Need Retirement Investment advice

[johnbb]

First of all, I'm not in a very good position financially, but I can not return to work due to being the caretaker for a family member that has cancer. Here's my situation:

I just turned 62 and will be signing up for soc. security - $1450/mo.
I have about $10,000 left in savings.
I have a 401K worth $255,000.
My home has a $200K mortgage with about $400K in equity.

That's it. I didn't start saving for retirement until in my 40s, due to ignorance, divorce, and financial limitations. My bad.

I owe $30K to my equity line of credit.
My monthly expenses are about $3,000/month.
I talked with my bank (Wells Fargo), and they recommended an annuity with a Franklin Templeton component. [Hartford's Principal First and Franklin Templeton Founding Funds (Franklin Income Fund, Templeton Growth Fund, and Mutual Shares Fund).

The distribution would be 7% for a little over 14 years, of course the growth component would potentially extend that. That would come close to meeting my monthly expenses.

I am not very experienced with stocks and investment strategies, and I do understand the opinions regarding annuities. I don't have expensive hobbies, and expect to sale my house eventually and move to a more affordable area, although I would prefer to stay where I am as long as I can.

There is a possibility I can generate income by working at home or part-time (I do Web development), but I can't count on that. For someone in my situation, what advice would you recommend?

Any advice will be greatly appreciated.

 

[d]

what advice would you recommend

no doubt there will be plenty of advice to follow from others, but for starters:
1) cut your spending
2) don't buy an annuity

 

[Brat]

I talked with my bank (Wells Fargo), and they recommended an annuity with a Franklin Templeton component. [Hartford's Principal First and Franklin Templeton Founding Funds (Franklin Income Fund, Templeton Growth Fund, and Mutual Shares Fund).

My gut says DON'T DO THAT!!   There are folks on the board who can give you better reasons than I.

 

[wabmester]

If your expenses are $3000/mo and social security gives you $1450, that leaves $1550 or $18,600/year. Multiply that by 25 to get a nest egg that would support a 4% withdrawal, and you get $465,000.

It sounds like you have a net worth of $655K including the equity in your home. Sell the house, buy a smaller home (in the $200K range), and invest the rest rationally, and you should be able to pull it off.

 

[Dawg52]

If your expenses are $3000/mo and social security gives you $1450, that leaves $1550 or $18,600/year.   Multiply that by 25 to get a nest egg that would support a 4% withdrawal, and you get $465,000.

It sounds like you have a net worth of $655K including the equity in your home.    Sell the house, buy a smaller home (in the $200K range), and invest the rest rationally, and you should be able to pull it off.

Ditto. You may not want to sell your house, but that appears to be your only option since you can't work. Good luck!

 

[tryan]

I can generate income by working at home or part-time (I do Web development),

If you can't/won't tap the home equity working from home is where it's at.

 

[johnbb]

Selling my house is something I was considering a year ago. But with my family member having cancer, I am trying to postpone doing that. I recently refinanced my house, and my house payment is less than it would cost me to rent. What I'm trying to understand is the consequences of supplementing my SS with my 401K, and selling my house later as my 401K is drawn down. Personally, I have no problem in selling, but I am very concerned about doing that under the present circumstances of my family member.

So, is there any advice on a transitional strategy. One that would give me a couple of years income to met my current needs, and then one that would include selling my house later.

 

[johnbb]

Without beating a dead house, can you give me a simple list of why the annuity is such a bad idea in my circumstance.

 

[haha]

Can the sick person qualify for disability payments?

Can you get part time help from family or others that might allow you to work?

Personally I would try to avoid the home sale. In your situation what you don’t need is the stress of a sale and move.

Go to your local senior center and talk to a social worker. Sometimes they can make very helpful suggestions.

Ha

 

[brewer12345]

Without beating a dead house, can you give me a simple list of why the annuity is such a bad idea in my circumstance.

john, if you don't want to move right now, don't move. You need to come up with roughly $18k a year, so find it. You could tap the 401k to a certain extent, but I would be cautious of withdrawing it too far because that is about your only major liquid asset.

If you are open to moving eventually, you just need to figure out how to bridge the gap between now and when you sell. I can think of three sources of liquidity that could tide you over for at least a few years until you sell the house:

- 401k withdrawals
- part time job
- incremental borrowings on a HELOC

Obviously, a combination of some or all of these might be a reasonable choice, too.

Don't buy the annuity. Without making things too complicated, the annuity your bank recommended would be extremely expensive. Most of us agree that a reasonable amount to draw out of a balanced (stocks and bonds in various combinations) portfolio is 4% a year, bumped up each year for inflation. The annuity your bank suggested likely has expenses of at least 3% a year. That means that just the annuity expenses would consume roughly 75% of what you could be safely drawing from your portfolio!

What is the 401k invested in now? You may wish to consider rolling it over to a low cost IRA at Vanguard.

 

[pilgrim555]

John, I was in very much the same situation...62-$1400 Social Security -$280,000 401k...Rolled over 401k to TRowePrice 50/40/10 and have automatic withdrawals monthly of $1300...A little more than the 4% desired but needed...It has been almost four years under this situation and I still have the $280,000!! My wife now gets $700 from social security...Big help...I would roll over the 401 and get a part time job...Even one day a week...Hope everything works our...

 

[unclemick]

Hmmm

This is not directly applicable - but here goes. Circa 1994 I put 100k of Mom's assets into Vanguard Lifestrategy Income to damp SD. Took out 12%(1k/mo) and gifted me and my sister each year for 11 yrs to start qualifing her for LTC by getting money out of her estate.

History does not repeat - 90's were a different decade but a damped balanced fund (at closer to 4% WD rate the better) in reverse DCA combined with active attempts to control spending is an alternate path.

Now if emotion trumps all other considerations - I would benchmark price VG annuities to compare others.

More the one way to skin a cat.

heh heh heh heh heh

 

[crazy connie]

If you only need to stay put to take care of an ill family member... Is there a timeframe from the medical professionals? Can the individual you are caring for assist in the finances? If not, because you are over the age of 60, you can possibly do a reverse mortgage. The bank would be my 1st stop after reading about them at bankrate.com etc...

Then once the crisis is passed you can weigh your options and move on in housing to a better cost structure.

I too would run like hell from the annuity games. They tend to be way overpriced for the returns.

I too have been a caregiver for terminal illness. It has rewards that are not measured in $'s.

 

[MooreBonds]

I just turned 62 and will be signing up for soc. security - $1450/mo.
I have about $10,000 left in savings.
I have a 401K worth $255,000.
My home has a $200K mortgage with about $400K in equity.

I'm surprised no one talked about his decision to tap SS...

Have you run the calcs to see what your SS payments would be if you waited until age 65? You are going to be getting a lot less per month if you take it now. While I realize that there may be financial limitations, it would probably be better to withdraw some of your 401(k) and work a part-time job, rather than take SS now and penalize yourself by something like 1/3 of your payments for the rest of your life.

 

[sgeeeee]

Selling my house is something I was considering a year ago. But with my family member having cancer, I am trying to postpone doing that. . . .

You don't have to sell your house now and if your investments do well, you might never have to sell.  

First, the 4% rule is a historical worst case scenario.  If we don't have worst case investment performance for the next decade or two, you might be able to live with a significantly higher withdrawal rate than 4%.  But even if we experience Great Depression type investment performance, your house doesn't have to be turned into cash today.  

Regarding the annuity.  Annuities are among the most expensive investment instruments out there.  They have very high fees.  For some people with a lot of money and a lot of fear, the price of an annuity might be worth it.  But you are not in that situation.  You would be better off in a couple of well chosen, broadly diversified, funds than buying an annuity.  

Good luck.  

 

[johnbb]

You guys are great. I really appreciate your advice. What I would like to know is what you recommend for my 401K roll-over to an IRA. Is Vanguard a good place to start researching? Do you have any advice on how to allocated the $255K? I don't have much in savings, but I do have enough to get me through this year. I'm going to revisit my decision regarding taking SS, and see if there is a way I can hold off until I'm 63 (July 2007). I'm also going to spend the next month aggressively looking for part-time work, preferably from home. I have 10 years Web development experience, so maybe I can help companies with Web maintenance or project overload.

 

[poyet]

Why cant you rent part of the house ? rooms for students ? else ? so that you would generate part of the 18k without changing much of the structure of your assets ?
I mean longer term, not right now given the circumstances. Of course it leaves the problem of passing the hurdle right now open.

 

[jazz4cash]

johnbb
Sounds like you have received some good guidance from the forum. Let me give you some non-financial feedback: I admire the fact that you are so concerned and dedicated to making your family member comfortable. I am sure that is its own reward...Good Luck!

 

[brewer12345]

You guys are great. I really appreciate your advice. What I would like to know is what you recommend for my 401K roll-over to an IRA. Is Vanguard a good place to start researching? Do you have any advice on how to allocated the $255K? I don't have much in savings, but I do have enough to get me through this year. I'm going to revisit my decision regarding taking SS, and see if there is a way I can hold off until I'm 63 (July 2007). I'm also going to spend the next month aggressively looking for part-time work, preferably from home. I have 10 years Web development experience, so maybe I can help companies with Web maintenance or project overload.

I think Vanguard is a good place to go. If you plunk the money in the Wellington, Windsor, or balanced index funds, you should be in decent shape without having to make a lot of decisions or get too fancy. If you decide you want to take the time to read/learn, you can get fancier, but any one of the three I named will do OK for you.

 

[2B]

johnbb --

I'll second the recommendation to defer social security. Your payment rises about 8.5% for every year you wait and it will increase indexed to inflation. If you can wait until you are 65, you'll get around $1850. Wait until 70 and you'll get $2700 plus it will also have grown due to inflation. If you are happy living on $3000 per month in current dollars you'll be just about there if you can hold on till then by spending down your other assets. Check my numbers -- the real numbers are on your last SS benefit statement. For most of us wage slaves, SS is actually a pretty good COLA annuity.

Another reason not to take SS now is that you might keep working. When you work you lose benefits based on your income in addition to permanently lowering your benefit.

I believe you have too much house. If you can raise $400K by selling it, you should as soon as the situation allows. You may be "living there for less money than rent" but you are also losing the $20,000 per year you could be netting in a safe CD. Your house may appreciate or depreciate but you would be a real estate speculator if you stay put for that.

I would suggest rolling your 401K over to Vanguard or Fidelity. I believe they both have CDs yielding over 5% which is much better than you'll get at Wells Fargo. With CDs, you can create a "self-annuity" with your $255K to provide you with your $3,000 a month for over 8 years. That will give you plenty of time to sell the house while you wait for the SS to grow.

BTW, I am the "anti-annuity troll" so I don't want to hear about you going back to Wells Fargo and getting screwed.

 

[modhatter]

Well, my two cents.  First of all, if  he waits on Social Security, he will most likely have to wait until he is almost 66 (nearly four years)

That is a wise course to take if he can in that time frame generate an income of $28,000 a yeqr, with the rest (approx. $8,000 coming from distributions from say a Wellington fund)  Of course when social security kicks in, he will then be in pretty good shape.

If you read the posters numbers, you see that maybe he has at best $200,000 equity in the house, not $400,000 and less than that when you take out selling costs and a declining market.

I believe the market will get worse in the ensuing years, so if there is any hope of selling, I think now is better than later, unless it is much later (5 to 10 yrs.)

I don't know what state the poster lives in.  Hopefully it is not California.  If it is a more reasonable state (real estate wise)  I would strongly recommend downsizing to a condo if a house is out of the question.  They owe a $30,000 line of credit on the mortgage as well as a $200,000 mortgage.  Then add in at least $15,000 in selling costs for commission and closing costs.  Poster is now left with $155,000.

Depending on where you are from, you may be able to buy a two bedroom (sometimes 3) two bath condo for that.  Now you have no mortgage, and much lower taxes, no outside upkeep, and generally a much more stress free life style.  (Peace of mind)  So instead of requireing $3,000 a month to sustain yourself, you now could probobly get by on $2,000 a month.

Also, with bringing $250,000 to the table at Vanguard, they will assign you a personal advisor who will help contruct your portfolio for your needs.  So due to the fact that you are lacking in knowledge at the momment, this will be most helpful.

Also, a note about downsizing.  It is surprising how well one can adapt to a much smaller place, and like it.  Most other countries around the world live in much smaller homes or apartments than we do, and do it very well.  As long as you don't have a bunch  of screaming kids running around, you would be surprised how happy you could be in a 900 to 1,100 sq. ft condo. (Much easier to clean too)

But all that being said.  Waiting another 4 years and meanwhile having to generate an additional $28,000 a year is a tall order.  However, downsizing now and having to produce $16,000 a year may be very duable for you.

 

[Khan]

Well, my two cents. First of all, if he waits on Social Security, he will most likely have to wait until he is almost 66 (nearly four years)

He can take Social Security at 62 or 63 or 64 ... 70 ... 75 ... not at all.
Of course there are issues of penalties/taxes to be considered for each age.

 

[FIRE'd@51]

Actually, it seems to me that this is an ideal situation in which to take SS at 62. It appears the SS benefits will not be taxed, and the $1450 per month makes it easier to get to the 3000 per month income OP needs in the near term by by withdrawing $1550 per month from the retirement accounts (401K and/or IRA). This way OP can wait until a less stressful time to sell the house and move, and who knows, by then even the housing market may be better.

 

[modhatter]

That's a 7.50% withdrawel from his portfolio. Better he take 4% ($833 a mo. )and supplement the balance ($716 mo.) with some side work. Give his portfolio a chance of growing for future inflation instead of depleting it.

 

[johnbb]

I've said it before, but I'll say it again: You guys are great. Not only am I getting excellent advice, I feel like you have genuine concern for my situation. I especially appreciate the sentiments from crazy connie and jazz4cash. Here's where I am at... I am NOT going to do the annuity. I really feel that I need to stay in my home a while longer. If it were just me, I would put it on the market tomorrow. But, my 38 year old daughter who lives with me has terminal cancer, and has been given 6-18 months. I just can't make a change at this time. Hopefully I'll never have to make that change. I am putting together an aggressive plan for part-time work, with a networking component, Internet Job Search, placement agencies, personal Web site with resume and portfolio, and email to key people in local compaines.

I don't know I can wait for SS. I have enough in savings to get through the end of the year. I will roll my $255K 401K over to either Vanguard or Fidelity, and if I can get consistent part-time work, I can decide if I want to take SS, or supplement my income with IRA distributions. Which would be better? Or as someone suggested, maybe a mixture of all three, since the work component may not be consistent? So, given these circumstances, here's what I see as my choices for now:

1. Part-time work supplimented with SS
2. Part-time work supplimented with IRA distributions
3. Part-time work suppliments with SS/IRA
4. No significant work - SS and IRA distributions

The part-time work is a big factor, but I don't know if I will find enough, and how much it will contribute to my income.

for Modhatter: I do live in CA (Bay area). I'm not sure I understand your comment:

"If you read the posters numbers, you see that maybe he has at best $200,000 equity in the house, not $400,000 and less than that when you take out selling costs and a declining market."

My house appraised at $650K when I refinanced. I owe $200K, plus the $30K equity loan. I stated I had about $400K in equity taking into consideration the equity loan and selling costs. I recognize the value will potentially go down, but I would think I would have $400K at this time. Am I missing something or just dreaming?