Pre-Retirment Investing Strategy


Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Sep 25, 2003
Hi All, I am presently 54.5 years old and have just been presented an opportunity to take a voluntary early retirement package at work :D.  Given that: interest rates are at historical lows for lump sum calc, the lump amount will be increased an additional 5%, and given severance pay will take care of ~ 18 months living expenses, and my medical will be paid for 1 year, makes me seriously want to take this offer (this could be the last voluntary offer the company ever makes).  Although I don't plan to completely retire until age 60, I want to make sure I invest my pension, 401K and severance pay wisely.  Today, the wife and I visited with a retirement planner, who made the following recommendations:

1) Place severance in a tax exempt (muni bond) fund so as to provide 12-24 months living expenses, fairly liquid and can be drawn against electronically.  My severance will total about $xxxK before tax and could go here.

2) Roll Pension lump ~$xxxK into IRA equity indexed annuity and leave it there.

3) Roll over my 401K money ~$xxxK into an IRA with asset allocation of 25% large cap funds(value,growth), 25% mid cap funds, 25% small cap fund, and 25% international.

I have not yet discussed cost/fees with the planner, but I wanted to request your opinions on such an approach.  I am very concerned about loads, sales fees, and other potential gotchas and will have another meeting with the planner to discuss these details.  There are some very savy folks on this board, so your input would be most appreciated.


What are you going to live on? What portion of this money will you need and when. What is your emotional/skill/comfort level with stocks and bonds and volatility of the markets. Since you were planning to retire later at 60 what does this early offer do to your plan? Look at what you have to do to avoid any tax hits if you are pressed for time - i.e. can the 401k stay with company until YOU are ready. Severance (taxable?) can go a lot of places. Lump pension can go to money market IRA until you are ready to asset allocate.

BTY - disclosure requires me to say I'm a diehard Boglehead since I read his book in 1994.
My understanding of most equity indexed annuities is that they tend to have much higher expenses than index mutual funds. Higher expenses can reduce return over long periods of time. In return for the lower return, there is usually a guarantee that you can get your original money back if you leave it in a certain amount of time. Pay careful attention to expenses, this is the area that can potentially hurt your long term return the most with this type of product. How much will depend upon the particular product being offered.
Equity indexed annuities read like a new form of toxic waste - that's my initial impression from just reading the definition of them using search on my webtv prior to this post. They are unregulaed ( by the SEC ) insurance products for people who want a minimum garanteed return (3%) and some upside of the selected index and vary widely as to terms calculation methods etc. Read carefully and procede with caution.
 Today, the wife and I visited with a retirement planner...

If you provide some indication that you regard your wife as a person rather than an object, I'll give you some useful advice.
Boy oh boy - I feel left out. Flamewise that is - I expected 'Boglehead' and 'toxic waste' to draw some spirited response.

An annuity done well can be an effective part of a retirement plan. The big hit is expenses - can you do what YOU want to do at lower cost - via say index funds.

Take our case, combined portfolio's (balanced index) dropped maybe 150 to 180k at low point (yrs 2000-2003) out of a peak of maybe 800 to 850k. Would that cause you to lose sleep at night?
Heh heh... Count your blessings. I am so happy (and even a little surprised) that this board has maintained it's adult demeanor and sense of proper deportment. The other boards: Motley Goons, MSN, and even sections of Morningstar, long ago degenerated past the point of any value. Very sorry scenes

Boy oh boy - I feel left out. Flamewise that is - I expected 'Boglehead' and 'toxic waste' to draw some spirited response.
I'm not sure I have the stomach to go through another period like we have been through without some downside protection. Although the costs/flexibility of an annuity are definitely elements to look at carefully before diving in, my initial reaction was that I like the fact the principal has a floor, and you can still get some upside growth, although the upside would be something less than actual market performance that the annuity is indexed to(eg S&P 500). The other aspect of the annuity that appealed to me is that it somewhat gets you out of the risk of investing in the market when its relatively high and then seeing the market and your investment immediately nosedive.

Alternatively to using the planner as described above, would be to manage this portfolio myself using a discount broker like Schwab, or maybe staying with a large cost effective family of funds like Vanguard. If I take that route, most likely I would adopt a conservative growth strategy and allocate something like this:

64% fixed income
21% large cap
11% small cap
4% international

The other aspect to my situation that I need to address is: what if I don't get a job before my severance runs out, then I will need to Sepp possibly either the 401K( first would need to transfer to IRA) or the pension money which would be in an IRA.

I am still not as financially savy as I would like to be, and dealing with investing a large amount from a market timing perspective is a concern, as is re-balancing periodically, and avoiding tax/cost to fullest extent possible. Despite my limited knowledge, I have not done too badly in my 401K, despite suffering significant losses from my own companies stock that doesn't provide much option to reallocate within the 401K portfolio. Its shameful to end up toward the end on my career and now have to educate myself financially, but better late than never. This board is certainly a wealth of info, and is a great place for those that are financially naive to get educated. Wish I planned a little better 10 - 15 years ago as the ER dream would already be a reality for me, but there is no point dwelling on that.



PS - If anyone else is wondering, I love and cherish my wife dearly and all decisions we make are as partners, and having a wonderful spouse to share retirement with makes me really look forward to those years ahead.
Its shameful to end up toward the end on my career and now have to educate myself financially, but better late than never.

But it seems many never do! They march into some financial "planner" (most are really salesman!) who tells them what to do. I strongly recommend reading the book "The Four Pillars of Investing", and chanting over and over, "they are NOT our friends". Sure, you have a learning curve to come up, but you are making a start, and none of the investing decisions need to be made right away. A year later you will look back, and realize how much you have learned. I know my wife and I sure have.

At a quick look, for your age and level of assets, you are in great shape. Age, because you only have ~7 years till SS is available. Level of assets, because, well, there's quite a bit there!

But I do have some observations which may or may not temper my quickie assessment above:
No mention of savings outside of the 401k. Do you have after-tax savings assets?
The first child's future college expenses that are "taken care of", are those outside of the assets listed, or will they be included as expenses drawing on the listed assets?
For the last child, there's college, and, well, college. A far off private school with high tuition, and if no scholarship is available, will be big $.

Do you have a handle on what your realistic living expenses are/will be? This is a key to any plan. I don't think any plan can be seriously laid out without a handle on that. And its okay to make some cutbacks if Dad isn't working anymore. No shame in that.

Tread very carefully with annuities. For us, fixed or variable were not a good choice. Resist the human impulse to try to protect all your assets from possible decline (while at the same time, killing the reasons that they would most likely appreciate!).

Inflation. Right now inflation is very low. Whenever some parameter stays at a level for an extended period of time, people factor that level into their thinking. But it will change, as I'm sure you remember double-digit inflation. When we had double-digit, an old(er!) couple lived a few houses over from where we were living at the time. He was on a fixed pension, and kept cutting back and cutting back. It was sad. Like a big annuity would be. Looks great for the every month check in the beginning, but...

Oh, enough pontificating from me :)

P.S. about the Ted comment, I always look forward to reading Ted's posts. As you mentioned, he is very knowledgeable and willing to share it here. I always enjoy the discussion. That was not at all in character! Either a "turn of the phrase" text translation issue, or someone got ahold of his login. I knew a guy who had a bulletin board account set up and left the "always log me in" default boxed checked. Well, his Granddaughter would get on his computer when she was over, found the link to the board, and made very nasty posts to the regular users, all under his username of course! He had a lot of angry people to try to placate. He didn't catch it for a while!
Thanks Telly, I'll pick up a copy of the book. As to savings outside/beyond what I have mentioned:

Have approx $144K in stocks/EE bonds/MM (about $40K being other IRAs), a large % of this will fund child 1's college. From an expense perspective, I am running currently around $80K and could easily ratchet down to $72K, and if we downsized current house, probably down into the $50's. Want to be able to offer child 2 a private school ed, but I need to make up some ground over the next few years to do so.

I hear you on the dangers of inflation, but no matter what one does there are +/-. One other factor with my company pension is that I can take it either as lump, annuity, or a combination thereof. Possibly taking a portion of pension in annuity, enough to cover my housing/insurance might be good protection in event I can't replicate current salary before severance runs out.

Lots of options and much to think about, but its a great way to keep the brain stimulated :D.


One more thing to reasearch - between ages 55-591/2 your 401k withdrawal rules are different than IRA - provided you "separated from service at age 55". I never used this option in 1998 and the rules may have changed but I had a small 401k I could have tapped without penalty - amounts are added to over all taxable income. Once you rollover you go to IRA rules.
Unclemick, A big bummer with my timing is that I need to be off the companies payroll this year and I'm still 54. If I was 55 now, that would have made the 401K accessible without the 10% penalty. I do have the option of leaving the 401K where it is and could always roll over at a later date.

Anyone out there using any tools (eg Morningstar) to track/analyze the portfolio? Recommendations?


If you take a monthly pension, be aware that the PBGC will probably only guarantee a small fraction of the size of pension you would receive if you take the whole thing monthly. Early retirees are hit particularly hard by the age cap on their guarantee. The airline pilots lost fantastic amounts of money when their plans failed. This would only come into play if your company pension plan fails, and it is PBGC insured.

Morningstar offers part of their portfolio tracking for free. You can try out the free portion to see if it is helpful to you. They also tend to offer free short term trials of their pay service from time to time.
Anyone out there using any tools (eg Morningstar) to track/analyze the portfolio? Recommendations?
I have used the free Morningstar portfolio tools in the past, as well as the fund analysis tools at They are still worth a peek every six months or so. These days I primarily use Quicken and the old Quicken Financial Planner for detailed analysis of my investments, budgets, and withdrawal benchmarking.

Once you get a plan to your liking, things move pretty slowly after that.


I also use the Quicken retirement planner. This coupled with Firecalc gives me about all the planning tools that I need.

I used Quicken to give me the confidence to take the leap into ER a couple years ago.
I use Quicken also.

Has anyone tried the new version of Quicken? Is it worth buying? I'm on 2003 version and didn't see any features in the new version that made me want to run out and buy it.

(215 days and counting)
Hi moguls,

I have bought the new version of Quicken 2004. I buy the new version mainly for the new tax tables. Quicken 2004 has a bad bug in it and I have re-installed 2003.

The bug has to do with customizing the graphs on your home page. If you do so, it will corrupt all your data. I contacted Quicken and they said they knew about this. I will not install 2004 again, until I see a patch available on their website.
Wow! Thanks Cut-Throat. I appreciate the advice.

(215 days and counting)
To get back to DFW_M5's original question: isn't an annuity in an IRA a pretty terrible idea? Is an "equity indexed annuity" the same thing as a variable annuity invested in an index fund? The main benefit of an annuity, as I understand them, is the tax deferral. If you are putting it in an IRA then you are adding a ton of fees for no reason. If there is downside protection, then you can probably do that a lot cheaper by mixing in some bonds.

Scott Burns had some pretty harsh words for an advisor that put IRA money in a variable annuity here:
Here are some good links for Equity Index Annuities:

This was a reply over on the conversation boards, by Chuck Yanikoski:

“An Index Annuity should be compared to a fixed annuity (which, technically, it is, which is why it is not regulated by the SEC and does not require a prospectus).

The idea behind the Index Annuity is a good one: rather than lock people into a fixed annuity, which reflects current market conditions and expectations but which may not continue to do so indefinitely, use a fixed, guaranteed base for the annuity, but also let the owner share in the market upside.

Obviously, you cannot share fully in the upside if you are guaranteed not to share in the downside. Also, rather obviously, this kind of arrangement is complex to develop, sell, and administer, so expenses tend to be higher than for plain vanilla annuities. These issues may well be valid reasons, in any given case, for avoiding the product.

There are so many variations on index annuities out there, that it is very hard to generalize. I do think it is fair to say, though, that in ALL cases you need to be willing to invest some serious time to read and understand the product specifications fully (if you do not get written product specs, walk away!). You really need to be something of a financial genius to intelligently compare two such products, unfortunately, so it is difficult to know whether you are getting a good deal.

Personally, I would not dismiss this concept out of hand, IF you are the kind of person who likes the idea of a fixed annuity, but wants a chance at some upside participation. The market is well off its peak right now, and over the long haul there is probably a lot to gain on the up side. If you want a piece of that action, but feel you cannot afford (or would not sleep well) taking downside risk, an index annuity could be the right thing for you.

But if so, be careful. When you look at all the costs and at the limitations on the gains, you might change your mind!”

Before I put money into an EIA, I would make sure I understood all the possible upsides and downsides. What is the participation rate (remember, no dividends to reinvest)? Are there any surrender charges? Is your financial planner compensated any differently if you don’t put money into the annuity?

I would never invest in anything I don’t understand. This way, no one can pull a fast one on you.

- Alec
The financial strength/rating of the company producing the annuity is also of some importance.
"You really need to be something of a financial genius to intelligently compare two such products, unfortunately, so it is difficult to know whether you are getting a good deal."

If the deal is overly complex, and there are large fees involved, then I think it is NOT difficult to know whether you are getting a good deal.
From all that I've read or heard from people I respect, I'd have to say anuities do not belong in IRAs generally. I'm sure there are exceptions, but I've never heard/read what they might be. Anuities benefit the salespeople/ Insurance companies as much or more than investors.

My educated (?) opinion but then I'm not legally qualified to make recomendations nor do I play someone on TV that is.

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