Advice for a Newbe..... Please

[ShokWaveRider]

Hi all:

Happy ER.

I am trolling for advice or good places to look for it. I am very wary of financial planners of any sort. (I made it this far on my own) I would love to hear from people in a similar situation to myself with about the same amount of assets, or at least the same amount in comparable dollars when they ER'd.

The Story:

My wife and I are 50 and 45 Respectively. We retired last year and sold all our hard assets (Yes including the house) to travel. We will be doing so for another year then will most likely settle down, someplace. (TBD) Canada, Caribbean or USA are options on the table at the moment. We are very open to recommendations.

We have $1.2m in after tax cash investments CD's mainly. And $400k in MM in Pre-Tax 401K accounts. Total Income is about 3% of this total. We have some left over tax credits that make our tax base very low for a couple of years.

We are living off the poultry (LOW) interest at the moment and NOT taking any capital draw down not even 2%. We have NO OTHER SOURCES of income.... yet.

At present we get economical health care in Canada. As we are temporarily living there when not on the road, with my sister, at least for the Canadian Summer. We will be sailing in the Caribbean for the winter and possibly going to Europe next year.

We will be filing Taxes in Florida next this/next year.

Remember we do not own a house any more. I am VERY adverse to any risk of any kind as we are just about comfortable that our capital, if not lost, may last us our life expectancy.

I read a lot about TIPS and BONDS on this forum but really do not understand how to hold them or buy them into a portfolio, from whom, where and when I would want to buy them. The Government Sites talks about Auctions of Bonds etc. Hence why I am comfortable with CD's for now.

Please remember, If I buy bonds now as interest rates are going up, I could loose, the same with stocks. I have been reviewing Vanguard funds and like their expense ratios, but not their current returns on the stable value funds. Most of the cash is tied up till the end of the year anyway. We can do what we like with our 401ks, but currently they are getting 4% where they are. It is the cash investment that has a lower return.

Oh, we are still toying over Buying or Renting in our retirement, but $400k of the above is allocated for a home, when we do decide. This will leave $1.2m to live on. Our plans are to slowly convert the 401K money to After TAX funds using the 72(T) option.

Any comments or advice or pointers would be appreciated.

SWR

 

[John Galt]

Hello SWR! Well, I am every bit as risk averse as you
but have a whole lot less money, Thus, I switched from CDs into bonds when CD rates fell too low to stomach.
I recognize that I will lose (have already lost in fact) NAV
as interest rates go back up, but this is "forever" money
invested solely for the income it throws off. I look at
it like social security, i.e. I paid in for a lot of years and
soon it will provide an income stream whcih will last
until I die. Since I will never sell (the bonds) and they will keep throwing off income at the same rate, it
doesn't really matter if the NAV goes to -0-. Another way to view this is it's only a loss if you sell it.
Bottom line? My bonds plus SS should provide a
comfortable living after my 62nd birthday. All the other
stuff we have (no stocks) can be used to raise more cash
if needed. But, the long term bonds and SS will provide
the income base, at least that is the theory. BTW,
looking back now I can see I could have left the money
in CDs and MMs and waited on the interest rates to move. Psychologically motivated switch. But, I am happy with my bond rates.

John Galt

 

[WilliamG]

John - Are you re-investing any of your bond returns? If not, how do you envision your income staying with inflation affected expenses? Thanks, Bill

 

[John Galt]

Hello Bill. Good question!

I currently hold bonds in 2 ways. First through my IRA
which is not being drawn down as yet, so that
money is being reinvested at present. The second way
is through a small holding company and there the interest is paid out, but no taxes are due because of
an NOL "net operating loss" which offsets the income.
Inflation is a real worry. I do own one bond with rates
that "ramp up" over its life, but who knows how that
will turn out? For inflation protection I am counting on my real estate which is roughly half of my net worth.
This is pretty unconventional I know, but I am comfortable with it.

John Galt

 

[Jarhead*]

John Galt:

Regarding your psychological motivated switch from TD's to bonds, I think if you listen real close, you can hear Cutthroat on the keyboard

 

[John Galt]

I wondered what that noise was. Thought it might be a
woodpecker

John Galt

 

[charlie]

Hi ShockWaveRider,

Why convert your 401k to after tax funds
using the 72(t) option? IMHO, you should
leave that money in a tax sheltered state
until you reach 70. Rolling your 401k into
a Vanguard IRA would be a good idea. You
could put the money in Vanguard's Short Term
Corporate fund until you figure out how (or if)
you want to diversify some of it into stock funds.
Since you are risk adverse, you might consider
TIPS for your sheltered account to provide inflation
protection. Vanguard's brokerage service can help
you with this.

As for your after tax money, you and your wife could
buy $60k of I-bonds from any U.S. bank per year.
You could buy another $60k per year of the
"paperless" kind directly from the U.S. Treasury.
I-bonds will track inflation and can be sold after 1 year.
If you sell before 5 years you forfeit a little interest.
Otherwise, you can't lose money on I-bonds. I believe
you have to be a U.S. resident to buy I-bonds, however..

Check out the following link for details:

http://www.publicdebt.treas.gov/sav/sav.htm

IMHO, you need to put some of your after tax money
in tax efficient stock index funds to help fight inflation.
The key thing is to consider all of your financial assets
as one portfolio and decide on an overall stock/bond
allocation for your risk tolerance. To avoid buying at
a market peak, dollar cost average (or value average)
over a 3-4 year period until you get your desired mix.

I don't trust advisors either, but you need to read
Bernstein's "4 Pillars of Investing" and Larry Swedroe's
"The Successful Investor of Today" to protect yourself
from the quacks and sharks.

Cheers,

Charlie

 

[Cut-Throat]

John Galt:

Regarding your psychological motivated switch from TD's to bonds, I think if you listen real close, you can hear Cutthroat on the keyboard

You're right, I was just getting my response ready and then I realized it was John Galt.

 

[ShokWaveRider]

I am a resident of the US for Tax purposes and have an address there. So investments are not a problem. As far as TIPS are concerned, is it better for me to get them along with other investments in Vangards TIP funs and such like or simply go and buy then directly?

As interest rates are going up, and my stash is tied up till year end anyway, I may get a better deal on the bonds then.


How about the rental versus buying ideas. And Please contine with the investment suggestions.

SWR

 

[cute fuzzy bunny]

You're right, I was just getting my response ready and then I realized it was John Galt.

Crap. I was hoping for another "blow me!"...

 

[John Galt]

You 2 better be nice to me or I won't write any more poems.

John Galt

 

[sgeeeee]

You 2 better be nice to me or I won't write any more poems.

John Galt

Promise?

 

[Bob_Smith]

As far as TIPS are concerned, is it better for me to get them along with other investments in Vangards TIP funs and such like or simply go and buy then directly?

I prefer to own individual TIPS because I can lock in a return for over 20 years. That's one part of my portfolio that will provide a guaranteed inflation protected income for two+ decades. I have no control over a fund. Just bought some TIPS a few weeks ago paying 2.53%.

 

[Nords]

Bond funds are great for DCA.

SWR,

Vanguard's bread&butter customer doesn't have a lump sum to buy bonds, but those small investors can gradually own an allocation of bonds by signing up for monthly deposits into low-cost funds. You could dollar-cost-average into a TIPS fund if you wanted to, but you're just paying Vanguard to do very little (if any) work for you. Admittedly you're paying very little money, but you don't have to pay any at all.

Since you have a lump sum, it's a lot easier to link your checking account to TreasuryDirect (you can trust them, they're with the U.S. Gummint!) and buy the bonds directly. Yes, it is an auction, but it's automated and you get the same price as the big firms. (Read Roger Lowenstein's book on Buffett to see what happened to Goldman Sachs when one of their "rogue employees" tried to manipulate the auction...) Dividends (if any) are deposited back into that same checking account as are the proceeds at maturity. It's painless and it doesn't require you to keep a current mailing address, cart around a bunch of paper, call toll-free phone numbers, etc.

If you buy a bond FUND then you could lose (a little) with rising interest rates, but not if you buy a bond and hold it until maturity. Since you're holding the bond directly, you're not affected by interest rates unless you decide to sell the bond or to buy one on the secondary market. You don't sound like you're interested in doing so, and if you're not selling then it won't matter what interest rates do to your bond's price. You'll still get the same $$ in your account and % yield as the day you bought the bond. (Of course for I bonds, that amount is raised with the CPI so you'll probably get more.)

Risk-averse is another challenge. If you're not interested in putting a portion of your assets in a long-term low-cost index stock fund, then you're going to have to downsize your lifestyle as inflation downsizes your returns. That may not be a problem, or perhaps a fund like Vanguard's total stock market index would smooth out your volatility concerns. But if you haven't already, you need to read Bernstein and educate your aversity. I'm not trying to change your mind, but there are issues to consider that could hit hard in a couple decades.

You've started off like the Terhorsts. If you haven't already, you might want to read "Cashing in on the American Dream: How to Retire at 35." My first thought on seeing the book was "#$*@, I'm years too late!" but they're perpetual travelers who have dealt with a lot of the situations you're facing. http://www.geocities.com/TheTropics/Shores/5315/

Another risk-averse retiree you may enjoy is Bud Hebeler and his "Analyze Now!" website. http://www.analyzenow.com/ Hebeler's a retired engineer whose conservativism makes John Bogle look like an Enron day-trader. The website has excerpts of the book and his products. Bud's book includes free spreadsheets & calculators, and you can probably find it at a local library.

I'd keep renting. Maybe someday you'll find your idyllic valley or dream home that you just have to settle down in, but until then there's no reason to tie up a bunch of money (and pay a bunch of fees) just to have a landing pad.

I've lived all over the world and traveled much of the rest. If you crave the island lifestyle but tire of Caribbean humidity, then try Hawaii. I wouldn't necessarily look at Oahu or Maui or the Big Island (Kailua-Kona) unless you like infrastructure (& Home Depot), but there's still some "old Hawaii" on all the islands.

 

[cute fuzzy bunny]

Hey, I take it as a term of endearment.

Hot one today and tomorrow. I'm headed out to the pool. Hot summers...the penalty paid for warm winters...at least ITS A DRY HEAT!

Was up nearer to your neck of the woods last sunday, took my dad up to Oroville as he's never been and the wife needed a few extra hours of sleep unencumbered by 200lbs of dogs. Took a drive out on the road over the south side earth dam/sluice gates.

Always thought about renting one of those houseboats out there for a month or so. Then I remember I cant because you cant teach dogs to use a head or hang butt over the side...

 

[unclemick]

Oroville - one week each, over two summers as a kid (11 -12) in the 50's. What a great place for rock collecting and old mining (placier) areas to explore. Probably tony and civilized now.

 

[ShokWaveRider]

While the banter is very informative, it is a little off topic.

Sorry, I did not mean to be rude, but I am looking forward to theinformation to come. Thanks for the geat information and recommendations given so far.

SWR

 

[John Galt]

Hey SWR, I wouldn't worry about being "rude" (I never do).
And, if we get a bit off topic, so what? Life is too
short to worry about it. Plus, if anyone is annoyed
they should say so and we can be guided accordingly.

John Galt

 

[cute fuzzy bunny]

Oroville - one week each, over two summers as a kid (11 -12) in the 50's. What a great place for rock collecting and old mining (placier) areas to explore. Probably tony and civilized now.

Eh, its not so bad. The usual "strip" off the highway with a walmart and a bunch of other stores. Handful of casino's. Bunch of mobile home parks. Not as bad as some lakey areas around here. Its still beyond the urban creep.

 

[unclemick]

SWR

Now that oroville has been scoped, take a look at Vanguard Lifestrategy Income - have had my 'Great Depression Era' mom (now 87) in that for about ten yrs. 4.56 std dev, 3.27% current yield, about 20% stocks, all index. Better yet, call vanguard and ask about lifestrategy vs Target Retirement comparison of their Retirement vs Income (the two most conservative of each set).

 

[wabmester]

I read a lot about TIPS and BONDS on this forum but really do not understand how to hold them or buy them into a portfolio, from whom, where and when I would want to buy them. The Government Sites talks about Auctions of Bonds etc. Hence why I am comfortable with CD's for now.

Since you're very risk averse, TIPS might be your best bet. You've eliminated volatility by buying CDs, but you're exposed to inflation risk.

The next TIPS auctions are in July. The 10-year will be on sale July 8, and the new 20-year issue goes on sale July 27.

Individual investors don't bid in the auction -- you just place an order and you get whatever the market rate is at the time of the auction. I'll be buying some 20-year TIPS at the next one.

I described my first time through the process is this thread:

http://early-retirement.org/cgi-bin..._board;action=display;num=1072027004;start=14

 

[ShokWaveRider]

All:

It appears that the general opinion is TIPS. Has anyone got the any stats on say the last 2 years of TIP base rates (annual) and inflation rates (6 monthly)?

SWR

 

[John Galt]

I think the concept of TIPS makes a lot of sense.
I even think someone with my investment mindset
is well suited to this type of investment. Yet, I hold none
and have no plans to. My theory is that I fall back on
familiar stuff so that I won't have to research
anything unfamiliar (lazy). BTW, if any of you are thinking that means I would rather take the easy way out
than study up and make more money long term, you are
exactly right.

John Galt

 

[wabmester]

Has anyone got the any stats on say the last 2 years of TIP base rates (annual) and inflation rates (6 monthly)?

The treasury maintains daily yield curve data that goes back about 18 months here:
http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield-hist.html

Historical treasury auction data going back to 1980 is here:
http://www.publicdebt.treas.gov/of/ofaicqry.htm

The semi-annual CPI-U data is the same as that used for i-bonds here:
http://www.publicdebt.treas.gov/sav/sbirate2.htm

 

[ShokWaveRider]

OK Based on the I Bond Rates. For Today (May) If I purchased some, I would get 1% fixed and 1.19% interest. I have some 2.675% CDs how do they differ

If I do the Math for $1000 with a TIP at the end of 1 year I will have roughly.... $1022 My CD would accumulate $1026.75

Am I way Off base here?

SWR