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Retirement plan help for 51 year old sister
Old 08-27-2010, 01:00 PM   #1
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Retirement plan help for 51 year old sister

Hi, I am a long time lurker on this site. I am 49 and on my way to retiring in a year or 2 if all goes well. Thanks to everyone for all the information I have received from reading this site for the past 5 years or so.

While I am confident in dealing with my finances I am not secure enough to advise others. My sister has been early retired by her company at 51 and is looking for help. I went to her financial planner with her and was not particularly in agreement with his recommendations. Here is her situation.

Lump pension 500k
401k 370k
Small IRA 20k
Approx 130k in severance savings etc
company pays most of her retirement medical costs
Expenses around 4k per month
135k balance on mortgage no other debt


single, no children, not planning on leaving money to anyone, happy to be unemployed, plans to get a small job with the goal of making 20k or so per year, she has had enough of megacorp, she does not know much about finances but is learning


Her planner is pushing her into variable annuity for 500k pension rollover.
I read all the literature and still don't really understand it totally. The gist is the money is locked up until she is 62 then she starts an income stream. I see no reason for this product for her since the money is already tax deferred and she has no dependants. Does anyone see this differently?

He also wants to put the rest into loaded funds, no details on that yet. I have always used no load index funds myself. .

I would prefer it if she skipped the planner and rolled all the money into vanguard or fidelity and built a portfolio of mutual funds, bonds and cds. with an approx 50 50 allocation.

Any comments or suggestions are appreciated.
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Old 08-27-2010, 01:12 PM   #2
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Quote:
Originally Posted by chewy View Post
Hi, I am a long time lurker on this site. I am 49 and on my way to retiring in a year or 2 if all goes well. Thanks to everyone for all the information I have received from reading this site for the past 5 years or so.

While I am confident in dealing with my finances I am not secure enough to advise others. My sister has been early retired by her company at 51 and is looking for help. I went to her financial planner with her and was not particularly in agreement with his recommendations. Here is her situation.

Lump pension 500k
401k 370k
Small IRA 20k
Approx 130k in severance savings etc
company pays most of her retirement medical costs
Expenses around 4k per month
135k balance on mortgage no other debt


single, no children, not planning on leaving money to anyone, happy to be unemployed, plans to get a small job with the goal of making 20k or so per year, she has had enough of megacorp, she does not know much about finances but is learning


Her planner is pushing her into variable annuity for 500k pension rollover.
I read all the literature and still don't really understand it totally. The gist is the money is locked up until she is 62 then she starts an income stream. I see no reason for this product for her since the money is already tax deferred and she has no dependants. Does anyone see this differently?

He also wants to put the rest into loaded funds, no details on that yet. I have always used no load index funds myself. .

I would prefer it if she skipped the planner and rolled all the money into vanguard or fidelity and built a portfolio of mutual funds, bonds and cds. with an approx 50 50 allocation.

Any comments or suggestions are appreciated.
Chewy,

I think your recommended allocation and choice of firms (Vanguard or Fidelity) is the way to go. Do everything within reason to dissuade your sis from following the advice of the FP - especially the variable annuity.

If you are a long time lurker the warning to stay away from any annuity other than single premium immediate annuities should come as no surprise. I really like this series of articles to explain the issues surrounding buying annuities:

Annuities: Good, Bad or Ugly - Forbes.com
How To Cut The Cost Of A Variable Annuity - Forbes.com
Variable Annuities Don't Belong In Retirement Plans - Forbes.com
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Old 08-27-2010, 01:22 PM   #3
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Quote:
Originally Posted by chewy View Post
Hi, I am a long time lurker on this site. I am 49 and on my way to retiring in a year or 2 if all goes well. Thanks to everyone for all the information I have received from reading this site for the past 5 years or so.

While I am confident in dealing with my finances I am not secure enough to advise others. My sister has been early retired by her company at 51 and is looking for help. I went to her financial planner with her and was not particularly in agreement with his recommendations. Here is her situation.

Lump pension 500k
401k 370k
Small IRA 20k
Approx 130k in severance savings etc
company pays most of her retirement medical costs
Expenses around 4k per month
135k balance on mortgage no other debt


single, no children, not planning on leaving money to anyone, happy to be unemployed, plans to get a small job with the goal of making 20k or so per year, she has had enough of megacorp, she does not know much about finances but is learning


Her planner is pushing her into variable annuity for 500k pension rollover.
I read all the literature and still don't really understand it totally. The gist is the money is locked up until she is 62 then she starts an income stream. I see no reason for this product for her since the money is already tax deferred and she has no dependants. Does anyone see this differently?

He also wants to put the rest into loaded funds, no details on that yet. I have always used no load index funds myself. .

I would prefer it if she skipped the planner and rolled all the money into vanguard or fidelity and built a portfolio of mutual funds, bonds and cds. with an approx 50 50 allocation.

Any comments or suggestions are appreciated.
The loaded funds are because the advisor needs to compensated somehow for his time (or her time). That is common if someone asks a professional for advice.

I add up $1.02 M in assets (Pension+401k+IRA)
I see a $48k need (income)

And two logical paths

1) which pays down mortgage "now" and then invests 885k to supply 48k income (minus the mortgage- so I know that 48k is lower). If mortgage payment was $1500/mo and this went away (18k per year) the new withdraw rate would be 30k per year (income need) on 885k of assets which is 3.3% withdraw rate. Verify my assumptions on the mortgage (those were guesses).

2) which keeps mortgage and uses all assets to fund 48k of expenses.
this plan is a withdraw rate of 4.7%. It should be noted once mortgage is paid off, the expense need drops below 48k.
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Old 08-27-2010, 01:38 PM   #4
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Avoid the financial planner and the VA.

She'll be close to the "4% rule". Around a million in her savings/portfolio and $48k/yr expenses, some of which will disappear when the mortgage is paid off. Earning $20k a year at some (any) job will go a long way to ensure a higher chance of portfolio survivability. I imagine SS is also in her future? So her withdrawals may look like: $28k for the next 11 years until age 62, then, say, the $6000 a year mortgage is paid off and she can get $12000 a year SS, she stops working at 62, and then she draws $30,000 a year from her portfolio for the remainder of her life. This would have her pulling no more than 3% of the portfolio value.

You could probably beat the pants off of the financial adviser's load funds by buying something simple like Vanguard Lifestrategy Moderate or Conservative. Tax efficiency isn't too much of a concern since most of the assets are tax deferred.

Also, I believe Vanguard will provide financial advice for free if your sister is rolling over a half million or so. Yearly "updates" may be free as well - it has been a while since I have looked at what they offer.
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Old 08-27-2010, 01:43 PM   #5
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Thanks for the responses, yes the VA response was predictable, just wanted to make sure.

The mortgage payoff info is something to think about.

And she is eligible for social security when the time comes. 32 year work history.
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Old 08-27-2010, 01:47 PM   #6
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And she is eligible for social security when the time comes. 32 year work history.
Looks like she is in excellent financial shape, especially if she takes a job to supplement her needs for the next few years...and doesn't buy that annuity.
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Old 08-27-2010, 01:58 PM   #7
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Just so you are not stuck being the lone voice in the wilderness why don't you bring her to a "fee only" (someone who does not benefit from annuities and load funds) planner and get a 2nd opinion.
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Old 08-27-2010, 02:08 PM   #8
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Bikerdude, that is a good idea.
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Old 08-27-2010, 02:22 PM   #9
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Or you can put the money in Vanguard and become a Flagship client with 1M.
This will give you an advisor for free with no commissions attached. They will set up the portfolio for her and she can go on cruise control.
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Old 08-27-2010, 03:56 PM   #10
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Or you can put the money in Vanguard and become a Flagship client with 1M.
Fidelity has something similar where you can get free financial planning advice. I don't know what their minimum investment amounts are for the service.
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Old 08-27-2010, 04:06 PM   #11
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For an interesting take on how some Registered Investment Advisors aka Registered Reps think, you should probably browse through their web forum. Here's one such thread courtesy of the bogleheads forum: Bogleheads - A visit to the land of Oz | Registered Rep Forums

The planner is no such thing. They appear to be a sales rep out for your money and nothing more. I'm not sure how to find a decent one. It seems like 90% of them are probably like the one already encountered.
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Old 08-27-2010, 04:12 PM   #12
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Can the Lump Sum pension be rolled into the IRA? If so, why use a variable annuity? The money will be tax sheltered in the IRA.


IMO - Grab your money and run. A low cost balanced mutual fund (or a few) might alleviate some of the complexity of rebalancing and managing allocations.
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Old 08-27-2010, 04:50 PM   #13
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Just so you are not stuck being the lone voice in the wilderness why don't you bring her to a "fee only" (someone who does not benefit from annuities and load funds) planner and get a 2nd opinion.
FYI even fee only planners might suggest annuities

Buyer beware
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Old 08-27-2010, 04:51 PM   #14
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For an interesting take on how some Registered Investment Advisors aka Registered Reps think, you should probably browse through their web forum. Here's one such thread courtesy of the bogleheads forum: Bogleheads - A visit to the land of Oz | Registered Rep Forums
Yikes.
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Old 08-27-2010, 05:37 PM   #15
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For an interesting take on how some Registered Investment Advisors aka Registered Reps think, you should probably browse through their web forum. Here's one such thread courtesy of the bogleheads forum: Bogleheads - A visit to the land of Oz | Registered Rep Forums
I think that article brings up lots of good points that apply to all of the no load mutual fund companies. My experience with the reps for load type places has not been any better. For investing advice I turn to places like books, friends I think are smart, and places like this forum.

I bought up talking to the Fidelity people because it may be free and it gives you food for thought, but I personally am rethinking the whole mutual fund thing myself lately.
I made my own retirement planning model, so I wanted to see if their numbers were in the same general ballpark.

I've been buying TIPS directly, which the Fidelity people don't make any money off of, so of course they try to discourage those kinds of investments, even if they make a lot of sense for your particular situation.
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Old 08-27-2010, 05:47 PM   #16
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I entirely agree with everything in that article.


It's a forum/discussion board, not an article. There are huge differences of opinion voiced by those posting. What do you entirely agree with?
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Old 08-27-2010, 06:00 PM   #17
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From some of the Fidelity-advised portfolios presented here and at bogleheads, the advisors at Fidelity seem to load folks up with lots and lots of actively-managed and overlapping no-load funds. It is almost as if the Fidelity folks ate some bad minestrone soup of funds and puked it up on your portfolio.

In contrast, Vanguard seems to advise a simplified approach of just a few index funds as we have seen from of recent thread here.
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Old 08-27-2010, 06:27 PM   #18
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It's a forum/discussion board, not an article. There are huge differences of opinion voiced by those posting. What do you entirely agree with?
Sorry, my mistake. The first long post looked more like an article with comments. I agree with many of the points brought up by the first poster about staying the course. Of course the mutual fund places are going to say that or else they would lose money. For me I've been on more of a ZVI Bodie, Worry Free Investing path lately. I'm just trying to save enough so I can live off lowly TIPS income and social security, with maybe some business income, too, though I'm not sure how far into the future I can count on the business income.
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Old 08-27-2010, 06:34 PM   #19
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From some of the Fidelity-advised portfolios presented here and at bogleheads, the advisors at Fidelity seem to load folks up with lots and lots of actively-managed and overlapping no-load funds. It is almost as if the Fidelity folks ate some bad minestrone soup of funds and puked it up on your portfolio.

In contrast, Vanguard seems to advise a simplified approach of just a few index funds as we have seen from of recent thread here.
The Vanguard adviser folks seem have got the index fund religion that they even advice against something like Welseley
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Old 08-27-2010, 06:42 PM   #20
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Sorry, my mistake. The first long post looked more like an article with comments. I agree with many of the points brought up by the first poster about staying the course.
The first post is by a "Registered Financial Rep" (think Edward Jones, Morgan Stanley Smith Barney, etc.) railing against the Kool-Aid drinking DIY investors who follow Jack Bogle and his 'cost matters' investment style. What the first poster espouses is 180 degrees from what most many of us posting on this forum subscribe to - that you need a financial advisor to hold your hand (make your 'stay the course' decisions for you) and charge you fees to do so.

At least that's the way I read it...
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