OK, so I’ve had a 401(k) for decades, and I’ve always been 100% in stocks. A fairly diversified portfolio, and not super-aggressive, but it sure has done well over the years.
Now that I’m on the threshold of my “golden years”, I really want to preserve my principal and be able to draw out a certain amount every month. Not much, but somewhere between 1% and 2% of the total. I’m very comfortable investing in stocks, but I know next to nothing about so-called safer havens to park my investments in. For example, pretty much the only thing I know about Bonds has to do with a guy whose first name is Barry. I’m past the 59 1/2 year threshold, too, so that’s not an issue.
I don’t want to touch my principal if I don’t have to, but I am aware that once I reach a certain age, there are minimum withdrawal requirements based on a percent of the total. Right? Once I’m there, I’ll probably have to dip into the principal to meet the requirement, but so be it!
Any input from you guys would be greatly appreciated. Feel free to link me to on-line resources you’ve found helpful yourself. Oh, I’m planning to have a discussion with my adviser at the company my 401(k) is with soon, so if you can think of any questions I should be asking him, that would be great, too.
The best advice I can give you is to get yourself to Bogleheads.org and talk to some people there. Because everyone’s situation is different you’ll get a variety of viewpoints. To start you out I’ll repost what I posted over there in response to a question much like yours:
This gives me a broadly diversified portfolio of both domestic and international stocks and bonds as well as extremely low fees, somewhere down around 0.04%.
Qualifications: I work in senior insurance and financial planning. I spent a lot of time giving lectures of social security planning and making sure your finances were secured so you didn’t run out of money in retirement in the event of a major economic downturn.
The general rule of thumb is you want the percentage of your investments in “safe money” to match your age. What that safe money is, is up to you. Personally I think that, again depending on your age, a portion of it should be in an indexed annuity with a floor and a lifetime income benefit rider that will pay out like a pension plan when you start collecting social security. Note that I say a portion. I can get into why I like this as well as some of the downside risks (because there is nothing that has no downside risk) if you are interested. If not, it’s complicated and will bog things down.
Some of it should be in bonds too and (if you are, for example, 60) roughly 40% should stay fully invested in the stock market. If you do this you don’t need to stay super conservative in the stock market investments either. I wouldn’t get aggressive, but locking up 60ish% of your savings into something with lower but steady growth allows you some freedom with the rest.
401K fees are notoriously insane so it is likely a good idea to roll all of it out of the 401k and into a private IRA with more transparent fees. If you are still receiving employer matching keep enough in the 401k to keep it alive and continue to fund it to reach the match. Otherwise dump the whole thing into an IRA. I like Vanguard but YMMV.
You do have to start taking required minimum distributions at age 70.5. Note that you don’t have to take these RMD’s from everywhere equally. Have them taken out of the bond holdings that are earning hardly any interest.
Now is also likely the time to start thinking about legacy. If you want to leave any of this money to anyone that is actually what permanent life insurance is for. There is not better vehicle to transfer money from one generation to the next. Look for Single Premium insurance policies that have dividend growth or indexing options, also look for ones with short penalty periods in case you need to get back to that cash at some point in the future and can’t actually leave it behind.
I genuinely recommend that you speak to an adviser about this all though. Speak to a fee based adviser, or a commission based one. There isn’t as much difference as many will lead you to believe. Get multiple opinions. Look at the advisers track record. Time in the industry AS A RETIREMENT ADVISER is more important than most other qualifications. Try to find someone who has been at this more than 7 years.
These days I work professionally primarily with people who failed to plan for retirement properly. I have need many do it yourself retirement plans gone horribly wrong. MANY will tell you that you don’t need an adviser, and you don’t if you feel confident that you know what you are doing. Based on the op I would strongly suggest engaging a professional.
As far as permanent life insurance goes, if you’ve got more than $5.5 million and need to find a way to pass on your estate without paying estate taxes, go ahead. Otherwise permanent life insurance is a good way to turn your money into the insurance salesman and the insurance company’s money.
There’s no way a simple calculation like your age in bonds can be considered meaningful without considering how much you need and how much you have. Suppose you were 60 years old, needed $20,000 a year and had only $60,000? In that case you shouldn’t have $24,000 in stocks, it would be reckless.
On the other hand suppose you were the same age with the same needs and had a couple of million. You don’t need to have $1.2 million in bonds, that leaves too much opportunity on the table. Even if you were going with a fixed percentage, 60% in bonds is crazy high. The Vanguard Target Retirement 2020 fund designed for people retiring in, oddly enough, 2020, is only 44% bonds. That’s a much more reasonable number considering that your portfolio may have to provide income for a lot more years than you believe.
In the OP John Mace mentions taking out between 1% and 2% of the total on a monthly basis. That’s a lot of draw down. The old rule was 4% in the initial year, and adjust for inflation after that. I use a more dynamic approach, and am pulling about 2.5%. 12% to 24% a year is not going to be sustainable.
Ack!! I meant 1-2% per year. My bad. What I really meant to say was, whatever gains accrue each month, I only want to take out 1-2% that month. Not that want to take 1-2% of the annual gains out each month. I don’t want to touch the principal quite yet. Maybe in 10 years, but not now.
Again, I don’t know your specific situation, but if your other income is low enough in your sixties that’s an excellent opportunity to take out just enough to avoid bumping you to the next tax bracket, or you may be able to convert monies in a conventional 401k to a Roth by paying taxes on the contributions. By depleting the 401k this will reduce your eventual taxable RMD withdrawals.
You can go to $91,900 without getting into the 28% bracket.
This is something you should talk to an accountant about. It’s not complicated, they want you to pay the correct tax, but they’re not concerned if you pay too much.
I was 1) giving him down and dirty back of the napkin broad strokes and 2)advising him to get professional help in properly planning his retirement.
Also, you are fundamentally wrong about life insurance but that’s ok. This is a common misconception that comes from the majority of advice being given on the subject also being done in overly broad strokes. So I shouldn’t fault you when I’m doing the same.
Now would be exactly the time to lock up legacy only money into a participating single premium policy that would earn dividends and pass on instantly and with no tax burden or probate. Estate tax isn’t the only thing to be concerned with.
Now, he would need to have a significant amount of money already anyway to even consider this but I have no details about him at all so my post was a kitchen sink post that was intended to give a place to start looking and to build off of what you already suggested.
But bottom line, I meet with 12-16 people a week who tried and failed to successfully plan their own retirement and have run out of money before they died. Maybe because if this my perspective is skewed but, get a professional to help you. If only to give your work a second opinion.
Based on my parent’s experience with annuities, I recommend a great deal of caution and upfront education before signing up. They bought from an advisor recommended by a church member. Right off the top the advisor got a 7.5% commission… that is a huge number and it took them years for the value of the annuity to recover.
Oy. I may start a thread on why we hate commission sales people in our society. They don’t get paid any other way.
But yes, know what you are getting into. Get opinions from lots of people.
Yes, annuities can be dangerous though they are significantly more regulated today than they were even 15 years ago. That said, remember what annuities are. They are protection against out living your money. They are NOT short term investment vehicles. They are no different than the pension plan that you used to get back before everyone switched to 401k, but you are funding them instead of your employer. No more than 50% of your assets that you are already planning on not having directly invested in the stock market should be in one because early withdrawal penalties are large.
But, they can do good things such as create a self funded pension stream that is impossible to outlive. Turn it on and boom 2k a month for the rest of your life (depending on your initial investment and time horizon). As a piece of a larger puzzle this can be a good thing. A better thing is an immediate annuity if you have the cash for it. No waiting just pension plan payments. Again, even after they have paid out more than you put in your payout does not change. Most annuities hit this mark around 7 years in. But there is a risk. It’s still insurance. It’s the reverse of life insurance. It protects you from living longer than your money.
I’m a little past John in age - retired for about a year now.
First - since John is in California, I assume he has a trust. If not, first step is to see a lawyer to set one up. My father had one, and his estate was a lot simpler than for my father-in-law who lived in Pennsylvania.
Second, if you have any reasonable amount of money, see a financial planner, who can customize advice. See a few until you find one who will listen to you. One of the best things mine did for me was to run Monte Carlo simulations of how much I’d have from now until about 90 which gives you probabilities - say 90% chance of having amount $x, 50% of $Y > $X and so forth. Given that nothing is certain, this was a good technique for me.
Third, do the computation for all your money, not just 401K. I had a bunch of post-tax money which I invested when AT&T paid me a bundle to get a better job in Silicon Valley.
I’m now 48% fixed income, 39% equities, 6% cash, and a few random things. Cash is a bit high since we got some inheritances, and figured we can live on it.
I’ve moved a lot of the riskier equities into dividend funds for income, especially since the market is so high. Our income from them is such that when my wife and I take Social Security we shouldn’t have to dip into capital very much. There are options which return more than bonds though which aren’t quite as safe, but they are less volatile than standard equities.
The IRS has a calculator which tells you how much you have to withdraw from your 401K after you hit 70 1/2. It was less than I thought. What we are going to do is that since we have almost no real income any more - just the return on our post-tax investments and some writing income from my wife - we are going to take money out of the 401K to reduce the hit even more. But an accountant we visited suggested moving the money we take out into a Roth. You still have to pay tax - and we can take just enough out to keep the tax burden down - but then we get the Roth advantages later.
I also have an annuity I bought with my AT&T pension cash value, which I can start if I need income.
Of course living off your investments is a lot easier if you have a lot of them and are frugal. So far we are better than the best case in the simulation, and have grown the balance over my first year of retirement.
It is also a good idea to look over your current expenses, and see if it matches expected income.
We also have a nice little hack where I’m going on spousal benefits from my wife, and will stay on them until I hit 70 when she goes on mine. Since 50% of my SS is > than what she gets at 70, it pays for her to start right when I turn 66.
John lives in California, as do I, and since our probate is so awful anyone with any amount of money sets up a trust. Everything I own pretty much is in the trust - cars, house, bank accounts, investment accounts.
My wife just went through closing out her father’s estate in Pennsylvania, so I know where you are coming from, but the situations are a lot different.
Hope the OP doesn’t mind my poking in a question in his thread, but is the main drawback of using something like the Fidelity Freedom 2050 just the management fees involved? And also that maybe they’ll invest your money in such a way that has Fidelity’s interests in mind, not yours?
From my point of view it’s the fees. The Fidelity Freedom 2050 has an expense ratio of 0.75%. The Vanguard Target Retirement 2050 has an expense ratio of 0.16%. I’ll grant you those numbers don’t seem a lot different, on a $10,000 investment at a 7.0% return it costs you only $59 in the first year, but if you leave the money in until the target date of 2050 the extra fees will run you almost $15,000 and that’s only on a $10,000 initial investment. Adding periodic investments over the years only makes it worse.
The fact that the commission is baked in to the product doesn’t alter the fact that the investor pays them. They use that to conceal the commissions, but it doesn’t make them not exist. Any agent that says you don’t pay a commission on an annuity is lying.
So… I’m gonna need you to expand on that and I’m going to ask for some references as to your actuarial background at this point because you are starting to use really loaded language. I don’t sell annuities personally, but I don’t think they are the disaster some do.
To an extent Much is right. You put 10k into an annuity and the agent make 700 bucks. (he, by the by, makes no other money at all typically. If you earn commissions on these products you typically have no salary, unlike the fee based advisors) Your annuity account value is still 10k. Your implication is that the account value is actually 9,300 and hidden as a fee. That’s not how it works. So if you would not mind expanding on your understanding of how it actually does work, I would be interested.
So where does the agents $700 come from, the commission fairy? You put in $10,000, and the account value shows as $10,000, but that’s not really true, is it? The value of a thing is what that thing will bring, and how much is that account worth? You can’t get $10,000 for that account, there are surrender charges that can run as high as 10%.
I have nothing against a salesman who honestly reports the fees and commissions paid, but someone who pretends not to be charging those fees is certainly lying by omission.