You be the Financial Advisor

[Running_Man]

I am interested in what you would advise in the following circumstance. This is to be your advice that will be followed to the letter and never adjusted in the future (unless stated in the advice to rebalance or change as time passes in % ownership of asset classes)

Retiring couple ages 58 and 62. 62 year old eligible for $750 per month Social Security now. 58 Year old will be eligible for $1500 per month at age 62. 58 year old could take immediate non-cola pension of $2000 per month now or wait to age 65 for $3,300 non-cola pension - only option available as only retiree from active employment can get early retirement. There is no cash-out offered on pension.

Monthly expenses are $4,000 per month after-tax. Assets consist of 100K in taxable money market account 500K in 401K account. Also a home with a market value of 210,000 and a mortgage of 90,000 and a monthly payment of 700 per month P&I and taxes of $2,000 per year and insurance of 680 per year expenses included in the $4,000 per month after tax.
1000 square foot 2 bedroom condos in this area sell for $110,000 - $145,000 depending on the amenities desired. Couple prefers to stay in their current home but desire to not work is much higher than their home loyalty.


Couple is counting on you for advice and the expectation of never working again while maintaining their current lifestyle, what is your advice to this couple? They will follow it 100 percent to your plan but of course if it fails may be coming in to live with you.

[brewer12345]

Plans/cost for health insurance until medicare eligibility?

[Running_Man]

Group Insurance of $400 per month included in expenses. Provided through retirement plan.

[thefed]

Take the 750 in SS now. Take the 2000 cola'sd pension now. that leaves 1300/month to be taken from the 401k or money market (who has the 401k? the 62 yr old can take it out now, 58 cant for a year) 500k in that 401k means a 20k safe withdrawal rate. right now that 500k could be put in a money market yielding 5.25% (25k/year) or, 2100/month. So without touching principal, the 401k's interest could fund the rest of the expenses with 700 left over.

does this 4k expenses cover entertainment, hobbies, etc?


Then dont forget the 58 yr old gets another 1500 in SS in 4 yrs! So in 4 yrs, just the SS's and pension will cover all costs. The 600k in the bank can be used as/if needed

Im not sure what the problem is!!!

good luck

[packrat44]

IMHO they are cutting it to close to retire at this time. The $2k now / $3.3K at 65 non-cola is going to drop in buying power whereby the small cushion they have will be used up in the not to distant future. Taking $2k/mo now will reduce future income dramatically. Taking $3.3K/mo at 65 will require drawing down retirement account significantly. Being conservative, I would error on working 2 more years unless the expenses can be cut from the $4k/mo.

[Spanky]

The couple should be able to retire now based on the following assumptions:
inflation = 3%
return = 6%

first year income = 33,000 (24,000 + 9000)
first year return = 36,000
withdrawal = 15,000 (48,000 - 33,000)
withdrawal rate = 2.5%

Should not have any problem of running of money.

If she delays her retirement to 65 with a pension of 39,600 + SS, their chance of running out of money will be even lower.

[LOL!]

What is the plan if either one dies before expected? For example, if the 58 dies before age 62? Or the 62 year old dies before age 65?

[jIMOh]

Originally Posted by thefed

Take the 750 in SS now. Take the 2000 cola'sd pension now. that leaves 1300/month to be taken from the 401k or money market (who has the 401k? the 62 yr old can take it out now, 58 cant for a year) 500k in that 401k means a 20k safe withdrawal rate. right now that 500k could be put in a money market yielding 5.25% (25k/year) or, 2100/month. So without touching principal, the 401k's interest could fund the rest of the expenses with 700 left over.

does this 4k expenses cover entertainment, hobbies, etc?


Then dont forget the 58 yr old gets another 1500 in SS in 4 yrs! So in 4 yrs, just the SS's and pension will cover all costs. The 600k in the bank can be used as/if needed

Im not sure what the problem is!!!

good luck

I agree with most of this.

Follow up questions:

1) how aggressive is the money invested now
2) what is current asset allocation
3) do they want allocation advice?

[SecondCor521]

What are their prioritized goals?
What is their risk tolerance?
How do they feel about leaving an estate?
Do they have any gifting goals?
How do they feel about their mortgage?

2Cor521

[Running_Man]

What are their prioritized goals?
To not work anymore while maintaining current lifestyle which requires $4,000 per month after tax. This includes but not limited:
House Payment $925 ($225 Taxes and Insurance)
Medical Insurance $400
Electric & Nat Gas $300
Entertainment Budget $550

What is their risk tolerance?
Their trust in you is complete 100 percent whatever you say to do is what they will do.

How do they feel about leaving an estate?
Final Estate is not an issue, children have been informed that any remaining estate on death is being donated to church
Do they have any gifting goals?
None specifically other than whatever is remaining of final estate

How do they feel about their mortgage?
They like the house, but not happy about the debt

As a word of note, current employer is selling business and pension plan is terminating all future benefits to affected employees. So must either take now as active employee or wait to age 65 as penalty for early pension as non-active employee would result in a pension of only $1,600 at age 60(early retirement option for non-active employees) increasing by about $340 per month by year to age 65 of $3,300.

[Running_Man]

Originally Posted by jIMOh

I agree with most of this.

Follow up questions:

1) how aggressive is the money invested now
2) what is current asset allocation
3) do they want allocation advice?

Current allocation is about 40 percent S&P 500
60 percent company guaranteed fixed income fund yielding 4.8%

They will do whatever is recommended to them and will stick to it, but it needs to be a relatively easy to follow plan (no research or decisions on their part). Presently just following advice I gave almost 20 years ago to keep funds invested about 40 percent in stocks 60 percent in fixed investments and to rebalance annually. Last I saw it was pretty close to those percentages....

[jIMOh]

Originally Posted by Running_Man

What is their risk tolerance?
Their trust in you is complete 100 percent whatever you say to do is what they will do.


How do they feel about their mortgage?
They like the house, but not happy about the debt

Second issue first. If they can downsize to a condo, and save money, might be a wise decision. Condo's have lower maintainance fees, probably lower cost to purchase, and utilities should either be included or get lower.

risk tolerance... blind faith in anything/anyone will get you killed (quote from Bruce Springsteen).

My suggestion, if 2.5% of portfolio will generate income needed, would be to put close to 90% of the portfolio into dividend paying stocks and 10% into intermediate term bonds... with goal of living off close to a 3% yield from portfolio.

Any excess dividends each year should be used to buy more bonds. Goal if increasing bond position by 1% per year for rest of life.

This is aggressive, IMO this also leaves little risk for income to "dry up" from the portfolio.

[SecondCor521]

Originally Posted by Running_Man

What is their risk tolerance?
Their trust in you is complete 100 percent whatever you say to do is what they will do.

I would never give advice to anyone who answered this way. I have enough of a challenge living my own life.

2Cor521

[loves2read]

is this senario an excercise for a college class--the idea that all issues like health insurance/medical expenses are taken care of by saying they pay 400 a month is not real world --- there are co-pays and drugs that aren't covered by insurance at times...what about long term care coverage --what about home repairs or car repairs--and I really don't by that comment about all funds to be left to the church--people like that would be giving monthly as well...

[Running_Man]

Originally Posted by loves2read

is this senario an excercise for a college class--the idea that all issues like health insurance/medical expenses are taken care of by saying they pay 400 a month is not real world --- there are co-pays and drugs that aren't covered by insurance at times...what about long term care coverage --what about home repairs or car repairs--and I really don't by that comment about all funds to be left to the church--people like that would be giving monthly as well...

LOL I have been out of college for a long time!

I wanted opinions unaffected by my opinions to see what others would do. I did not think it was too difficult a problem to determine how one would handle the money in this situation and usually people are more than willing to say what they would do. Would I say what my advice would be at this moment I think there would be no end to the list of reasons why I should be adjusting my advice. And I would assume they are giving to the church presently as well, probably knowing them 10% of their annual income.

[Fireup2025]

Is this a pop quiz? Or a question from a financial planning class?

[Milton]

Originally Posted by Running_Man

Their trust in you is complete 100 percent whatever you say to do is what they will do. Couple is counting on you for advice and the expectation of never working again while maintaining their current lifestyle, what is your advice to this couple? They will follow it 100 percent to your plan but of course if it fails may be coming in to live with you.

From the last part of the above, I assume that the couple in question are your parents, or parents-in-law.

In my opinion, FWIW, you should decline to provide any advice and suggest that they see a professional financial planner. Most likely you can give advice that is just as a good as a professional (I don't know your investing background, but neither do I know that of the hypothetical pro), but that's not the point. It is simply unfair for these people to essentially abdicate all responsibilty for their future, and pin everything on your decisions guidance. If things don't work out, not only may you have involuntary houseguests, but those guests will probably be angry and resentful ("why did I listen to that bonehead, etc. etc.").

Doubtless your intentions are good, but this scenario places way too much pressure upon you. I'm with 2Cor521.

Bow out gracefully.

[FinanceDude]

Originally Posted by SecondCor521

I would never give advice to anyone who answered this way. I have enough of a challenge living my own life.2Cor521

[FinanceDude]

[quote=Running_Man;559590]
What is their risk tolerance?
Their trust in you is complete 100 percent whatever you say to do is what they will do.
quote]

WOW, I guess I know who will be the one taking the heat after having your friends/family take the advice of STRANGERS on an INTERNET forum to heart 100%............

Man, you got stones.......

[Milton]

On a somewhat related theme, see Should I lend money to my deadbeat in-laws? - Answer Desk - MSNBC.com