Retirement plan help for 51 year old sister

[MBAustin]

....

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.

I think you should be more secure in advising others - you hopefully have protected your sister from an expensive and probably less than ideal investment. Good job!!!

 

[Htown Harry]

Chewy, there's a gap in the advice so far...tax planning.

I agree the overall picture is good, but with such a large portion of the nest egg in tax-deferred accounts, tax planning is an important component.

This part you probably know. It's very likely the pension lump sum rolled over into an IRA or annuity will incur no current taxes, but if taken as cash there will be a very big tax bite. That $1M nest egg could be over $100k smaller next April. Maybe more if 10% early withdrawal penalty applies. (Unless there is some sort of exception for over-50 separations.)

There's usually at most a 60-day window for a tax-free rollover decision, so check this out immediately.

Once that part of the equation is understood, the next tax issue is to evaluate is the gross and net withdrawal requirements from your sister's IRAs and 401k's until age 59-1/2.

The base plan needs a cash flow of $48k, $20k to be earned at a job and $28k to be withdrawn from the nest egg. If the lump sum pension payment is tax-protected via rollover to an IRA, the current after-tax nest egg of $130k isn't going to take your sister very far by itself. Especially if a portion is set aside as an emergency fund.

Assuming withdrawals from the tax-deferred accounts will be taxed at a 15% rate and incur the 10% early withdrawal penalty, there is a gross withdrawal requirement of $37k to produce $28k of spendable cash, including a $3700 penalty.

On the other hand, if withdrawals from the tax-deferred accounts are taken as a "72T" stream of payments, the gross withdrawal requirement is reduced by $3700 per year. Search the forum for "72T" and you will find much more on the subject.

Looks to me like the annuity plus social security would put your sister in a very strong for cash flow position for age 62 and beyond, but is almost 100% dependent on the job and IRA / 401k withdrawals until then. If the "planner" did not include age 52-59 cash flow and tax issues in his discussions of that course of action, it is further evidence that he is biased by his commissions.

 

[Katsmeow]

The Vanguard adviser folks seem have got the index fund religion that they even advice against something like Welseley

Indeed. I just got a Vanguard financial plan. The recommendation was a 50/50 allocation (we are a little older than OP's sister so this was fine) divided between Total Stock Market Fund (Admiral Shares), Total Bond Fund (Admiral Shares) and Total International Fund.

I expressed a desire for about 10% of the portfolio in Wellesley and the person doing the financial plan was against it because the expenses were higher (we are talking about an expense of .22% for Admiral Shares).

I accepted her view on that but asked her to give suggestions of how much of everything to else to buy given an assumption we were buying the Wellesley. She wouldn't even do that. So, I took her plan, worked out the allocation myself and bought what I wanted.

 

[fritz]

Indeed. I just got a Vanguard financial plan. The recommendation was a 50/50 allocation (we are a little older than OP's sister so this was fine) divided between Total Stock Market Fund (Admiral Shares), Total Bond Fund (Admiral Shares) and Total International Fund.

I expressed a desire for about 10% of the portfolio in Wellesley and the person doing the financial plan was against it because the expenses were higher (we are talking about an expense of .22% for Admiral Shares).

I accepted her view on that but asked her to give suggestions of how much of everything to else to buy given an assumption we were buying the Wellesley. She wouldn't even do that. So, I took her plan, worked out the allocation myself and bought what I wanted.

It seems strange that Vanguard advisors would not recommend an actively managed fund that they own to Voyager Select or Flagship members. I own Wellesley and Wellington, along with index funds. Given the low cost fund expenses of the SP500 index, Wellesley, or Wellington - compared to the generally higher expenses of the rest of the market - Vanguard funds are all low cost (especially admiral class).

Only thing that makes sense to me here, is that Vanguard is pretty much known as the the place for "index" funds (per Mr. Bogle's claim to fame). This and the fact that Vanguard obviously has to pay Wellington Management for investment advisory service might be the reason for not recommending an non-index fund, but it doesn't make sense.

I recommend both Wellesley and Wellington to family and friends when conversation leads to investments. Even though people contirbuting in forums like this one are usually savvy investors - the majority of people are not (and a lot of them end up with annuities). These two investment vehicles have provided good returns over the long haul, and novices (or those not wishing to manage their own funds) receive active management with a built-in rebalancing feature. One day, even the savvy investor might lose his abilities in old age, and the features built into funds like Wellesley and Wellington might come in pretty darn handy.

 

[rescueme]

My sister has been early retired by her company...

Interesting use of words.

Is she truly retired, or just in between j*bs and plans on pursuing a job for the next 15 years or so?

Just wondering...

 

[Katsmeow]

It seems strange that Vanguard advisors would not recommend an actively managed fund that they own to Voyager Select or Flagship members.

Yes, I thought the same thing. I wondered if they have instructions to only do a plan recommending index funds, period. In my case I just wanted her to show the plan with the Wellesley in it but she wouldn't even do that. She actually went away and either asked someone or looked something up to see if she could put the Wellesley in the plan based upon my request that she do so and she came back and said she couldn't...

 

[Katsmeow]

I agree the overall picture is good, but with such a large portion of the nest egg in tax-deferred accounts, tax planning is an important component.

This is a good point. I don't think it necessarily leads to an annuity but she probably needs to look at 72t withdrawals.

 

[Bikerdude]

It seems strange that Vanguard advisors would not recommend an actively managed fund that they own to Voyager Select or Flagship members.

I think Wellington and Wellesley are managed by "The Wellington management group". Vanguard may not make as much on them as their index funds. Just a guess.

 

[chewy]

She has been retired by the company and would like to stay that way as much as possible. However, she realizes if she works at least part time for a little while it will be more affordable. Note that she is currently not retired, but is collecting her severance. She has to officially retire soon.

The original planner did have a plan for her to get from now to 62, it was to live off the 401k(360k) and the after tax money in addition to working. Then she could live off social security and the annuity from 62 on.

Her objection to the annuity(not based on my input) was that the money would be locked up and she felt that one of the reasons for taking the lump sum was to have control over her own destiny.

We realize that tax planning has to be a big part of the plan since most of her money is in tax deferred accounts.

Thanks again for all the valuable input. At this point we are going to visit a planner who charges on an hourly basis. I think she should at least get another opinion to help her decide her path. I have investigated the planner as much as is possible and he does not seem to be a proponent of annuities or load funds, at least not exclusively.

 

[Bikerdude]

She has been retired by the company and would like to stay that way as much as possible. However, she realizes if she works at least part time for a little while it will be more affordable. Note that she is currently not retired, but is collecting her severance. She has to officially retire soon.

The original planner did have a plan for her to get from now to 62, it was to live off the 401k(360k) and the after tax money in addition to working. Then she could live off social security and the annuity from 62 on.

Her objection to the annuity(not based on my input) was that the money would be locked up and she felt that one of the reasons for taking the lump sum was to have control over her own destiny.

We realize that tax planning has to be a big part of the plan since most of her money is in tax deferred accounts.

Thanks again for all the valuable input. At this point we are going to visit a planner who charges on an hourly basis. I think she should at least get another opinion to help her decide her path. I have investigated the planner as much as is possible and he does not seem to be a proponent of annuities or load funds, at least not exclusively.

Be sure to let us know the outcome.

 

[fritz]

I think Wellington and Wellesley are managed by "The Wellington management group". Vanguard may not make as much on them as their index funds. Just a guess.

I thought the same. I did suggest it in my second paragraph, and I commented that not offering Wellington/Wellesley to their largest investors just didn't make sense. Others have posted that John Bogle holds some of his retirement funds in Wellesley, or Wellington (or both). He also started out his career with Wellington Management (although he was fired by Wellington, Bogle admits his was in the wrong).

Unlike stock or bond only type funds where history has shown that index funds outperform active management - Wellington and Wellesley are balanced funds offering investors professional selection of stocks, bonds, and portfolio rebalancing - along with very nice yields. They are well established balanced mutual funds offering long track records of growth and stability. Wellington is one of the oldest mutual funds out there, and has almost $50 billion net holdings (Wellesley is almost $17 billion). Not small funds, but given that Vanguards' SP500 X holds $90 billion, Total Bond X holds $85 billion, and Total Stock Market X has $131 billion, guess you could say they push what their noted for - index funds...

 

[dgoldenz]

***Note*** I am NOT a CPA or tax advisor of any kind. Always consult a tax advisor or CPA for specific information.

From my understanding of current tax laws, annuities with income riders are taxed on interest first and principle last (assuming the income rider is utilized). This could change in the future, but is what I have been informed is the current rules. A SPIA taxes part principle and part interest with each payment. Make sure she talks to a CPA to understand the potential difference. A fixed annuity or fixed index annuity may be a good option if she decides a SPIA would be to her advantage down the line (when interest rates will also likely be higher) and she wants principle protection. At the end of the surrender period, she can walk away with the lump sum and put it into a SPIA or other deferred option at that time. All fixed annuities have had large reductions in guaranteed interest and cap rates as interest rates continue downward.

If she prefers to guarantee the future income today, I would bet there are fixed annuity products that will offer a higher guaranteed income.

 

[chewy]

Hello, thanks again for all the advice.

We have visited with 2 fee only planners . Both charge about .8 on assets per year, although 1 was willing to create plan for approx $2500 then it is up to my sister to implement.

One used DFA funds , but not exclusively. The other seemed to lean towards Vanguard. Both mentioned ETFs and index investing, with an occasional managed fund.

One would be moving in and out of funds without notification(I think) while the other would require email OK on all changes.

Both seemed very knowledgeable and easy to deal with, however I think my sister would learn more from the one with the email notifications.

After all this my sister is beginning to realize that she needs to learn how to do most of this herself for the future since she can't afford the .8 indefinetly. Right now she is leaning toward using the planner for a year or so until she learns enough to go it alone. I think this is a good plan.

Comments?

 

[jIMOh]

Hello, thanks again for all the advice.

We have visited with 2 fee only planners . Both charge about .8 on assets per year, although 1 was willing to create plan for approx $2500 then it is up to my sister to implement.

One used DFA funds , but not exclusively. The other seemed to lean towards Vanguard. Both mentioned ETFs and index investing, with an occasional managed fund.

One would be moving in and out of funds without notification(I think) while the other would require email OK on all changes.

Both seemed very knowledgeable and easy to deal with, however I think my sister would learn more from the one with the email notifications.

After all this my sister is beginning to realize that she needs to learn how to do most of this herself for the future since she can't afford the .8 indefinetly. Right now she is leaning toward using the planner for a year or so until she learns enough to go it alone. I think this is a good plan.

Comments?

Can I ask the names of the companies the planners worked for? If one was on his own, and another worked for a large established firm, that might change how to rate one plan over the other.


If sister had .8% fee taken out, for example, I know one planning firm which would give her the written plan for free as well. The .8% fee is typical (usually starts at 1% and decreases with higher assets on hand).


Ask if the advisor which does transactions would get paid extra per transaction (this should not be true, but its worth asking).

$2500 for the plan sounds about right (plans typically cost between $1000 and $10,000 with most higher than $5000 I believe).

 

[FinanceDude]

Can I ask the names of the companies the planners worked for? If one was on his own, and another worked for a large established firm, that might change how to rate one plan over the other.

Why does that matter? You cannot assume a Smith Barney guy knows more than an independent guy............ Actually, most indendent guys started out at wirehouses or regional brokerage firms..........

 

[chewy]

Both planners are on there own. I don't think the planner would get paid extra per transaction but I will ask.

If she signed up for a year at .8 the plan would be included.

One other thing, my sister mentioned 72t withdrawals to one of the planners and he seemed to dismiss the idea. She did not mention this to the other planner so it is not really a fair evaluation point.

 

[HFWR]

Yikes.

Yikes^2

 

[jIMOh]

Why does that matter? You cannot assume a Smith Barney guy knows more than an independent guy............ Actually, most indendent guys started out at wirehouses or regional brokerage firms..........

It is a data point, it might matter, it might not.

For example if one guy worked for a more popular insurance company and other was on his own, that might mean one thing, where as if one was with smith-barney and other was on his own that might mean less.

And some companies do fee only plans
where as others do fee only plans, AND manage assets AND sell loaded mutual funds. They get compensated one way or another, but depending on firm, they might only manage assets (so getting the plan would not happen from that firm).

 

[LOL!]

Why pay 0.8% to get DFA or Vanguard and an asset allocation? Is it because face-time is needed? There are plenty of DFA and Vanguard planners that charge 0.25% or less or even a fixed fee. Everything is negotiable as well.