Money Makeover column in the LA Times

[Zantastic]

I always look forward to the money makeover column in the LA Times, but this one leaves me scratching my head a little.

I'm new here and have a lot to learn, but it doesn't seem like the people profiled are quite as rich as the financial advisor makes it seem. Especially to be buying a new Lexus 400h Hybrid right before they retire. Am I wrong? Or do I have more to learn than I thought?

Tough problem: What to do with a $1.7-million nest egg? - Los Angeles Times

Zan

 

[W2R]

According to edmunds.com, the Lexus would cost about $41K -$42K or so. That's really not SO unreasonable for a couple with $1.7 million plus a home in S. Calif plus (or including?) a $480K lump sum from pensions on the way.

On the other hand, I do agree that the lifestyle he describes for them seems a little over the top!! Spending $94K right from the start, with no SS yet, probably would not be my choice were I in their shoes.

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.

 

[Rustic23]

Looks like they will have over 100k in income when SS kicks in. My guess is they are better off than they live. Also, he may look at Lexus brochures, but I bet he does not buy.

 

[chinaco]

They are in pretty good shape financially. $1.7M + $320k in Home equity

Looks like the 1.7 includes his pension in a lump sum. I was a little confused about the pension of $5400... since he is cashing his in, I assume the 5400 is a yearly amount??

I was also a little unclear about the house. They do not own it outright... are they planning to downsize?

If they get rid of the mortgage, I would say they are in great shape.

About the Lexus... I suppose it was a one-time splurge. It would not have been my choice.

 

[Patrick]

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.

$888K is not so hard to do, considering that 401Ks allow much larger deposits than IRAs and that compounding over the years is a great help.

I do question, however, the recommendation that they become philanthropists and give away some of their net worth. They're gonna need all the money they have when hyperinflation and dollar devaluation drives up the cost of living. Being a millionaire doesn't mean much when everything costs 10 times what it used to - you're really just a $100,000aire.

 

[Spanky]

Kessel also admonished the couple to stop taking chances on the market. In 2003, Judy followed the advice of investment guru and market timer Bob Brinker and pulled about $350,000 out of stocks, stowing it in money markets. After the market tanked, she reinvested the money and rode the market's rise, gaining $200,000 on her investment, a 57% increase.

A brave woman!

 

[Spanky]

They are in pretty good shape financially. $1.7M + $320k in Home equity

Looks like the 1.7 includes his pension in a lump sum. I was a little confused about the pension of $5400... since he is cashing his in, I assume the 5400 is a yearly amount??

I wonder if the home equity is real given the recent decline in pricing. It's plausible that the housing market of the Southern California is still blossoming.

I was puzzled about the pension also. The $5400 pension may not be his.

 

[CyclingInvestor]

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.

They have existed since the early 80's. It is not unreasonable to have twice that
in IRAs/401ks if you maxed them out for 25 years.

 

[ziggy29]

They have existed since the early 80's. It is not unreasonable to have twice that
in IRAs/401ks if you maxed them out for 25 years.

As a data point, I've only really been strongly investing in my 401K plan since 1990, plus Roth IRAs since 1998, and I have about $440K in mine, even AFTER the recent declines. My wife has almost none, but if I were married to someone with a similar income and savings regimen as I had in all that time, that would be $880K.

 

[RockOn]

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?

 

[ziggy29]

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.

A 4% SWR is a heck of a lot less risky now than it was started on November 1, 2007, before a 15-20% haircut in the stock market.

I also think that even if you think 4% is too risky, I think it's reasonable to draw 3.5% to 4% at least until SS kicks in, at which time you can reduce the withdrawals to 2.5-3% to account for the extra SS income.

 

[travelover]

........... 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.

Some 401(k)s allow after tax contributions, as well . I was contributing 40+K a year to mine before I retired.

 

[Dog]

They still have a mortgage on their home and they made no mention of healthcare. They do have a nice nest egg, but the state of the economy is an unknown. And, they live in California! I would remain conservative in my spending for the first few years and get a feel for retirement.

 

[Moemg]

http://www.blanchardonline.com/investment_news/vol11_page1.php


Ira's were passed into law in 1974 .

 

[RockOn]

A 4% SWR is a heck of a lot less risky now than it was started on November 1, 2007, before a 15-20% haircut in the stock market.

I also think that even if you think 4% is too risky, I think it's reasonable to draw 3.5% to 4% at least until SS kicks in, at which time you can reduce the withdrawals to 2.5-3% to account for the extra SS income.

I agree 100%. It does bother me when I see 4% as if it is a given. Safe bonds are not paying much and stocks are always risky. Most say not to expect more than 6-7-8% on stocks for several years. How that adds up to 8.8%, I do not know. You are correct the risk has dropped. If you are retired and had that 15-20% haircut, I'm sure you are questioning that 4% SWR today. If you did lose 15%-20% and are around 80% in stocks without other hedges, that WR is now approaching 5%. We could still be fairly early in a bear market, we cannot tell for sure. Inflation has to be accounted for also, if you are down 15%, you are down 15% plus inflation for that period, it can add up fast. I wish it was as easy as the article suggests.

 

[LOL!]

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.

 

[growing_older]

Looked to me like they did a good job saving and living below their means. If they continue as they were, with 1.7 million even with their mortgage they look to be in good shape. If they follow the planners advice and raise their spending to 94,000 (about 5.5%) then it looks not as good. Hard to tell from the article what all is included in the 1.7 million, but maybe SS was counted against income needs even before it kicks in. In any case a 40K splurge one time is not likely to be a problem. A 40K splurge as an annual habit could put a big pinch on their plan.

 

[Alan]

The Haibachs have amassed about $888,000 in 401(k) and IRA accounts, $350,000 in cash and money market accounts and $19,000 in other investments. In the fall, Steve will receive a $430,000 pension payout, which Kessel recommends he take in a lump sum. The couple's only debt is a $400,000 mortgage on their home, valued at $720,000.

They won't have the $1.7M until this Fall, giving them about 5 years before collecting $33K/yr SS plus a small pension of $5.4K. They also expect an inheritance of $300K sometime in the future so they are secure enough, but I wouldn't start off drawing $94K/year assuming they retire this Fall as this would be a withdrawal rate of 5.5% for the first few years.

I can see how they can have got $888K in 401(k) and IRA's between them. We didn't have anything in either before 1993 and now have approx $600K in 401(k)s and IRA's

I can also relate to their history of managing with 1 car. I used to car pool and DW had a child seat on the back of a bicycle. There was 1 year in Scotland when I couldn't car pool so I bought a racing bike and used to cycle to/from work each day (6 miles each way - up hill both ways)

 

[Zantastic]

They have done an outstanding job of saving! I just got a queasy feeling about the analyst's advice to withdraw so much money so soon and splurge. But then I'm a nervous Nelly at the moment.

 

[Midpack]

Looked to me like they did a good job saving and living below their means. If they continue as they were, with 1.7 million even with their mortgage they look to be in good shape. If they follow the planners advice and raise their spending to 94,000 (about 5.5%) then it looks not as good. Hard to tell from the article what all is included in the 1.7 million, but maybe SS was counted against income needs even before it kicks in. In any case a 40K splurge one time is not likely to be a problem. A 40K splurge as an annual habit could put a big pinch on their plan.

Exactly what I was thinking underlined above. They've done great and gotten themselves in good financial shape, why blow it by living high (at an arguably unsustainable withdrawal rate) now? Looks like they could retire if they wanted and live pretty much as they have. Ditto the comment, who FA'd the article?

 

[chinaco]

Exactly what I was thinking underlined above. They've done great and gotten themselves in good financial shape, why blow it by living high (at an arguably unsustainable withdrawal rate) now? Looks like they could retire if they wanted and live pretty much as they have. Ditto the comment, who FA'd the article?

I did not read it like that. I read 94k total.

94k - 33k (ss) - 5k (pension) = 56k/year from the 1.7M. That would be a 3.3% withdrawal rate.

Did I interpret it wrong?

 

[Spanky]

They both work and both contribute to 401(k)s, ...

I thought he's eligible for a big, fat pension. Can one contribute both 401K and a defined pension plan as well?

 

[Spanky]

If they get rid of the mortgage, I would say they are in great shape.

Agreed since mortgage payment is almost half of their expenses, assuming the loan is about $400K (most likely is a lot higher).

 

[Alan]

I thought he's eligible for a big, fat pension. Can one contribute both 401K and a defined pension plan as well?

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

 

[Alan]

I did not read it like that. I read 94k total.

94k - 33k (ss) - 5k (pension) = 56k/year from the 1.7M. That would be a 3.3% withdrawal rate.

Did I interpret it wrong?

That is correct if he retires at 62, but they are planning to retire at age 57 - this Fall when he gets his pension lump sum which gives the $1.7M total to live off for the first 5 years before SS and annual pension start.