@Kathy: Rental income can be a good investment from a tax perspective, as you can deduct the real estate tax and maintenance costs as well as depreciate the asset over time. Real assets, like real estate, also tend to increase in value in an inflationary environment, which some people fear we may be heading into. On the downside, it isn't a very liquid asset, so if you anticipate needing to sell the property to fund your living needs you may be better off putting the money elsewhere.
@Ann: There are investments which sound too good to be true. There is always a catch. Let me explain how this one works, and you can do it better if you want to:.
@ann: As others have said, the fees associated with annuity products can be high. I rarely find fee-only advisors recommending them. If you do really like the idea of a fixed payment, I would say it should only be a small piece of your overall retirement income strategy.
@Kathy: Here is how they have a "guaranteed monthly payment that will never go down but can go up depending on stock market". First they buy a zero coupon bond. In five years you get all your money back, and they can buy it for $0.85 on the dollar. This gives them $0.15 to buy options in case the market goes up. IF the market goes up and they make money, they give you half of what they make and keep the rest. If that sounds like a good deal to you, they you should buy their investment. Of course you could do the same thing and get all the profit, but that's their gimmick. What you get is a fraction of the upside of the market.
Many economists worry that inflation will rise well above 2% once the economy gains steam.
An interesting strategy, David!
Alright, here's our next question.
@RC Smith: Every economist thinks that the economy will recover. It is only a matter of time until millions of workers whose very livelihood depends on their companies earning a profit make those companies profitable again. There is usually a reversion to the mean, so when the economy is slow or negative it will ultimately rebound and return to average. Perhaps that is the wisdom that keeps seasoned investors from panicking when the markets drop or the economy stutters.
Smile, we recommend that you work with a fee-only financial planner on this vey complicated issue. In many cases, it can be more cost-effective to self-insure. Especially since many of the "best priced' LTC insurers have gotten out of the market.
@Smile: Long Term Care Insurance (LTCI) is constantly changing. They don't make the policy I would want, which is a waiting period of two years and then infinite benefits from that point forward. Most policies are the exact opposite, covering benefits quickly and then having a maximum. As a result, many of our clients choose to self-insure. It is also difficult to find a LTCI expert who isn't making their living selling LTCI. Perhaps some of the other advisors have sources they trust.
@Smile: There are long-term care brokers who sell products from several different LTC insurance companies. You can give them some parameters for what type of benefits you want (i.e. estimated daily benefit, inflation rider, number of years of coverage) and they can go out and get comparisons from several different insurers. I've worked with a company, MAGA, Ltd. in Chicago who has helped several of our clients in the past. You can get quotes with no obligation if you at least want to gather information.
Smile, as the advisors said, long-term care can be a very complicated issue, particularly because the the long-term-care insurance industry is in disarray right now.
Bobbie Munroe CFP, a NAPFA registered, fee only planner from Atlanta signing in....a bit late but sometimes technology doesn't play well with others. I'm so pleased to join with Kiplinger in this great effort to answer your questions.
Welcome Bobbie! Just in time for our next question.
Dear 24, a short visit wtih an hourly planner could help you check and see if your savings is sufficient. But I will list several thoughts...
@Phcastil: The most important practice is savings 15% of your salary for retirement. That might be 10% in retirement vehicles and 5% in a taxable investment account or it might all be in retirement vehicles. But saving 15% over a working career should adequately save for retirement.
The difficulty with putting your savings in dollar amounts is that your savings rate depends on your lifestyle.
1. Retiring at 55 is an ambious goal as you may well live past 100. I would love to think that you could do something that you loved so much you wouldn't want to retire at 55.
@Phcastil: First off, way to get started saving early! The "how much do I need to retire" is a tough question to answer without a lot of information. A rough rule of thumb is to save between 10-15% of your income. Without more info, I hesitate to say anything more concrete, but as Bobbie said, meeting with a planner could help you answer that question with more accuracy.
Phcastil, in order to retire at 55, we estimate that you can take 3.82% out of your portfolio. Your job is to have enough saved so that 3.82% provides the type of income that you can comfortably live off of. It sounds like you're off to a good start.
2. I recommend saving AT LEAST 15% of your income (that could include an employer match) to keep your lifestyle in retirement. Remember, you are likely to spend more in the earlier years of retirement...the GO GO phase, that you do while working......especially if you retire so young.
Here's our next question from Nate
3. You say you have a defined benefit plan.....a dying breed. Remember that you probably have to work a substantial period of time to vest in that plan, the amounts they quote are future dollars and they probably don' t inflate during retirement. It would be great if you could consider those 'gravey dollars" and save enough separately to cover your basic needs during retirement.
@Nate: Dollar Cost Averaging into the market, i.e. putting a set amount into the market over a set period of time, is a good way to start. Because you are putting in a set amount, you buy more shares when the value of the fund is low and less when the value is high. As far as what funds to choose, I would start with some inexpensive index funds that are well-diversified and try to replicate, not beat, the market returns.
I might suggest buying a Vanguard target date fund, perhaps for 2015. Now, this does NOT assume you will need the cash in 4 years but this could be a good start on a suitable portfolio that would get more conservative as you age. If you need the cash in 3-4 years then I wouldn't put the money in the stock market...tough since savings is earning so little.
Nate, Bobbie took the words out of my mouth...or my fingers...
I recommend to my friends who are interested in getting started with investing that they open a Vanguard mutual fund account and begin investing with one of the Age-based or "Target-Retirement" portfolios. Vanguard's fees are incredibly low and they have great educational materials. Vanguard is a client-owned company which how they are able to keep the fees so competitive.
I love it when other smart advisors agree with me:-)
@Nate: I would recommend a mutual fund company with low fees such as Vanguard. I would also recommend a diversified fund so it would automatically rebalance the portfolio for you. Perhaps something like Vanguard STAR Fund (VGSTX). Bobbie Munroe's suggestion is very similar, and allows you to target the date of retirement.
Next up, we have a couple questions from Elizabeth.