How would you allocate my retirement funds?

In My Humble Opinion
1

I’m going to re-retire in January. I retired from DOD in 2011, but got bored and went back to work, so in addition to my pension and retirement savings from that gig, I’ve added a 401k and additional earnings that bumped up what I should get from Social Security. We will be talking to our financial guy as we get closer to the date, but since this is IMHO, I’d like some ideas of what you’d do in a similar situation.

I figure my SS will be approximately what I’m bringing home now from my job, and I’ve got my DOD pension. Spousal unit is self-employed and plans to work at least 5 more years, and we can’t be sure what his income will be during that time, so we need to figure that my checks will pay the bills. We also have a decent chunk in savings - enough that a major car repair or several dead appliances at once won’t cause a panic.

Our other resources will be the 401k, a CD that’s about twice as big as the 401k, and 2 annuities - mine has matured and can be taken at any time, his matures in 2024. The big expenses are the mortgage that runs thru 2031, a home equity line of credit, and health insurance for the next 3 years till my husband gets Medicare.

We need to decide what to do with the 401k, when/whether to draw on the CD, and when/whether to pay off the house. Personally, I see the CD as our slush fund. We can draw on it at any time. I’m thinking between my pension, my SS and my annuity, we can continue our lifestyle, even if husband’s business hits a slump. He can draw SS without the earnings penalty in 2023, so we’d like to hold off till then. He feels like we should pay off the house, but I don’t like giving up that big a chunk all at once.

So, is my thought process logical or am I missing some fiscal reality? If it’s not readily apparent, we’ve very conservative with our money - at this stage, most definitely risk-averse. As long as we can pay our bills, take an occasional cruise, and toss a few bucks into our granddaughter’s 529 fund, we’ll be happy.

2

It’s hard to give you advice without knowing how much you have and how much you need. I base my allocations on my cash flow requirements. First; I calculated my monthly needs, then subtracted my guaranteed income. I figured what I needed over and above that and keep two years worth of money in cash in the form of eight separate two year certificates of deposit held at Vanguard maturing quarterly. That means I don’t have to worry about selling equities for at least that period. You need to set up a CD ladder to make that happen, but it’s pretty easy to do.

Then I have five years worth of money in a bond fund (VBTLX) also held at Vanguard. Income generated by this fund is used to reload the CD pipeline, so that as one matures and is spent another is purchased.

The balance of the money is held in three separate stock funds; 10% of it is in a real estate index fund, VGSLX, 30% is in and international stock index fund VTIAX, and 60% is in a domestic stock index fund VTSAX. AS with the bond fund, the income generated by these funds goes to replenish the CD pipeline, and any excess is reinvested in stocks.

It’s a set it and forget it plan. Annually I rebalance. I’ve been retired for three years and I have more in my 401k than I did on the day I retired.

When the stock market tanks I have at least seven years worth of cash and bonds that should carry me through a bad spell in stocks, especially as even in a depression the bonds and stocks will still generate some income, and in a few years when I hit 70 and start collecting social security my cash flow needs will be essentially nil. at that point my only withdrawals will be the required minimum distributions.

I didn’t elect to pay off the house. My mortgage interest rate is low and fixed at 2.875%, and current cash flow is more than enough to pay the mortgage. The mortgage has five years left.

3

Your mortgage is going to run for a while yet. You might consider refinancing to a lower interest rate/shorter term while you are still employed.

4

We’re at 4.38% - I don’t know if we can get a lower rate. We refinanced just before I retired the first time for the lower rate/shorter term, but the monthly payment for a 15-year vice 20-year was more than we wanted to take on.

The only way I see us paying it off, and this is a bit morbid - when my mom dies, I stand to get a decent inheritance, possibly enough to pay off the house. This assumes, of course, that she doesn’t face any catastrophic health problems that require her to sell her house. But that’s not in our calculus.

5

I would just like to put in a word for what’s called “socially responsible investing.” This means that you’re not making money off of things that are killing the planet (like oil), or killing other people (like arms manufacturers), and that you are making money off of things that are good for the planet (green investments) and so on. There are various levels or flavors of SRI, and I believe there are exchange traded funds (ETFs) that are easy to buy that use SRI principles. When you roll over your 401(k) into an IRA, please consider socially responsible investing.

Also, good on you for not counting on an inheritance.

6

I have a good chunk of my money in relatively stable equity funds with high dividend returns. The goal is to have enough income from these to meet our expenses when I start taking out social security at 70. Less of an upside but also less of a downside.
Remember that you need to consider cashing in 401Ks by 70 1/2. I’m converting some to Roth IRAs already (I’m 67) in an amount to keep taxes relatively low.

We paid off our mortgage, which was only 10% the value of the house, because there is no longer a tax advantage to keeping it.

Our financial adviser did a Monte Carlo simulation of our worth up to age 90 or so which gave probabilities of having various amounts of money still. That was very helpful. We’re ahead of the best case so far

7

I seem to recall our financial guy did a long-range projection for us, but it was some years ago and I expect it has changed. I think before we make our next appointment, I’ll ask him to run it again with the most recent info.

I don’t expect my 401k to remain untouched for 5 more years, but I’m not sure what Dave will recommend. We shall see.

8

I don’t have any investment advice, but since you are seven months out I have a suggestion. If you have a spreadsheet program available start recording all your expenses over a dollar. Make all sorts of categories and certainly include your ongoing big expenses (eg., mortgage) as monthly figures.

Your financial guy might have a template for this, mine did. After four months you get an eye-opening idea of what you spend and therefore what you’ll need. I’m glad my guy suggested this tactic to me. I was way off in my estimates. Now I know for real.

P.S. There are probably blank templates and free (simple) spreadsheet programs you can get on-line.

9

We’ve never done an expense diary, but at the end of the year, our credit card company sends us a summary of what we’ve spent thru the year by category. Since we use the card from most everything, it’s an enlightening tool - I’ve used it for budgeting.

Of course, it doesn’t help when prices go up - we’re driving less and spending more on gas, alas. But it gets us in the ballpark.

10

While tracking every dollar you spend will give you a great idea of where your money is being spent on, I’ll suggest an easier way. Simply add up the value of all your cash accounts at the end of every month and determine if the trend is going up or down. If it is going up, you’re saving money every month and your expenses are OK. In my case, the amount of the increase varies somewhat month to month, but I have an average number that I like to hit. If it goes down, I can identify a occasional or one time expense that accounts for the decrease in savings.

If you do this, you’ll get a feeling for what sort of retirement income you’ll need to invest for.

11
  1. Figure out how much you spend annually
  2. Assume you want to spend at least that much in retirement
  3. Do you want to leave anything behind when you die
  4. The answer to #3 makes a huge difference in how you’d construct your portfolio and how much you’d be able to spend. If the answer to #3 is no, you can easily throw off twice as much current income if you don’t care so much about growth or 100% preservation of principal.
12

Ah - #3.

Just as we’re not counting on an inheritance from my mother or my in-laws, I’d like to think that our daughter isn’t counting on anything from us. By the same token, I don’t want to saddle our estate with debt or to become a burden to our only offspring. But there’s no magic formula for knowing on what day you can spend your last dollar. We planned for retirement so we could have some fun (tho the definition of fun has changed several times), and we need to find the balance between enjoying our earnings and leaving a little for our daughter.

It’s so strange - I look at the total of all the accounts and I think “Wow! That’s a nice chunk of change!” But when you think about living 20 more years (if I do as well as my mom and my grandparents) it’s suddenly not so huge a chunk.

13

The benefit of setting it up to be able to live off the income; either by spending less or saving more; is that it protects you against longevity. The first person to live to be 150 may have already been born, and it could be you.

That’s why I’m holding out until the last moment to start drawing social security. It’s an 8% per year addition for every year you can hold off after full retirement age, and it lasts for life and is currently only taxed on 85% of the payments. My IRA over the last five years only earned 7.4%, and is 100% taxable. Drawing that down before signing up for social security at 70 also lowers the required minimum distributions and lessens the tax burden.

14

Seconded. If you write major checks, you can do this with Quicken also, and just subtract the credit card payments. That’s good enough to get pretty close to what you really spend. If it looks like an issue, then one can do really detailed tracking. But who spends cash anymore?

The number we came up with was pretty close to what we are really spending now I’m retired. I wondered where the other money I was making was going - turns out we were saving it.

My driving really fell, but I had a 30 mile round trip commute before I retired. Now I buy gas maybe once a month unless I do a fairly long trip.