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Need Suggestions on Investment strategy
Old 01-02-2004, 09:35 PM   #1
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Need Suggestions on Investment strategy

I am 47 and have been offered an early retirement from my job. I am in a dilemna whether to take the offer or not. I have 22 years with the company and they have offered a 4+4 + 30% retirement package. I can either take an monthly annuity of $1540 or a lump sum of 270,000. I also have $155,000 in my 401k. If I do take the package, I need guidance to where I need to put the money. I plan to go back to work for another 8 year not to touch the money until at least I am 55 and then retire completely. I do want access to the money in case I am in a bind but I have about $90,000 that I can tap in the meantime.
I consulted a financial advisor and here is his suggestions- Separate the money ($425,000) into 4 different baskets (100,000+ each) and 2 would be in a traditional IRA and the other 2 in a variable annuity that guarantees a return of 6%. The 2 IRA's would be invested in mutual funds that are conservative and moderate. These 2 IRA would be where I can access the money in an emergency. The 2 variable annuities will be invested aggressively. If I understand him correctly, he will have control of the investment directions of all the monies. I don't want to lose any of the money and I don't know if this is the right way for me to invest it. Please help.

Phoneguy
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Re: Need Suggestions on Investment strategy
Old 01-02-2004, 10:42 PM   #2
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Re: Need Suggestions on Investment strategy

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If I understand him correctly, he will have control of the investment directions of all the monies. I don't want to lose any of the money.
Phoneguy, if you don't want to lose any of the money, don't even consider giving the salesman control of the investment decisions. Put the "adviser" on hold and learn to do it yourself. Put the money in a savings account for a few months, and read a few good books. Then decide. My personal favorite for beginners is Personal Finance for Dummies by Eric Tyson, but there are many others.
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Re: Need Suggestions on Investment strategy
Old 01-02-2004, 10:51 PM   #3
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Re: Need Suggestions on Investment strategy

Bob,

Thanks for the advice. I pretty much am a novice when it comes to investing. I've delve some but not much. I've heard stories of advisors losing entire portfolios of their clients and that is what I am most afraid of.
In the meantime, I might do as you suggest and park the money in a bank account until I can learn more about investing.
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Re: Need Suggestions on Investment strategy
Old 01-02-2004, 10:57 PM   #4
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Re: Need Suggestions on Investment strategy

The SEC has some information about variable annuities here:

http://www.sec.gov/investor/pubs/varannty.htm

As Bob_Smith says, you're being sold a product from which the salesman expects a profit, so make sure you understand the fees and downside risk if you decide to take that route.

I'm sure you already calculated this yourself, but the annuity offered by your company is basically equivalent to a fixed annual 6.84% of the lump sum -- use that as a baseline if somebody wants to sell you another annuity.
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 09:47 AM   #5
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Re: Need Suggestions on Investment strategy

Wow when I read the initial post I expected to see a lot of negative backlash on annuities.

For the most part everything i've seen says annuities are a no-no. You're locked into a return that is usually lower than you can do on your own with a balanced index fund, and you're at risk that the provider of the annuity goes belly up. As I understand it, annuities are not "insured" in any way.

I would suggest this:

Do a budget for your expenses while sitting around and/or job hunting, this should be different from your existing budget - lower. Determine the maximum time you think you'll be looking for a job. Multiple by budget. Reserve half of that cash in your checking account.

Roll over your 401k to a good financial supermarket. I think most people here use Vanguard as I do. Cheap, lots of investment choices, nice web site, easy to deal with. I've had good customer service with them.

If you want to wait a while and self-educate, I think most agreed in another thread that a good parking place for cash is the vanguard short term corporate bond fund. If you want your money to be 'engaged' now while you learn the ropes, you can do a lot worse than one of the vanguard "target retirement" funds, or one of their "lifestrategy" funds. One of their standard balanced index funds is also a fine choice and I believe used by several here.

The "target retirement" funds are pretty simple: pick the year in which you're planning retirement and buy that fund, for example "target retirement 2005" if you're planning on retiring next year. Each of these funds autobalances each year to reduce risk and increase income, moving from a stock heavy portfolio to bond heavy over time. You do nothing except look at it when you feel like seeing what your money is doing.

The "lifestrategy" funds give you more hands on. There are a peck of them, from "income" to "aggressive" funds. Each shows you their allocation of stocks and bonds. The riskier funds have higher chance of return (and loss). The allocations never change, so you move your money from one lifestrategy to another when you feel its appropriate.

The "Balanced Index Fund" simply holds 60% stocks and 40% bonds, of varying sizes and types. This is the "standard allocation" many financial planners start people on. It charges a very low management fee.

Lastly, one favorite pick of mine is the Vangard STAR fund. The STAR fund is a "fund of funds". You put a clump of cash into it and vanguard invests that in a dozen or so of their diverse funds, from stock to bond to international. Its a nice diverse mix that should experience reasonable volatility and give a nice return. It charges less than a half of 1% for fees, which is pretty cheap considering the sophistication of the investment instrument.

If you're not going to vanguard, two balanced funds that charge fairly cheap rates and are buyable at almost any broker or financial service firm are the Oakmark Balanced (OAKBX)and Dodge and Cox Balanced (DODBX). Both have performed well over time, including the rough patch over the last 4 years. Good management, long track records, neither company is currently "in trouble" with the feds for the fund scandals. All in all you can find worse places after looking a long time. There is not a lot of overlap between the two in terms of top stock holdings, so you can buy both to diversify further.

What I would suggest is rolling your 401k to the vanguard IRA and use the target retirement fund corresponding to the nearest year to your "true" retirement between 59-65 for that. If you keep half the job seeking budget in cash, put the other half into the short term corporate bond fund, where it will at least stay ahead of inflation and its fully liquid. The remainder of your lump sum into the vangard balanced index.

Then go read all the books that are suggested.

Disclosure: all my money is at vanguard. Amazingly, I own absolutely none of the funds I mentioned although I've owned DODBX and OAKBX previously and been well served by them.
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 10:55 AM   #6
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Re: Need Suggestions on Investment strategy

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Wow when I read the initial post I expected to see a lot of negative backlash on annuities.
Annuities have been around forever and are the basis of fixed pensions that have been the mainstay of traditional retirement.

Personally, I wouldn't touch them, and variable annuities seem especially complex and throw up several red flags as mentioned in the SEC publication.

However, I wouldn't recommend stocks to somebody who "doesn't want to lose any of the money." With most annuities and long-term bonds, you know exactly what you're getting -- preservation of capital (or income) that will lose buying power over time due to inflation.

With stocks, you're likely to get a higher rate of return based on historical data, and you're guaranteed to get much higher volatility.

Bottom line: ignore all advice; seek out hard data; make your own decisions based on the data.
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 01:00 PM   #7
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Re: Need Suggestions on Investment strategy

Re: recommendations of stocks. Agree that there's volatility involved and clear risk of loss of moneys. However with the aggressively invested annuities and moderate risk mutual fund IRA's that were mentioned, I assumed some significant stock investment is already on the table. Further, with the amounts mentioned, some stock investment is virtually a necessity to establish the growth needed to retire in an 8 year period.
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 01:45 PM   #8
 
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Re: Need Suggestions on Investment strategy

Hello TH! Interested in your opinion that some stock
was a "virtual necessity" before retirement. I'm an
exception as usual, but I do have a confession.
I did own stock (still do), but it's in my own small
company. I think it provides many of the benefits
of ownership in public companies, plus total
control, more or less. So, I have owned equities.
I just bet on myself, not others.

John Galt
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 01:49 PM   #9
 
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Re: Need Suggestions on Investment strategy

Hello Phoneguy! Listen to Bob_Smith. You've done
well. Don't blow it now.

John Galt
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 02:23 PM   #10
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Re: Need Suggestions on Investment strategy

Quote:
*I am 47 and have been offered an early retirement from my job. I am in a dilemna whether to take the offer or not. I have 22 years with the company and they have offered a 4+4 + 30% retirement package.
Hi phoneguy!

What will happen if you DON'T take the ER offer? Will you likely be laid off soon? Will a lay-off package likely include ALL of the ER offer, PLUS 1-2 weeks severance for each full year of service? And continued health benefits in a layoff package, at least for some period of time?

I have seen layoff packages include all of the ER "offer" details, plus the extra severance benefits. In spite of companies saying at the time that "This ER offer will be the best there is, blah blah, etc. etc." Then the ER "takers" were processed out the door. Later, a big layoff happened. With your years of service and age, a layoff may be the best deal. It is something that you should snoop around and see what you can find out.

There may be legal precedent for what I mentioned above. That an offer for ER, that was not duplicated for non-takers who ended up getting laid off shortly thereafter, was discriminatory to those who chose to keep working. There has to be some reason they are doing it, it ain't out of the kindness of their heart, that's for sure!


My advice on annuities:

Fixed Annuity at your young age - Run!

Variable Annuity - Run away screaming!
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 03:15 PM   #11
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Re: Need Suggestions on Investment strategy

Quote:
Hello TH! Interested in your opinion that some stock
was a "virtual necessity" before retirement.
John -

I guess the answer to that requires your thoughts on how much a novice investor needs to have in hand before deciding to ER. Especially one that isnt as frugal as you might be.

I'm thinking the 400k-500k is pretty minimal and 700k is a lot more palatable.

Considering the recent debate regarding the imminent destruction of the bond market due to inflation and interest rates, putting ones fate to long term high yield bonds seems concerning.

To turn ~400k into 700k within 8 years without long term high yield bonds leaves only a few options: stocks (presuming you think forward returns mirror the rear view mirror ones), fast appreciating real estate (a real potential hole in the ground for someone who doesnt want to lose any capital), and what else?
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 03:18 PM   #12
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Re: Need Suggestions on Investment strategy

By the way, the "dont take the first ER deal" is a good one. I did take a "run away" option from my last job, but not the first offer. When not enough people took the bait, they juiced up the deal a bit but not for those who already took the first deal.

The layoff option wasnt quite as good. Basically they declared a range of people as no longer having their current job and they were put into a "redeployment pool". They could interview freely and temporary jobs counted as extension of their time in the pool. After 2 months in redeployment without a job, you got a little severance pay and a kick in the pants on the way out the door. You are given the option at start of redeployment to take the 2 months pay and terminate immediately.

So check into the options...sometimes the first deal isnt the best.
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 04:47 PM   #13
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Re: Need Suggestions on Investment strategy

Some comments: Decide if you are going to buy an annuity and compare the company one to the one you could buy with the lump sum. Then decide - don't cash out the pension plan just to buy another annuity without carefully checking the values. Your cashout sounds fair to me, compared to the offer I got. Most of the sentiment for early retirees is to avoid annuities, because of inflation. It does provide a guarentee, so only you can compare the intangible costs and benefits.

I took a similar offer from Avaya 2 years ago - 5+5. I know people who didn't take it, and without the +5 were not eligible for an immediate pension. Some of them got laid off the next year with no package. So keep the company health in mind when deciding. I know there were some wait and see comments above, but there is a potential downside to that as well. At 47 you are probably not eligible for an immediate pension, and may not be eligible for a cash out. Check your plan carefully if the company is in poor health. Also Avaya just stopped further accumulation of defined benefit plans, so those who stayed to add to it, were SOL. (I don't know if any age discrimination suits were filed, not really keeping in touch).

Also as has been said above Don't hand any money to a financial advisor who is paid by commision on sales. If you have to pay someone, go to a fee only one. I can't recommend any, but TAM and IFA have both been mentioned elsewhere on the boards and are index fund oriented. Vanguard has a lot of good index funds, and some advisor program, which I would still take with a grain of sald. Browse around the boards, read, read some more, then decide.

Good Luck
Wayne
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Re: Need Suggestions on Investment strategy
Old 01-03-2004, 09:00 PM   #14
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Re: Need Suggestions on Investment strategy

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I might do as you suggest and park the money in a bank account until I can learn more about investing.
If you do put it in a bank, watch FDIC maximums. It's not likely to be an issue, but why chance it? Check here:

http://www.fdic.gov/deposit/deposits/insured/index.html

If you need to spread it around, ING is paying 2% at the moment, but there may be better rates out there if you search. I'm using ING. The set-up was easy and all online. It's linked to my checking account and I use it to temporarily park cash.

http://home.ingdirect.com/
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Re: Need Suggestions on Investment strategy
Old 01-04-2004, 10:59 PM   #15
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Re: Need Suggestions on Investment strategy

Thanks to all who have given suggestions. They are all useful in my decision. My company gave me only 12 days to decide whether to take the ER package, and looking at my options, I decided to take it. I feel I am still young enough to find another job and work another 8-10 years. Besides, with the ER, my medical and dental are all paid which is a big part of my decision to take it.
One thing was unanimous in most of the suggestions, "Don't let someone take control of your money". I think I got that loud and clear and I will follow it to the letter. As for annuities, I think for now, I will avoid it since I don't know too much about it. Some suggestions to park the money in MM while pondering what to do sounds practical and that is probably what I will do for now.
If anyone can suggest a more specific investmest strategy, I would appreciate it. Please consider this in your suggestions, I am not risk-averse, but just cautious.

Thank you again,
Phoneguy
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Re: Need Suggestions on Investment strategy
Old 01-05-2004, 10:04 AM   #16
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Re: Need Suggestions on Investment strategy

Phoneguy, a wise decision to avoid the annuity, you're too young. And if you take the lump sum of 270,000, and invest wisely, here's what you'd have after 8 years: at 5% 402000, at 6% 436000, at 7% 472000, and at 8% return you'd have 512000. If you take the $1540 per month it will take almost 15 years to get up to 270,000.
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Re: Need Suggestions on Investment strategy
Old 01-05-2004, 05:21 PM   #17
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Re: Need Suggestions on Investment strategy

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If anyone can suggest a more specific investment strategy, I would appreciate it.
Phoneguy, it is very difficult, if not impossible, for anyone to recommend a specific investment strategy. There are too many factors that only you understand about your situation. It's almost like asking someone to help you decide what you should eat for lunch; everyone could take a stab at it, but ultimately, only you really know what works for you. There are plenty of advisers out there who will gladly take your money and tell you what you should do, but it is extremely risky to take anyone's advice. This is something you've just got to dig into and devote the time needed to understand the "menu". This is one of the only things I can think of where you are far better off to do it yourself as opposed to asking experts to do it. That's counter-intuitive, I know, but once you get into it you'll see what I mean.
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Re: Need Suggestions on Investment strategy
Old 01-05-2004, 08:55 PM   #18
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Re: Need Suggestions on Investment strategy

Thanks Bob, your honesty is conmmendable. I know I have to make my own choices but what I was trying to find out is what others have done in the same situation and what made them take that route. I don't intend to follow anyone's suggestion but to learn more. I don't have much time to decide and I am tryng to learn as much as I can in a short time.
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Re: Need Suggestions on Investment strategy
Old 01-05-2004, 10:02 PM   #19
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Re: Need Suggestions on Investment strategy

phoneguy, there are three basic types of investors:

1) Those who don't want to deal with investing. *The best approach for them is to find a fee-based CFP who can move their money into DFA funds. *Like this guy:
http://tamasset.com

2) Those who think they can beat the market. *There are 100's of strategies employed, and a few of them actually work. * Most of us who think this way currently have a large cash (or gold) position because we think everything is overvalued and/or that a perfect storm is brewing that will cause everything to become much more fairly valued real soon.

3) The smart ones who realize you can't time the market, and you can't even figure out which sectors will outperform others, so you fully invest all of your money, but you spread your bets around so that when some sector is crashing, hopefully another is running, so you end up winning, and who cares by how much.

The latter camp typically invests directly in low-cost Vanguard index funds (or ETFs) based on allocations suggested by Modern Portfolio Theory, e.g.:
http://www.efficientfrontier.com/t4poi/t4poi.htm
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Re: Need Suggestions on Investment strategy
Old 01-06-2004, 05:37 AM   #20
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Re: Need Suggestions on Investment strategy

And then there are the 'chickenhearts' - 70 plus percent balanced index(Vanguard LifeStragety funds to get roughly 50/50 stocks/bonds). True purity would be Vanguard balanced index(60/40) or one of the new target retirement series.

Tweaks are ~ 5% REIT index and ~ 5% High Yeld Corporate.

In salute to Monte Python and the Search For The Holy Grail - up to 10% in DRIPS. In the last 35 years I've beaten the market maybe for a couple of years a few times but overall trailed the index 500 by - best guess 2-3% - which strikes me as quite common. Hence I always call them 'hobby stocks'. BTY - I also spend 1$/wk on Powerball when I gas up the truck.

Eleven years in ER and having a ball.



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