Chuck, good luck. There are some analytical ratios that show the US Stock market as over valued. Moving into bonds will lower risk, with lower return potential for the long term. Be aware that the longer the maturity of the bond portfolio the more it will drop in value as interest rates rise.
If the mutual funds are owned personally be aware of the income tax impact when they are sold.
ChuckN - What you are considering is "market timing" which evidence has shown is an exercise in futility. No one can say whether or not the stock market is over-valued or not. Some stocks may be, while others may not be. Ideally, your investment portfolio should be well-diversified basket of low cost finds or ETFs, which should weather any storm.
ChuckN, we are in an odd financial position right now - "safer" investments (there is nothing that is risk free in every sense) pay very low, to no, interest so the only way that you can get a return on your investments is to place them at risk. And for risk averse folks, that can feel very uncomfortable. If this is money that you are going to need in the next five years or less, it would be wise to hold some of that in cash. If these are long term investments, understand that you still need to accept market risk via a diversified portfolio. The best investment strategy is patience and time; making tactical moves generally defeats you.
Chuck, what measures are you using to arrive at the overvaluation and what markets - as an example European equities appear cheaper than US equities but there is still the issue regarding Greece and the Euro. By some measures stocks valuations appear stretched by other measures they are in the range of acceptable and of course it all depends on future growth. I'd also caution you that is often difficult to time the market. That said, if you are uncomfortable or can't sleep at night, take some money off the table. Cash does not pay very much and will not keep pace with inflation and bonds while generally safe will be vulnerable to rising interest rates.
At Pat and Michael point out the issue is for long term investments you cannot reliably identify when to move back into stocks until after a significant amount of increase has already happened.
John Jeffrey, your wife should wait until full retirement age to get full benefits. Without knowing your complete situation, the most optimal strategy (to maximize your benefits) given your life expectancy would be for you to file and suspend at your full retirement age (waiting until age 70 to start your actual payments), then have your wife file for her spousal benefit at her full retirement age. Then, your wife should file for her own benefit at age 70 IF it is larger than her spousal benefit. Filing earlier might be necessary given your finances, but if you have resources to meet your needs outside of Social Security, waiting is almost always the best strategy.
John, a spouse at least age 62 can file for spousal benefit on their spouse who has reached full retirement age and filed and suspended. The problem is locking in a lower spousal benefit by claiming the spousal benefit before their full retirement age. Many of the analyses we have done normally show it is better for the spouse to wait until their full retirement age to claim the spousal benefit. That is dependent upon many factors like age, benefit amounts and longevity potential.
John, this is a complicated question. By filing and suspending you are doing so only to allow your younger spouse to receive benefits on YOUR record. Therefore there is no need to file a restricted application. If she has not yet reached her full retirement age her benefit will be reduced but will be adjusted higher once you apply for your benefit. Whether to start now or wait until her FRA depends but in general it will be lower than waiting until her FRA. There also are other factors to consider.
MS - As long as you can "afford" to do so, in most cases, the answer is yes. The pre-tax contributions are an excellent way to save. Congrats also on maxing into a Roth
Despite the low match there are benefits to maxing out your 401(k) contributions including a higher savings rate and lower taxable income.
Yes I would try to put the max in both your 401k and your Roth IRA. You may have option to elect whether to do Roth or pre-tax contributions to your 401(k), which way you choose will depend on your current tax bracket and future expected tax bracket. Employer match will always go into pre-tax account. What you contribute is always yours to take when you leave.
MS, contribute at least enough to 401K to receive maximum company matching. Beyond that look to your cash flow, tax situation and goals to determine where else to save and invest money. The 401K is automatic just not as accessible, which is good and bad.
MS, congratulations on your ambitious savings. The answer to your question in one word is YES. You are fortunate to have an employer contribution, even though it is modest, but that should not be a factor in your decision. ALWAYS contribute, no matter what, as much as you can afford.
Howard, I'm going to answer part of your question. The IRS has just ruled that a portion of an IRA (not to exceed 25% of the balance or $125,000 whichever is smaller) can be set aside into a "longevity annuity" that is then scheduled to make distributions at a later date (i.e. beyond the required minimum distribution age of 70 1/2). For example, you can set up such an annuity to delay payments until age 85. It is temporarily carved out of your IRA balance and not subject to minimum distributions at age 70 1/2, but of course must start to distribute at the age you've specified. This can help to preserve an IRA; it's not really meant to shield it permanently from minimum distributions. Because this is new you may want to consult a savvy advisor about this technique.
Howard, focus on total return needs for your investments compared to how much return volatility you can withstand and understand. Some people do move to a lower risk portfolio as they retire. Another concept is having three to five years worth of withdrawals in fixed income investments, i.e bonds, to provide some stability.
Howard - It's difficult to answer that question without knowing more about you and your portfolio. You should be aiming to get a rate of return from a diversified portfolio that will enable you retire successfully. Often you need to "back in" to this return by analyzing how much you will need in retirement, and then investing accordingly to see if the portfolio can sustain this distribution rate. For the IRA question, if you lower the balance by taking distributions before you are 70.5 (by "annuitizing"), then that will lower your RMDs; however, you are paying taxes on these distributions whenever they are made, so there is no benefit.
Howard - I was unaware of the strategy that Pat describes, so this changes the distrbution part of my answer somewhat.
Opps I did the same thing. Yes, once you reach FRA there is no earnings limitation so your benefits are not reduced. Also, you should also see a slight bump in your benefit due to the additional contributions to SS.
Don - SS benefits are based on the "35 years that you earned the most", so if your salary now is higher than it had been at some point, it may increase your benefits
Hassan, if you are on the Vanguard Web site, they have a risk tolerance questionnaire that will help you figure out how much of your funds to put into bonds versus stocks. Vanguard's index funds are good and cheap, and even their actively managed funds are not expensive.
Hassan - There are many study's that show active managers do not provide consistent enough returns to justify the additional fees over index funds. Vanguard is the leader in index funds, and you can get a well-balanced portfolio using their total bond and total stock offerings.
Hassan, some theories say that there are some efficient investment markets that make it more difficult for active managers to beat the market index. In a low interest rate environment there is a bond strategy to ladder the maturity of bonds over 5 to 10 years. So for a five year ladder, 20% in 1 year maturing bonds, 20% in 2 year maturing bonds and so forth. Must have enough critical mass, $250,000 or more for the bond component of the portfolio to implement this strategy, otherwise look at bond funds or ETFs.
Hassan - David brings up an excellent point on bond ladders. I agree, if you have the opportunity, this is a good interest rate environment for a bond ladder.
Hassan- I agree with Pat and Michael on the Vanguard funds as a good choice. Something else to consider depending on the amount of money you have to invest in bonds is seeking out an advisor who can help you with individual bonds with staggered maturities. If you hold the individual bonds, you know exactly what you back at maturity(unless bond defaults) vs a bond fund which is constantly turning over bonds and in a rising interest rate environment when the NAV of the fund falls and everyone gets worried and starts cashing out, fund managers have to sell bonds they otherwise would not have to satisfy redemptions and this can have a snowball effect on the falling NAV of the fund. You need to have enough to put into individual bonds so you can adequately diversify though and build a ladder of maturities. Another good fund option is Dimensional Fund Advisors which are low cost and have not experienced this bond net redemption issue like retail bond funds.
Dan, I am not aware of a simple formula to answer your question. An in-depth professional software system can analyze the time value of money difference between a variety of different approaches.
Dan, I agree with David - this can't be analyzed without knowing someone's specific situation, including their risk tolerance. You are right in terms of wanting a comprehensive analysis of all of the factors.
Dan - Excellent question. If I am reading it correctly, I think a big factor is whether you are taking these monies from a retirement account (i.e., monies taxed upon distribution), or an "investment account" (i.e., where you have more control over taxes upon distribution). If you are taking money from a retirement account, it is much worse because any distributions are taxed as ordinary income. If one is fortunate enough to have a sizable non-retirement (or "investment account') where there is a possibility of tax-free distributions to fund retirement, then by all means, wait as long as possible to take SS benefits and let the eventual benefit grow.
Dan, I agree with you there is some benefit to using other assets for income to delay receipt of a higher social security benefit. I am not aware of a specific formula but consideration should be given to the type of securities used, how they will be taxed - resulting in net incomes and of course life expectancy - difficult to predict but certainly you can model.