Christopher, the first thing I would do with extra money is build up an emergency fund equal to about six months of living expenses. After that, attack your debt like it was your worst enemy (it is) and get rid of it. Assuming you are investing enough for retirement, you can start building up a nest egg with a low cost no load mutual fund. Vanguard and Fidelity have them as do others. I like the Vanguard Star Fund and the Fidelity Puritan Fund. It's easy to get started. Just call them.
Wsledge, could certainly suggest one but as you have likely noticed from this chat and the large amount of articles on this topic, there are many, many ways to do this and they are different for each family based on their own circumstances. I don't think I can provide any real value to you in an answer unless we ran a report with your specifics applied. Please consider seeing your planner to do this.
Wsledge, others may be more comfortable with giving off the cuff advice on this topic, I find the nuances to be too complex, especially when considered in the context of income needs, than to sit down and run a report as Bonnie suggests.
wsledge - Did you know you can sit down with Social Security staffers and have them run the income you would receive under different scenarios? I've done that with clients and then determined the best route for them.
wsledge, you or your wife could claim and suspend (only one - not both) at full retirement age and the other claim spousal benefits while you both delay claiming your own benefit at age 70. I think I read where there are 3500 different claiming strategies for married couples. Many of us have specific software to make these calculations for us. Like Robert and Bonnie suggest,get professional help. The decision is too big to leave to chance. It looks like Walt has had good luck with SS staffers. Some of us have not been so fortunate.
Hi Joseph, They've had a very nice run-up since the downturn. I like them for a few reasons - they pay income (the rents collected on the properties), and can be relatively inexpensive. We use Dimensional's REIT, sometimes other public REITs. I've had clients come in with private ones but sometimes we have difficulty getting out of those when they want to.
Joseph- REITs can provide additional return and diversification when combined with stocks and bonds in a portfolio. We traditionally invest in REIT mutual funds or ETFs due to liquidity and diversification.
Hi Joseph, I think real assets and REITs are a great asset to include for the long-run. We can buy so many asset classes today in low-cost index products, include them in a plan, and rebalance to targets. I prefer liquid assets that can be rebalanced, and do not believe in the ability of most to outperform markets, so passive, index-based funds are ideal for a strategy of selling to capture gains, and buying low when they are down. I've seen too many issues and experiences with private REITs to recommend them.
Todor - the pros of a traditional 401(k) is that the contributions are tax deductible and the earnings are tax deferred. The pros of a Roth 401(k) is that the earnings are tax free and the withdrawals are tax free (after 5 years and age 59-1/2). If you take money out of a regular 401(k) before age 55, you will pay regular tax and a 10% penalty tax.
Todor- Regular 401k will give you an immediate tax deduction while with the ROTH 401k you would experience the tax benefit later upon receiving distributions. Nothing happens to the account if you stop working however you may consider rolling it over to an IRA. You would need to wait until age 59 1/2 to take distributions
from an IRA or potentially earlier from your 401k as a result of separation from service.
Todor, there are many benefits of a Roth account, and many complexities on using it versus other accounts. Which benefits you depends on your current and future income tax picture, which require both a review and assumptions about the future. In general, if you can pay a lower tax today than later, the Roth wins.
Hi Tommy - what are your spending needs expected to be in retirement? What does GIA stand for in your case, General investment account, guaranteed investment account, ?
tommy2shot - I love that handle. You are trying to time the market and you can't successfully do that. I can't either and neither can anyone else on this board or ant board. You need to come up with an allocation that makes sense for you based on your own unique circumstances. We are going to have market corrections. They are normal but nobody knows when or to what extent or when they will be over. There are much better ways to manage them than jumping in and out of asset classes.This is your retirement and you want to do it right. That 60/40 thing came from asset managers who were managing money for defined benefit plans. It has nothing to do with you. Please see a fee only financial planner to help you work through your situation and give you the peace of mind you deserve.
Hi Tommy - Investment allocation questions are always tough to answer in a forum like this. For many people in your position, keeping your investment allocation balanced among several different investment types is key to keeping the risk exposure down. It seems the US stock market is currently overvalued compared to international stocks, and of course bonds are expensive due to the low interest rate environment. So, I would encourage you to position your portfolio in such a way that you're not too concentrated in any one asset, including cash. Keep in mind that in a rising interest rate environment, the price of bonds will fall, but the bond mutual funds will also benefit from new bonds being issued with higher yields. Eventually those higher yields will help offset the drop in bond prices. Using short term bonds will help prevent losses in the near term.
Tommy, you shouldn’t be trying to time things here. Yes, we may have a correction, but if you have money in the GIA account to the extend you need to cover withdrawals over the next 5+ years, you can diversify much more to keep up with the inflation we will have over your retirement. Create a plan to take your emotions out of things, you likely lost a lot of growth and now are faced with the second decision everyone who times markets has – when to get back in. The foreign allocation also seems like a timing move that probably didn’t work in your favor. Cover your future withdrawal needs in safe assets, diversify broadly, don’t guess or time markets, let the rest ride. Markets tend to recover within 4 years, and often sooner if you are diversified.
Hi Gloria, this answer will look similar to others in that it is relatively simple to physically move a 401k to an IRA. What to put it in in terms of investment would have to be considered in the context of your age, goals, other resources, timeline, risk profile - have you ever gone through the planning process? When that happens, the answer will sift through for the professional who can translate why a particular portfolio makes sense in your personal context. This is important so that when a correction or life event comes, you have great information and confidence to ride it out.
Gloria, you don't have to roll a 401(k) account to an IRA just because you're turning 70-1/2. That's not a requirement. But you DO need to satisfy the required minimum distribution whether in a 401(k) or an IRA.
Gloria- Buy back the investment you are selling to create cash for the RMD. Or, you could look at doing an in-kind distribution.
Hi Gloria. Keep the RMD in cash. For that matter, I suggest you keep the next three RMD's in cash. The rest should be a balanced allocation of stock and bond mutual funds or ETF's. What should that allocation be? I don't know. It depends on your own unique circumstances. I suggest you spend some time with a fee only financial planner who will help you arrive at the right decision.
Gloria, your RMD doesn’t have to come out the month you turn 70.5. You have until April 1 of the year following your turning 70.5. You can take your RMD this year, and that’s often a good decision. Your investment allocation is personal, and, yes, you should have some in cash for withdrawal needs over the coming years, but you also want to grow it, and diversify your interest producing funds more than one index fund. Especially if a goal is to also lower volatility.
Jason - how much are you expecting to borrow for school?
Hi Jason, congratulations on your savings! These can be tough choices - and you probably have already thought of these issues, but do you have a handle on expected earnings once out of school (i.e. will you be an in office service provider at Costco, open your own shop, join someone's practice?)? That would make a difference to me - assuming a 4 year program, you could start earning back your savings in 4 short years if you used them to avoid more debt. Do you have existing debt from earlier college?
Jason, when you think about your earnings over the next 50 years, I wouldn’t feel too badly about taking on some fixed debt and investing some in a Roth. If your expected return on your Roth is 10+%, you win by paying 6.8%. Investing now also gives you experience with investing when you can make mistakes and it won’t cost you much. You need earned income to make a Roth contribution, so make sure you will have that. You can also think of a Roth in some ways as an emergency savings account that you can access the contributions if you need. At low income levels there is also a tax credit for Roth contributions that may benefit you. Overall, it’s possible you could benefit from doing the loan, but it requires more planning. I agree, avoiding debt to the extent possible is a worthy goal. I would balance it though with expected earnings, and the benefits you may realize from beginning to save and invest.
Jason - I would encourage you to hold the all $8k as an emergency fund for unexpected expeses
Jason, also agree, keep some in cash, but if there is more you will earn via work I'm not against saving a little for the long-run and having it be a learning experience. I would prioritize paying family back though before long-run investing... but, I like to be devil's advocate at times!
Jason, if there is any way to avoid that, please do it. Can you go to school part time? Can you delay school for a couple of years? $164,000 in debt is a whopper and it will take a very long time to pay off.
Jason, looks like earning potential ranges from $50k/year to $185k/year - given that the ultimate debt is so high $164k as you shared, I might invest the $7k in a great low cost stock fund and work very hard to do very well in school and start talking to employers before I start my last year.
Peter, Is this a deductible 401K so she is contributing before tax money. Have her look into investing in three types of tax vehicles, deductible 401K, Roth IRA or 401K if available and then personal portfolio. Allows flexibility in the future for cash needs to manage taxation on withdrawals
Peter, depending on your daughter's income level a Roth IRA may be a good option. Assets in a Roth grow tax deferred and come out tax free. There also is no requirement for distribution at 70 1/2. Roth contribution income limitations are $131,000 if single, $193,000 MFJ. A Roth 401(k) could also be a good option.
Igor, not many of of advise on Structured Notes (which may tell a cautionary tale), but we may all agree to tread lightly as you appear to be doing and read any accompanying literature very carefully because structured notes have many moving parts and each one is different. Make sure know all fees involved, and Caveat Emptor
Christopher, the first thing I would do with extra money is build up an emergency fund equal to about six months of living expenses. After that, attack your debt like it was your worst enemy (it is) and get rid of it. Assuming you are investing enough for retirement, you can start building up a nest egg with a low cost no load mutual fund. Vanguard and Fidelity have them as do others. I like the Vanguard Star Fund and the Fidelity Puritan Fund. It's easy to get started. Just call them.
I have a question about claiming social security benefits. I have had the much higher salary over the last twenty years. My wife is approximately 17 months older than I am. We certainly want to maximize my SS income. Can you suggest a strategy of claiming/suspending benefits such that we would maximize our SS income over time?
Wsledge, could certainly suggest one but as you have likely noticed from this chat and the large amount of articles on this topic, there are many, many ways to do this and they are different for each family based on their own circumstances. I don't think I can provide any real value to you in an answer unless we ran a report with your specifics applied. Please consider seeing your planner to do this.
Wsledge, others may be more comfortable with giving off the cuff advice on this topic, I find the nuances to be too complex, especially when considered in the context of income needs, than to sit down and run a report as Bonnie suggests.
wsledge - Did you know you can sit down with Social Security staffers and have them run the income you would receive under different scenarios? I've done that with clients and then determined the best route for them.
We have LOTS on kiplinger.com about boosting your Social Security benefits. Check this out:
Joseph- REITs can provide additional return and diversification when combined with stocks and bonds in a portfolio. We traditionally invest in REIT mutual funds or ETFs due to liquidity and diversification.
Joseph, REITs are a favorite of our Investing for Income editor. Here's his most recent look at five REITs with attractive yields --
Peter, Is this a deductible 401K so she is contributing before tax money. Have her look into investing in three types of tax vehicles, deductible 401K, Roth IRA or 401K if available and then personal portfolio. Allows flexibility in the future for cash needs to manage taxation on withdrawals
Igor, not many of of advise on Structured Notes (which may tell a cautionary tale), but we may all agree to tread lightly as you appear to be doing and read any accompanying literature very carefully because structured notes have many moving parts and each one is different. Make sure know all fees involved, and Caveat Emptor
