Which way to go with Deferred Comp?

[broonsbane]

I will be retiring early next year after 27 years with a defined benefit plan. I will get 67.5% of my current salary and pay health insurance at $200 a month. I live in Illinois (for now) so my retirement income is not taxed by the state. I owe about 90,000 on my home which is worth about $230,000 at 3% interest. I have no car debts or credit card debts. My monthly check before fed tax will be about $9,000 a month. I also have about $250,000 in a 457(b) that is spread through several mutual funds.

My question is, upon my retirement, I can no longer add money to the funds. My monthly check will more than cover the bills so there is no need for me to draw from deferred comp. My questions are, should I keep the deferred comp in the mutual funds or move them to a safe fixed account of 3.5%? I could take out $1k a month and it would last over 30 years. (That is if the calculator I used was correct) I could leave it in the funds and let it grow, but my concern would be if the market tanks, I won't be able to dollar cost average like I have in the past to recoup the loss.

I know these are good problems to have and I would really appreciate any thoughts on which way to go. Thanks for any thoughts or opinions.

 

[joylesshusband]

These two statements contradict each other:

My monthly check will more than cover the bills

and

I won't be able to dollar cost average...

If your pension provides excess income, why not keep on the dollar cost averaging in after-tax investments if/when markets go sideways?

 

[broonsbane]

These two statements contradict each other:


and


If your pension provides excess income, why not keep on the dollar cost averaging in after-tax investments if/when markets go sideways?

It's a deferred comp. I won't be able to make contributions from my salary as it will be a pension. So if it stays in the deferred comp and the market crashes, to my understanding, I can't add into it. Forgive me if I don't understand exactly how it works.

 

[Backpacker]

Tangential question, but is the 457b governmental, or non-profit? Mine is at a non-profit and is at risk, if company goes belly up creditors are ahead of me in getting the 457b money.

 

[pb4uski]

That isn't tangential.... it is important... an arguably critical depending on the financial strength of the sponsor.

 

[VanWinkle]

Your 12,000 per year withdrawal from the 250,000 457B would be 4.8% withdrawal rate. That is not beyond reason, but would perform better with at least a 20-30% allocation to stocks. You could get that through a conservative balance fund with both stocks and bonds. I would keep it simple. The fact that you don't need the 457B money to live on means you could be very safe or you could be more aggressive with 50-70% stocks. It all depends on how well you could sleep at night and not meddle with the funds due to emotions.

joylesshusband was recommending that you take any excess income from the "monthly check" and invest it in a taxable brokerage account in a conservative allocation to keep dollar cost averaging into the market over time.

It can be your traveling/car purchase/inheritance fund.

The 457B can also be rolled into an IRA for more control but that decision needs careful study.

VW

 

[pb4uski]

Your most important decision is to decide an asset allocation (AA). Since your pension exceeds your expenses you are in the catbird seat. There are two schools of thought for such situations. One school of thought is that you have "won the game" and don't "need" to take any risk so should invest all in safe investments (bonds or CDs for example). The other school of thought is that since you don't "need" that money that you can swing for the fences and go all in stocks. Obviously, since either extreme is safe, anything in between is as well.

What is your AA?

 

[VanWinkle]

I will be retiring early next year after 27 years with a defined benefit plan. I will get 67.5% of my current salary and pay health insurance at $200 a month. I live in Illinois (for now) so my retirement income is not taxed by the state. I owe about 90,000 on my home which is worth about $230,000 at 3% interest. I have no car debts or credit card debts. My monthly check before fed tax will be about $9,000 a month. I also have about $250,000 in a 457(b) that is spread through several mutual funds.

My question is, upon my retirement, I can no longer add money to the funds. My monthly check will more than cover the bills so there is no need for me to draw from deferred comp. My questions are, should I keep the deferred comp in the mutual funds or move them to a safe fixed account of 3.5%? I could take out $1k a month and it would last over 30 years. (That is if the calculator I used was correct) I could leave it in the funds and let it grow, but my concern would be if the market tanks, I won't be able to dollar cost average like I have in the past to recoup the loss.

I know these are good problems to have and I would really appreciate any thoughts on which way to go. Thanks for any thoughts or opinions.

Congrats on the upcoming retirement, take a deep breath, and it is not as difficult as you may think. Here's to a great retirement for you

VW

 

[broonsbane]

Thanks VanWinkle for the congrats! IF I take the $12,000 out per year, are you factoring in the 3.5% if I put it in the fixed account? Backpacker...its a 457b governmental. I'm not sure if I can just take it over and keep contributing. I guess I really need to talk to the company that it is through. I would say who it is, but Im not sure of all the rules here yet, but it's a large company. Pb4uski...The money can remain in the funds that I already have them in or I can move now to a 3.5% fixed rate.

 

[gayl]

Gonna make it simple: you can only defer compensation (income) from your government job into your government deferred compensation account.

But even though you cannot keep contributing to your 457b but you don't have to start withdrawals until 70.5. So the real question is: do you need the income? If you can live on 67.5% of income as stated and your pension has the possibility of being cut, I'd suggest keeping it in index fund and letting it ride for the time being. Markets go up / markets go down. Those who stayed fully invested in 2008-9 recovered faster than those who didn't

 

[VanWinkle]

Thanks VanWinkle for the congrats! IF I take the $12,000 out per year, are you factoring in the 3.5% if I put it in the fixed account? Backpacker...its a 457b governmental. I'm not sure if I can just take it over and keep contributing. I guess I really need to talk to the company that it is through. I would say who it is, but Im not sure of all the rules here yet, but it's a large company. Pb4uski...The money can remain in the funds that I already have them in or I can move now to a 3.5% fixed rate.

broonsbane,

The calculator I checked showed with a 3.5% return, 2.5% inflation, and a withdrawal rate of 1000.00 per month, you would run out of money in 23 years. That is with the fixed account return of 3.5%. If you don't adjust for inflation, it will last for the 30 years. That is why I suggested at least some amount in stocks, to keep up with inflation. Do you know currently how much you have in stocks and fixed income. % in each would determine how much risk you have going forward.

VW

 

[Scuba]

I would keep the 457b invested. I have mine in a balanced fund that is typically between 60-70% equities. Because your pension will cover your expenses, you can afford to take some risk with your 457b money and it will be worth more in the long run if it's in the market. But if you have low risk tolerance, maybe you'd be happier with the 3.5% guaranteed return. Neither alternative is risk free. If inflation spikes, a 3.5% nominal return could be a negative real return.

 

[gayl]

I would keep the 457b invested. I have mine in a balanced fund that is typically between 60-70% equities. Because your pension will cover your expenses, you can afford to take some risk with your 457b money and it will be worth more in the long run if it's in the market. But if you have low risk tolerance, maybe you'd be happier with the 3.5% guaranteed return. Neither alternative is risk free. If inflation spikes, a 3.5% nominal return could be a negative real return.

well said!