Set it and forget it retirement

[mugs]

I’m a single woman about to retire at the end of the year. I want to set up a “Set it and forget it” financial plan that will last for at least 30 years.

I’ll be receiving about $17,000 from social security and my expenses will be about $50,000 per year. My home is paid for.

For assets, I’ll have around $150,000 in a taxable account, and $1,100,000 in 401K/IRA ROTH accounts.

My problem is that $720,000 of the 401K will be in cash (as a result of a payout from my company 401K plan).

I’m considering signing up with Fisher Investments (charging 1% or 1.5% of my account as a yearly fee)

My brother is recommending that I either move all of my accounts to Vanguard and use their financial planning services, or skip the financial planning and invest as follows for a “Set it and forget it” plan:

VGSTX – 30% - A conservative fund of funds.

DODGX – 20% - An aggressive low cost actively managed large value fund. I already own some, so it’s being closed isn’t an issue.

VSMGX – 30% - A conservative indexed fund of funds.

VWENX – 15% - A conservative actively managed fund.

DODFX – 5% - A bit of foreign exposure to add to the DODGX foreign exposure.

I’m thinking on using another fee based financial planner, but I really don’t know WHAT to do.

Any suggestions?

 

[wildcat]

[quoteI’m considering signing up with Fisher Investments (charging 1% or 1.5% of my account as a yearly fee) ]
Reconsider. For those investors who don't know much or don't care much about rebalancing, allocations and slicing/dicing, why not just put your money into Target Funds that match your needs going forward? That's the only true set it and forget it plan. Pay 1-1.5% is crazy when the returns will likely not compensate for the expenses. You worked hard to accumulate the money, why pay it out and make someone else rich in the process?

 

[wildcat]

BTW Mugs - that was free

 

[LOL!]

Hi Ms Mugs,

Vanguard is probably a good way to go.  Fisher is not.  If you like the Fisher route, then go with someone better and cheaper.   Here are two links which you should look at:

www.altruistfa.com
www.evansonasset.com

You can also read the stuff at
www.fundadvice.com

FD: I have not used any of these outfits, but maybe one day I will.

 

[mickeyd]

Hey Mugs,

You have gotten some pretty good advice so far, most of which I agree with. Most folks do not realize how much a 1% fee on the value of their funds is. This is why investment firms use percentage (%) rather than dollar amount. 1% on a million dollars doesn't sound like much to pay for someone who is going to look after your hard-earned money. However $10,000 a year for the rest of your life is really more indicative of the real costs. You would also have to pay the expense ratio of each mutual fund that you were also invested in, an average of 1.5% (or $15,000). 

This is why you are receiving so much support in this thread for the Vanguard option.  A million dollars at Vanguard at 0.20% (ER) would be that same as about $2000 per year.

The difference ($25,000-2,000=$23,000) is yours. And again, this represents only one year.

This is also the reason why Fisher would like to have you as a client ($25,000/annually). Vanguard/Dodge & Cox would also love to have you as a client also but leave it up to you to decide.

 

[free4now]

One way to look at it is that by learning to be your own financial adviser you are effectively earning $20k a year or so. Once you have your portfolio set up you shouldn't need any more than just to rebalance once a year or so. Hardly worth paying someone $20k a year for.

I suggest you DIY with Vanguard, and look at the Target funds.

 

[mb]

Fisher:  

Vanguard:    

 

[Cut-Throat]

You should have no Problem with a 1.25 Mil portfoilo and only needing about a 3% withdrawal rate. My advice would be to go with the Vanguard Target Retirement Fund 2005. They will change the allocation for you as you get older. The yield on this fund is around 3.8% which is more than you need to add your SS to give you $50K per year.

RUn this by your brother, he sounds like he knows what he's doing.

I'll bet he agrees with my advice. He may not be aware of these funds. You can truly set and Forget it and redeem shares on an annual basis.

 

[JWR1945]

For Mugs:

I recommend against paying anywhere near 1.0% to 1.5% in management fees. You need a custodian to handle retirement accounts. Pay Vanguard or some other low cost provider to handle the account, but direct the money yourself.

I recommend that you build a TIPS ladder within your tax-sheltered account. If you can get 2.0% interest rate (the current rate for TIPS), you will be able to withdraw 4.0% (plus inflation) for 35 years before running out of money. This should be enough even after taxes.

[Even if you were not able to get any interest at all, you would be able to withdraw 3.33% (plus inflation) for 30 years. This means that $1000000 would be enough to meet your $33000 (plus inflation) requirement if it were not for taxes.]

With a TIPS ladder, you make your withdrawals from the bonds that mature and reinvest the rest. That is, you buy some new TIPS at the longest maturity of the ladder. In your case, I would expect you to choose a ladder length between 10 and 20 years.

This approach meets your requirement for income.

You also have the option of reinvesting some of your money into stocks later, if you find them attractive enough. Pay special attention to high quality companies with higher than average dividends. The odds are high that you will be able to find some really good stock buying opportunities within the next 10 to 20 years. Exactly when? I don’t know. But it will happen sometime within the next 10 to 20 years.

In any event, you never have to buy any stocks. You simply have the option available to you.

Have fun.

John Russell

 

[mb]

Mugs,

A few comments:

(1) Is your 401k currently in cash?  If not it is a sideways move to go from stocks/bonds in the 401k to similar stocks/bonds in a Vanguard account and doesn't change your risk levels.  If the 401k is in cash you might want to consider putting it in a money market first and then dollar cost averaging it into the funds.

(2) I suggest that you calculate the overall stock, bond, etc. allocation since your bonds are in balanced funds.  I think that you should know where you are at.  I think that your funds are all good choices and I'm not sure what your knowledge base is as far as investing but it would be worth while to do some home work on asset allocation.

(3)  If you want to make it really simple look at the taget/lifestyle funds.

MB

 

[Jane_Doe]

Welcome, Mugs!!!  

You have come to the best place to get lots of good advice.  

Take your time - don't rush into anything that you don't feel comfortable with or understand fully.

I agree with the Target Retirement Fund at Vanguard - it truly is a "set it and forget it" account.   

Please don't pay anyone a percentage of your portfolio - if you really feel the need to pay an "advisor" there are fee-only advisors who charge an hourly or set rate.  Find out up front the cost and also find out if they are making any money (very likely) off of any of the investments they sell or recommend to you. 

Please keep posting here - you are among friends! 

Wishing you good luck!
Jane

 

[gindie]

While I agree with the "target portfolio" approach, I'd first investigate a couple of others besides Vanguard.

True, Vanguard is the cheapest, but they tend to have the most conservative stock/bond mix.

Before commiting to Vanguard, take a look at the similar, but a little more aggresive offerings by T. Rowe Price and Fidelity.

 

[Cut-Throat]

The odds are high that you will be able to find some really good stock buying opportunities within the next 10 to 20 years.

Exactly when? I don’t know. But it will happen sometime within the next 10 to 20 years.

Not necessarily!

No one knows for sure. Stocks may be cheaper now than anytime in the next 100 years!

 

[cute fuzzy bunny]

...not to mention that TIPS ladder only works great if your personal inflation rate is less than or equal to the CPI, and you dont live longer than 35 years...

My bet is you see declining value of your portfolio in many areas due to CPI underperformance, then the joys of hitting 90, still being alive, and having no money.

But its nice to get our semi-annual visit from one of the 'wonder twins'...

 

[frayne]

Various portfolios back tested, may be of some interest.

http://socialize.morningstar.com/Ne...F100000015&convSeqNumber=48384&mrr=1141516560

 

[Ed_The_Gypsy]

Mugs wants a set-it-and-forget-it package.

I would go with Vanguard, for sure (and I have!).

As I recall, Vanguard will also set up a regular withdrawal for you, even a SEPP withdrawal schedule by the 72T rules.

EZ. Least expensive. Automatic.

Now, go to Spain and lay on the beach.

 

[rs0460a]

Hello Mugs!

I was going to be the "first" (really I was  , when my DW told me it was "time to go" (go here - go there - go everywhere) yesterday, when I read your initial post.

24 hours later, I see that the "advice"   I have to contribute to this issustrious "gang of reason"   is the same....

I split my (and my DF) portfolio between Vanguard and Fidelity.  Fidelity, since it is "required" of my respective work places, and Vanguard, since I've been with them "on my own" for the last 20+ years.

The important thing stated in all the posts (and I agree), is to not let your retirement decisions "to someone else".  As has been stated, it will "cost you" upwards of $20K per year to have somebody else tell you what to do.  Wouldn’t it make more sense if "YOU" understand the "investment scheme" and save the $$$?

I have (over the last 25+ years), and have spent the time in the local colleges (macro/micro economics, global economics, investment theory <yes, even learning the Sharpe Ratio for investment performance analysis!>

I can't reveal the detail results, but I can tell you that it certainly made a difference in "where I was - where I am" from a financial perspective.

The only "advice" I would tell you is to "take charge", but do it carefully.  Don't jump into any new scenario unless you understand and accept what the results would be.

No, having your money in a retirement (e.g. tax deferred account) money market account may not seem "glamorous", but it's safer than "making the leap" without knowing what's on the "other side of the wall".

Peace!

- Ron

 

[Caroline]

Thanks for the great question, Mugs!

I'm right behind you on the retirement track and want to set up a plan that takes minimum effort and allows me maximum play time! I own a couple of Vanguard funds myself for non-retirement money, and plan on moving my mish-mash of 401(k) accounts over to Vanguard before I retire.

Does anyone think it would be wise to split the money among a few low-cost fund companies, instead of just one, to lower the risk?

I suppose that Vanguard is as sound as any other company. If they got into trouble it would probably mean that the whole market was on the ropes -- so owning more than one fund wouldn't matter anyway.

Thoughts, anyone?

Thanks,
Caroline

 

[wildcat]

Does anyone think it would be wise to split the money among a few low-cost fund companies, instead of just one, to lower the risk?

C -

We discussed this in an old thread (Yrs to go..) and the consensus was your money will be safe at one institution. I believe Al posted the facts.

 

[cute fuzzy bunny]

Vanguard is basically shareholder owned, and even below that level, theoretically you own the underlying stocks and bonds in your funds.

This is sort of one of those 'nuclear war' scenarios. Should a company like vanguard suddenly become insolvent, maybe your portfolio isnt going to be your biggest problem.

Still, scandals come and go. If I were going to list a hundred fund/investment companies that I thought would run into a scandal, vanguard wouldnt be one of them.

 

[justin]

While I agree with the "target portfolio" approach, I'd first investigate a couple of others besides Vanguard.

True, Vanguard is the cheapest, but they tend to have the most conservative stock/bond mix.

Before commiting to Vanguard, take a look at the similar, but a little more aggresive offerings by T. Rowe Price and Fidelity.

If you want a more aggressive stock/bond mix, just pick a more aggressive stock/bond fund at Vanguard. Like Target retirement 2015 or Lifestrategy conservative growth (or moderate growth, if you want more risk). When other fund companies charge you 1-1.5% in fees, they have to get more aggressive to increase the returns (and as a result, volatility) to pay the extra 1-1.5% in fees. No need to shop around when you are already at the discount store (Vanguard) who only charges 0.2-0.25% for the funds I mentioned.

Mugs, without investigating further, it looks like your brother has recommended funds that would make your portfolio almost all stock (very little cash or bonds). With this type of portfolio, you will experience a lot of price fluctuation and volatility. You may want to consider a less risky portfolio with a larger share of cash/money markets/bonds.

As to selecting the advisor, DON'T DO IT!!!! The total expenses for an advisor will be around 2.5% (1% for the advisor, plus 1.5% for mutual fund expenses that the advisor will stick you in). 2.5% of $1.25 million is $31,250 per year, almost the exact same amount you will need to withdraw from your portfolio. Wow. Just find a fund or a few funds, and like you said, "set it and forget it". You'll do a lot better that way.

 

[cute fuzzy bunny]

Vanguard does tend to run more towards the conservative side, however its pretty easy to 'counteract' that by choosing a more 'aggressive' fund or leaning more heavily towards a 'riskier' choice.

It also makes picking some normally risky asset classes less concerning. Look at the credit quality in the 'high yield corporate bond fund'. Not that bad really.

 

[HBH]

Reply from brother

Hi,

This is Mugs' brother.

You all sure have been helpful to her with all of your replies.

Probably the best thing you've all done is that she's now leaning against using that expensive financial planner! I tried to dissuade her, but she needed that extra nudge.... If she still feels that she'd be more comfortable running her portfolio by a financial planner, the one's at Vanguard should do nicely.

The portfolio I recommended was stock heavy, but I figured that the SS would act like bonds and, along with the bond portions of the VGSTX(35%), VSMGX(29%), and VWENX(31%) would balance her portfolio.

However, I see now that I was designing a portfolio more for MY needs than for HERS. She should probabily go with a 55/45 (or maybe 50/50) bond/equity split.

I still like the original funds that I recommended, but would add a DODIX portion that, along with the SS treated as bonds and other funds, would achieve the desired mix. If she decides to go with a fee based financial planner like Vanguard, they might have some other suggestions for actual funds.

I wasn't recommending the Vanguard targeted funds because they seem to concentrate on index funds, while I believe that SELECTED managed funds tend to do better.

Thanks again for all of your help for her........ PLEASE, keep it coming!

HBH

 

[rmark]

Vanguard Target funds would be simple and easy. Few managers beat the market average after expenses (plus hidden transaction costs) and taxes. In taxable accounts the high turnovers eats into your return.

Target 2025 is about 60%stock/40% bond, which is typical of portfolios used in research that developed the 4% withdrawal rule of thumb.

 

[rmark]

I should add that the 4% rule of thumb is taken from academic studies that didn't include investing costs, so your net withdrawal is lower. High cost funds typically just reduce your net even more.

Retirement Savings Choosing a Withdrawal Rate That Is Sustainable by Cooley, Hubbard, and Walz. (also known as the Trinity Study)

Zunna.com/research has some other variations on this study.

For all the hype over winning fund managers, few are able to repeat over time, with most simply being lucky to catch a winning trend. Once you hold a large number of securities (as happens as money flies into a winning fund) you tend to become average.

Magellan fund under Peter Lynch barely beat the S&P 500 after costs and taxes, but when compared to the midcap stocks he invested in early in his career there, he fell behind (I've lost my reference for this, past hard drive failure). As it grew he moved to larger stocks and fell behind.