richard, depending on the size of your IRA, I would recommend keeping a year of withdraws in a cash, and then another 1-2 years in a short term bond fund for liquidity. You could invest the rest of this account in a balanced manner. Just remember to keep a solid bond allocation for income and safety.
Richard, they would indeed most likely be suitable - you can consider balanced funds (a mix of stocks/bonds), REITs (Vanguard's low cost REIT has paid nicely), large bond funds (to reduce concentrated exposure). We keep 3-5 years cash on hand for retired clients - so if you need $20k/year from your IRA, we'd keep $60k - $100k in cash, short term low cost bond funds, and invest the balance very conservatively given your age.
Allison and Bonnie, when you're ready, here's our next question from William
Hi William, here's some of what we evaluate in this scenario. What other resources do you have, what can they pay and what is the timing of their payment (other assets for example). We devise a retirement paycheck that shows source, amount, and timing to understand if we'll have enough to live on. Lump sum may be best if you have professional management. The monthly payment may be better if you want it on auto-pilot. Joint and Survivor is an educated guess based on many factors in your situation - predicted longevity of each of you, needs when the other passes, other resources available to the survivor. It's part of a larger picture. We'd need to know much more before coming down on one side or the other. I hope you take your total financial picture to a competent advisor to get an answer that you understand and agree with. Good luck.
William, if we assume that you will live until age 90, then that is 25 years of payments from the annuity which equates to about 4.75% annual return on the $500k. If you use a diversified investment strategy and have reason to believe that you can earn a higher rate of return over those 25 years on your investments, then taking the lump sum would be better. If you do not use a diversified strategy and/or expect to live a very long time, then the pension would likely be better (if we assume 30 years then the ROR increases to 5.5%, 35 years-6%
Here's our next few questions from Rad82 and Alan
Rad82 - what's the rest of your portfolio look like?
Alan, she will be entitled to 50% of your survivor benefits as long as you are receiving SS at full retirement age. If she claims survivor benefits before 66 they will be reduced.
Here's on more question for all of you from Micki before you have to sign off.
Micki-that is a very tough question in the current interest rate environment. I think the more important question is do they need the additional income on their money? How much longer do they expect to live and what does the rest of their situation look like. There are not many great options right now for income. I would likely look to short term bonds and make sure they have a diversified portfolio overall. Also be sure to avoid annuities or high risk investments at this stage.
Micki, lucky they have you watching out for them. I agree that does not sound appropriate. Can I assume this money is for their use and not to be passed down to another generation? If so, they could simply take what is not needed for the next few years and put it in a low cost Vanguard or other index bond fund for some extra income. It's liquid, low-cost, and provides more than CDs (although with some risk) and less risk than proprietary stock/bond funds
Micki, I would like to know what serum they are using to make it to 90! The most important thing for them would be to keep a large amount of their money liquid (cash and short term bonds). You can do this through short term bond funds with Vanguard. You can also look at balanced funds with both stocks and bonds like Vanguard Wellesley and Wellington. Just make sure that over their entire portfolio the majority is in fixed income for income and safety. Also, look into dividend paying stocks for the stock portion as income is important to them.
Micki - I would establish a bond ladder going out for about five years, which would provide guaranteed cash flow. Even at their ages, the balance could be invested in mutual funds, with maybe a total 50% equities/50% fixed-income asset allocation.
Thank you Kiplinger, this has been great and very informative!
Thank you! Signing off...
Thank you, Rich. We appreciate your help!
Agreed - good to 'see you' again Rich and nice to work with Allison - thanks, Kiplinger!
Thanks to you as well Bonnie, Allison, and Amanda!
Alright, hang with me here as we transition from advisors.
Eleanore (Elly) K. Szymanski, CFP signing on. I am with The Financial Planning Answerplace, LLC and EKS Associates, LLC--both of Princeton, NJ
Hello, Stacy Bakri, CFP, CDFA, from The Family Firm in Bethesda, Maryland signing on!
Hello. Jeff Kostis, CFP, CDFA, CPA/PFS with JK Financial Planning signing in!
Alright, Jeff, Stacy and Eleanor. Let's get going again here.
Here's our first question from Vietnamvet
To vietnamvet - First of all, thanks for everything. Second, your question is very technical and is one that the Social Security Offices, who have all your records, can answer for you. Please know that they have improved their responses significantly in recent years, so you probably will not have the hassle from years past. You deserve the exact calculation, which Social Security is equipped to provide.
Hi, Vietnamvet, you are correct in that SS will recalculate your benefit but not exactly the way your friend described to you...it's quite complicated. I would recommend you go to the SS office directly for the exact figures.
Vietnamvet, Let me start by sayng thank you for your service. For your question, yes, you should recieve credit for the checks you did not receive. From the Social Security website: "[A]fter you reach full retirement age, we will recalculate your benefit amount to give you credit for any months in which you did not receive a benefit because of your earnings. We will send you a letter telling you about any increase in your benefit amount".
Thanks, Vietnamvet. Here's our next question from JohnC
To JohnC46 - if you are planning on using any of the proceeds to purchase a new house, I would recommend keeping that amount in a money market account - safe and liquid. If you don't have in place already, I would recommend that you put at least 6 months of living expenses in a money market as well for a safety net. After the two items are considered, you could take the remaining proceeds and fold them into your already diversified portfolio. The funds would need to go into a brokerage account, not a retirement account.
JohnC62 - Thank you for your question. Where to put the money depends in large part on what your long term plans are. For example, if you plan to buy another house soon, the money to buy the new house should be put in a no-risk, insured account. Alternatively, if the money will be used for retirement and you both plan to work for 10 more years (your age 72 and your wife's age 61), the money can be invested for the longer term. Can you give us a little more information?
To JohnC46: If your house has been your primary residence for two of the last five years, your entire $500K is excluded from capital gains taxes. However, it looks like you are downsizing and will not require those funds for a new residence--is that the case? If those funds are investable, that would mean your portfolio might increase significantly from what you may be accustomed to managing on your own. I would recommend that you engage a fee-only financial planner to help you plan this new phase of your lives and recommend an investment mix that is appropriate for you both.