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.
Hi Rick, Did the pension admin provide their answer to you in writing? Most of my clients rely on the pension admin for good information but we ask them to get it in writing.
Rick - Are you sure there is a penalty if you start taking you pension at age 58? With most pension benefits there is no penalty (Enforced by the IRS) when receiving the benefit after separation of service. Are you referring to a 401k/403b plan?
Rick, I'm not entirely clear on the reason you need to wait on the pension to avoid a penalty, the 10% early withdrawal penalty I'm not sure would apply. Also, many 401(k) plans allow distributions penalty free if separation from service occurs after 55 if you happen to have a 401(k) plan. Review the benefits of delaying the pension, often times they are not worth delaying.
Rick, it depends on what kind of pension you have. If it is a defined benefit plan that pays you a stated monthly benefit for as long as you live, your plan administrator's answer confuses me. If it is a defined contribution plan like a 401(k) or profit sharing or money purchase, your administrator is right.
The self-employed 401k plan may allow loans . . .
Fiscally123, Pros - gaining control over your 401(k) choices, and possibility to diversify and grow your funds as you choose. Cons - Perhaps there are some slightly lower cost options and your solo 401(k) will have some fees involved. It just depends if it's worth it. IRAs tend to have less legal protection in some states (not a lawyer, and this is grey area).
Fiscally - I assume you're referring to a solo 401(k). Honestly, I'd go the IRA route because you would avoid falling under the regulations that govern company sponsored retirement plans. Plus, you would probably have more investment flexibility. The tax consequences are the same.
Solo 401(k) plans with balances above $250,000 are required to file Form 5500, which is not something you will look forward to!
Fiscally 123 IRA's are less expensive to administer, easier to move around and offer more withdrawal flexibility. With a 401(k) , even if it is a solo, you will have some administrative tasks if the account gets above a certain asset level and you will be restricted on when you can take your funds out.. Robert and Walt both make good points. As long as you are not concerned about a creditor grabbing it, I would go with the IRA.
Donna, Roth conversions require calculations with the couple's actual numbers, then modeling the outcome inside their plan. So whether a conversion is ever a good strategy depends on that and whether they have the money to pay the taxes due on conversion.
Donnaj, I would recommend discussing this with someone prior to doing it. I do advise considering conversions when you or your heirs will pay more in the future. However, huge amounts have another consideration in that they may decline in value after the fact. There are ways to lessen this risk to some degree with recharacterizations. However, there are a lot of moving parts with taxes and increasing income that require running individual projections, and plenty of assumptions about the future.