, especially on top of almost a full year of wages. The taxes would be terrible. Why wouldn't a CFP recommend rolling it into a IRA?

 

[LOL!]

packrat, pension payouts can go directly to an IRA, so I assumed that's what was going to happen. We see this question from time to time on this forum: Should I take lump sum or annuitize my pension? The LS goes to an IRA.

 

[packrat44]

packrat, pension payouts can go directly to an IRA, so I assumed that's what was going to happen. We see this question from time to time on this forum: Should I take lump sum or annuitize my pension? The LS goes to an IRA.

My mistake. Thanks for the clarification. When ever I have heard someone referring to taking their pension as a "lump sum" it was in the form of cashing out, not having it rolled over into a IRA or another pension plan (if they were changing jobs).

DW and I met a couple 3 days ago who were convinced into the husband taking his pension as a cash "lump sum" last Nov when he retired. Now they are upset that their taxes are going to be so high.

 

[Alan]

My mistake. Thanks for the clarification. When ever I have heard someone referring to taking their pension as a "lump sum" it was in the form of cashing out, not having it rolled over into a IRA or another pension plan (if they were changing jobs).

DW and I met a couple 3 days ago who were convinced into the husband taking his pension as a cash "lump sum" last Nov when he retired. Now they are upset that their taxes are going to be so high.

When DW retired 4 years her lump sum pension was rolled into her 401(k) and then a couple of months later we rolled the 401(k) into an IRA.

Whoever advised that couple you mentioned was simply stupid, and confirms that most people need a FA for even the basics.

 

[LOL!]

I guess it goes both ways. That Frontline show on retirement did show a couple that withdrew their 401(k) all in one year and lost a big fraction of it to taxes.

 

[haha]

The Haibachs need to live it up a bit more and help those who are less fortunate than they, he said. As extreme savers, they can balance their thrift through more volunteering, charity and pleasure-seeking, he said.

Do you think that the FA profession may draw more than its share of bossy busy-bodies?

I vote the FA balance his life with more vounteering, charity and pleasure seeking. Maybe Alexandra Dupre has a free time slot soon?

Ha

 

[jazz4cash]

My mistake. Thanks for the clarification. When ever I have heard someone referring to taking their pension as a "lump sum" it was in the form of cashing out, not having it rolled over into a IRA or another pension plan (if they were changing jobs).

DW and I met a couple 3 days ago who were convinced into the husband taking his pension as a cash "lump sum" last Nov when he retired. Now they are upset that their taxes are going to be so high.

The point to me is this: I would expect the writer to make it crystal clear that the lump sum was being rolled over to an IRA tax-free and we would not be debating this issue. I guess I missed the boilerplate too.

The more I think about the whole article, it's more of a gossip column than a self-help article.

 

[chinaco]

The columnist could have butchered the piece. Who know if important detail was left out.

The couple is in pretty good shape. As long as they stick to the basic LBYM approach they should be fine.

The main part left out was the question about health care expenses. This is a large oversight in the article.

 

[Milton]

Some of the advice does make sense, and I do think that they probably can ease the pursestrings somewhat. But it would be better to ease into things gradually, rather than beginning retirement by purchasing a fancy car and increasing their annual charitable donations by a factor of 8.5.

And haha makes a valid point: if the couple was genuinely interested in volunteerism or socially conscious mutual funds, chances are they would not need the advisor to push them in those directions. Taking a holistic approach to money management shouldn't mean pushing your personal values on your clients.

P.S. IMHO, any couple who at ages 55 and 56 has liquid assets of only $1.3 million (not counting the anticipated lump-sum value of the pension), an outstanding $320,000 mortgage, and average annual living expenses of $63,000 is neither "ridiculously secure" nor "extreme savers".

 

[A854321]

I have to agree with prior criticisms:

1. Expecting a return of 8.8% over the 40 years this couple has to plan for is just far too high a risk, especially given the market and global changes in the last 6 months.

2. Their outstanding mortgage negates the lump-sum. They need to get rid of that mortgage before even considering themselves retired, IMHO.

3. Average living expenses of $63K would be less if they got rid of that mortgage. I agree that is not particularly extreme savings for living in so Cal.

 

[clifp]

I agree with consensus. The couple had done a good but not exceptional (by the standards of the board) job saving and is well positioned to retire early with no major change in their lifestyle.

It seems foolish to the point being irresponsible to say that the should buy Lexus give away their money etc. I am in a better financial position than they are, and after a weekend where a $20 stock in a blue chip company Bear Sterns is suddenly worth $2... My confidence in making 8-9% over the next 30 years isn't very high.

 

[Milton]

after a weekend where a $20 stock in a blue chip company Bear Sterns is suddenly worth $2

Actually I believe it is rather worse than that: Friday's closing price was approx. $30. Thursday's was approximately $60! And less than a year ago, Bear Stearns was trading for upwards of $150.

Ugly!

 

[Spanky]

3. Average living expenses of $63K would be less if they got rid of that mortgage. I agree that is not particularly extreme savings for living in so Cal.

The expenses will go down to about $40K if the mortgage is paid off.