Running Scared as I near Retirement

[jackalope]

I am 56 and I am planning to retire in about a year. I have a comfortable nestegg with about 50% in equities,30% in a variety of bonds and bond funds and 20% in cash or cash equivilents. In the past year I have accumulated about $200,000 in "cash" because I am fearful of investing in anything that would have any risk associated with it. With rates so low I feel compelled to invest my cash. Any advice, comments, thoughts would be appreciated......Thanks........jackalope

[RYD]

Greetings,

Though I am a bit younget than you 52 and not planning on retireing yet I understand the situation you face. I rolled over an IRA of around 200K and dropped it into MM account. Good idea then but now that the stock market has ticked up and rates seemed to be at bottom or very close to it bonds are scary as well. One web site I read is the Coffeehouse Investor. Good basic advice on asset allocation. Take it look it may help. I am planing on putting some in the market (50-60%) balance in bonds and cash.

Good luck and please let us know what you decide

[earlyout]

hello,

I retired this year at age 51. Decide on your asset allocation, set up a cash reserve to draw from and ignore market. I have set up a 5 year, cash flow account and try to ignore the market swings. I keep reminding myself that we are talking 30+ years, so don't worry about the market. Yes, you do need to asset allocate so you can sleep at night. Everyone is different. I liked galeno (i.e. 25% in fixed income, some in mm other in bonds maturing in 2 year increments) and at end of each year shifting some stock into the fixed income portion to replace what was used.

best wishes

early out

[haha]

Quote:

I keep reminding myself that we are talking 30+ years, so don't worry about the market. ... I liked galeno (i.e. 25% in fixed income, some in mm other in bonds maturing in 2 year increments) and at end of each year shifting some stock into the fixed income portion to replace what was used.

I must be mis-understanding. At one point you say "we are talking 30+ years", then you say "each year shift some stock into fixed income to replace what was used." To me, that gives in effect a one year horizon, not 30 years. SInce market up or market down, you will be selling stock. Is this what you mean?

I would be more comfortable with varying allocations, depending on the level of the market. I know it is not as mechanical, but it may accept a small ongoing anxiety in favor of a big disappointment later on.

Mikey

[earlyout]

Hi,

this is one way to look at it. Say you have $ 500,000 , are retired and looking at 30 to 40 years of retirement.

Safe withdrawal rate of 4% (could be 3-5%, depending on risk tolerance). yearly withdrawal adjusted annually for inflation = (4%)($500,000) = $ 20,000 year cash flow from investments.

investments (depending on risk tolerance) is 75% stocks 25% fixed income. The initial start up would be
75% stocks = $ 375,000
25% fixed income = $ 125,000
$125,000/ $20,000 annual withdrawal, lasts 6 years+, will cover most bear markets.

then once each year move 4% from stocks to fixed income (MM), to replace what was used up in withdrawals.
Fixed income could be 2 years worth of withdrawals in MM ($ 40,000), 2 year in US bonds, 2 years in corporate bonds etc. each year shift some from MM to bonds.
Current yield on I-Bonds is 4.66%, good rate for short-term, guaranteed money. The above can be adjusted to your needs, this gives a general idea.
Always do your own checking for what is best for you. Adjust above for your risk tolerance, time frame and beginning asset base.

good luck

earlyout

[Ted]

Quote:

In the past year I have accumulated about $200,000 in "cash" because I am fearful of investing in anything that would have any risk associated with it.

Unfortunately, even "cash" has a substantial risk -- that of losing purchasing power if and when inflation increases. *Some of the "early retirees" in this forum seem to be too young to really appreciate the negative impact that inflation can have on the purchasing power of people who are living off of their invested money. *Inflation (within reason) is not necessarily bad for the overall economy, but when the inflation rate increases, it shifts purchasing power from creditors (investors) to debtors and people who are working and experiencing the rising wages that accompany general inflation.

Other than a nominal amount that I hold in a checking account for purposes of routine bill payment, I keep "cash" in Vanguard's Short Term Corporate Bond Fund, which historically has provided a return that at least matches inflation, even after taxes on the dividends. *(The "dividends" on such funds are actually interest payments from the underlying bonds and therefore are still taxable as ordinary income).

For a greater probable real (inflation-adjusted) return, with minor risk of near-term loss of value, I can't think of a better investment than TIPs. *I-bonds pay less interest and are only preferable to TIPs if you are in a high tax bracket, since the "interest" payments on I-Bonds are tax-deferred. * I-Bonds are not as liquid as TIPs because there is a mandatory holding period.

You should also consider REITs and high yield bond mutual funds. *In terms of the "standard" allocation between stocks and bonds, these may be considered to have risk/return characteristics that are about 2/3 like stocks and 1/3 like bonds, but the price fluctuations will be different than either stocks, bonds, or even a fixed blend of stocks and bonds. *Therefore, using these assets as partial substitutes for stocks and bonds can reduce a portfolio's volatility without reducing its expected return.

For example, if my "normal" preferred allocation (outside of my "cash reserve") were 50% stocks and 50% bonds, I might put 10% into REITs and 15% into high yield bond funds, reducing the stock allocation to about 35% and the bond allocation to about 40%. *And I would have a substantial portion of the bonds in the form of TIPs.

[LA_Newsboy]

Howdy all. A very interesting issue and replies. I have a question regarding TIPs.

By way of background and introduction, I am 58 and have been retired for three years. I set up my retirement finances following a plan advocated by Jonathan Clements, the WSJ's "Getting Going" columnist.

I keep five to six years of living expenses in MM and CDs, and rest of my taxable and tax-deferred portfolio in well diversified and allocated mutual funds.

So far, my plan seems to working and provides plenty of income for my wife and I to maintain our pre-retirement life-style and has even allowed for increased travel.

But now, with rates so low, I am beginning to mull the idea of moving maybe perhaps $100,000 from the MM/CD bucket into TIPS.

I would welcome all further thoughts/ideas/advice/criticism on TIPS. And my question is this: Is there a mutual fund family or families that offer a TIPs fund?

Thanks to all,

Dick

[JWR1945]

LA_Newsboy

Quote:

I would welcome all further thoughts/ideas/advice/criticism on TIPS.

Here is the official website with basic information. You will want to wander around the site:
http://www.publicdebt.treas.gov/sec/sec.htm

A general overview of US treasuries:
http://www.publicdebt.treas.gov/of/ofbasics.htm

A discussion of treasury inflation-indexed securities (TIPS):
http://www.publicdebt.treas.gov/sec/seciis.htm

I think that you should look into ibonds as well. They have advantages in several instances, some of which may apply to you. Here are the FAQs about savings bonds:
http://www.publicdebt.treas.gov/sav/sbdfaq.htm

The Treasury is not currently selling anything that matures later than ten years. You must buy any 30-year TIPS (with slightly less than 30 years remaining) on the secondary market (i.e., through a broker). Yields on those bonds have been above 2.2% for the last month or so.

There are TIPS funds, including at least one by Vanguard that I know about. Remember, though, that owning bond funds are much different than holding individual bonds. Bond funds continually buy and sell bonds. When you own individual bonds, you can hold onto them until maturity or some other time at your convenience.

The inflation protection offered by TIPS improves your financial position dramatically when you use FIRECalc. (Understand that FIRECalc's treatment of fixed income investments is limited and that is by necessity.)

I think that you are making some good moves, which includes investigating the facts before taking action.

Have fun.

John R.

[Telly]

Hi,

There are at least 3 TIPS mutuals:

Fidelity FINPX
Pimco PRTNX (watch the load and E/R on this one!)
Vanguard VIPSX

TIPS mutuals were doing good, until about the day I mentioned on this board that even my stinkiest Tax-Exempt bond fund's return in 3 mos. was greater than new CD's return over a year. From that day on, the bonds have been floating lower, and the TIPS funds have too. But the TIPS funds went up about 1/3rd % today.

About inflation, Ted's comments are good. I well remember those days. New hires to the company I was working for were getting paid higher, to keep up with the inflation rate. That was needed to attract new employees. But the rest of the folks were lagging the high inflation rate for some years there.

The high inflation rate actually helped me some back then. I was able to pay off my mortgage (10% rate) with cheaper and cheaper dollars. I paid it off by qaudruple (sp?), triple, or double principle payments. Nothing like seeing a printout of each payment into the future, with the amounts for principle and interest for each! What fools we were for not paying more extra principle payments in the beginning when the principle amount was such a small part of it all! But inflation helped pay it off even earlier.

[MRGALT2U]

I suggest that everyone remember that none of us
may still be here on Monday. This is important!
Projecting your situation out 20-30 years is fine.
Always remember that you might not live too see
the result.

[Ted]

Quote:

I set up my retirement finances following a plan advocated by Jonathan Clements, the WSJ's "Getting Going" columnist. I keep five to six years of living expenses in MM and CDs, and rest of my taxable and tax-deferred portfolio in well diversified and allocated mutual funds.

I don't think that you can find any better advice than that offered by Jonathan Clements. He understands the implications of "efficient markets" -- meaning that the best way to maximize probable long-term, risk-adjusted returns is to diversify investments, and to minimize taxes and other expenses.

Jonathan and I would suggest that you put more of your short-term investments in a low-cost short-term bond fund such as Vanguard's, rather than MMFs or CDs.

He and I also are also advocates of TIPs, held either directly or through low-cost mutual funds. Telly posted this on July 9 (and I don't know how to automatically quote it):

"There are at least 3 TIPS mutuals:

Fidelity FINPX
Pimco PRTNX (watch the load and E/R on this one!)
Vanguard VIPSX"

TIAA-CREF also has an inflation-protected securities fund with low expenses competitive with Vanguard's. What's more, a person can own this within a TIAA-CREF after-tax annuity, which, for a reasonable additional annual fee, makes the earnings on the TIPs tax-deferred.