Retirement

[jwaggs]

Another question -- Does anyone have any thoughts on annuities? I get the impression they are expensive.

[Jimmy Cantiello]

Here's the dilemma that my brother-in-law Tommy, my retiree partner in crime, have discussed in the past; How do you predict when you're going to bite the dust? Nobody wants to run out of money before they die, right? Of course you can't predict the future so our conclusion is take the S.S.payout no later than full retirement age, before that, if you can. Granted, everyone's situation is different. One size does not fit all. However, what happens if one decides to wait to collect S.S. at age 70 then kicks the bucket at, say, age 69? What was gained by that strategy? Figuring out this retirement thing can be a daunting task. So many variables and unanswerable questions. Bartender! Pour me another please.

[Jimmy Cantiello]

Jeff, I don't know from annuities but Prudential is the administrator of my pension and I'm pretty sure they have referred to the monthly payout as an annuity. I'm sure Pat could shed some light on the subject.

[stonemonkts]

Jeff - Annuities like the ones offered through the large brokerages (Fidelity, Vanguard, Schwab, Morgan Stanley, etc...) are defintely not a good deal now, and haven't been for quite a number of years. With future expected returns across broad asset classes running 2-4%, then factoring in the hefty fees charged for the annuity, you're really burning money. If/when the markets drop substantially, offering a better window for future return expectations (2008-2009 was ideal), investing in a lifetime annuity becomes a much better deal.

I am not an expert in this topic, but I do know enough to confidently state that right now they are not the best option. We're in a very odd phase right now: deeply depressed interest rates, inflated equities, especially here in the US, and a ton of structural economic issues across the globe to sort out (or not, which means delaying the inevitable).

When anyone presses me for a "good" place to invest money, my response, at least lately, has been real estate with a fixed rate mortgage. The other answer is a non-brokerage 5 year CD yielding 2% (such as one that can be found at a few reputable online banks). The penalty for early withdrawal is insignificant, and for now, 2% guaranteed annual returns is the best deal in town. Sounds boring, but there you have it.

I veered way off topic but in a sense everything I wrote is related to whether annuities are worthwhile, or not. Sometimes they are, but not now.

[BFrank]

I've never heard anything good about annuities. Bottom line, why pay an insurance company or financial institution to give you a "salary"? If you have a handle on your money (cash, investments, real estate), you can pay yourself for FREE.

About when to claim SS, I've heard good arguments both ways. I think everyone needs to evaluate their own situation to make that decision. I'm currently holding off until I reach 66, because I don't need the cash yet.

[stonemonkts]

About when to claim SS, I've heard good arguments both ways. I think everyone needs to evaluate their own situation to make that decision. I'm currently holding off until I reach 66, because I don't need the cash yet.

Bingo. So, enjoy your 8% annual deferred annuity courtesy of SS admin..

[jwaggs]

What about REITs?

[BFrank]

What about REITs?

Can be volatile. But if you're interested, do the research so you don't get burned.

[stonemonkts]

REITs are expensive now. Throw up a weekly chart of IYR and see the rise. They are as expensive as much of the other fixed income assets. It is understandable given the current state of affairs, but I am not seeing a compelling risk/reward scenario. If I had to allocate to fixed income I would do it in stages over several years, to mitigate capital loss when rates rise, and to save cash for opportunities when they present themselves. Just scratching the surface really. Even bond ladders are not compelling in this environment, unless you go way down in quality but doing that exposes yourself to default risk.

http://stockcharts.com/h-sc/ui?s=IYR&p=W&yr=3&mn=0&dy=0&id=p11761971955

I would rather invest in non-financial preferred shares at the moment, something like Public Storage 5.2% (PSA-W or PSAPRW at some websites). Any preferred rated above BB+ and selling under par (par is usually $25). Few more are available. Several also with lower yields but A+ or better ratings out there too.

I normally would have an allocation in REITs but being a value investor I'm not seeing them as bargains lately.

It is hard to hold cash yielding nothing but there will come a time when it will prove to be prudent...when everything else drops. I've been saying this for a few years so take all this for what it's worth. At this point I'm satisfied making less but also losing less. I'm not bearish by nature, although I do try to avoid chasing overbought asset classes. I like buying stuff on dips but they are few and far between, and brief.

[BFrank]

Muni bonds pay pretty well these days (relatively speaking, of course), and if you buy them from your home state, the dividends are state and federal tax-free.

[Jimmy Cantiello]

I just saw my direct deposited pension payment online this morning. Sure enough it says Prudential Annuity Payment. Of course, since it's a pension it was paid for by my employer over the years, not me.

Talk about being conservative, my "asset allocation" of my 401k is 100% in "stable" interest, meaning I recieve a measly 3% return. It's been that way since I got royally burned investing in mutual funds years ago. I don't have the stomach for losing thousands of dollars in one shot. I don't make a lot of money but I don't lose large amounts of money either except through inflation, of course. My fees are not too bad being around 1/3 of a percent.

Not only am I super conservative, I'm a procrastinator. I still have yet to roll over my 401k into an IRA. When I do that I'll probaby take a little more risk.

[jwaggs]

I suppose I am less risk averse than most. I am a believer in "dollar-cost averaging," or putting money into funds slowly, over time. I also anticipate that I could see up to a 20% drop in my portfolio at any one time. I just hold tight.

[moldyfigg]

I'm with waggs.

With the Republicans controlling congress, there is a very good chance they'll put the economy in a recession as they have in the past, maybe even a depression. If they get a president elected a tin can in the back yard will be the best place to put the bread.

[Jimmy Cantiello]

I suppose I am less risk averse than most. I am a believer in "dollar-cost averaging," or putting money into funds slowly, over time. I also anticipate that I could see up to a 20% drop in my portfolio at any one time. I just hold tight.

A 20% drop would give me a fucking heart attack.

[jwaggs]

I think the 2007-2009 drop was better than a 20% from the early 2007 highs.

I was working then, and shoveling it in my 401(k). I came close to maxing out my 401(k) contributions of @$23,000 a year for a couple of years. It was fun to watch the market climb back from 2009.

Of course if that happen again, while I was retired, I might have a heart attack.

And I know a lot of smart folks, like Pat, say the market is way over priced.

[BFrank]

Interesting piece and ongoing column:

Why I'm Not Buying the Retirement Gloom

[Jimmy Cantiello]

Jeff, I found out something interesting a couple of years before I retired. Hopefully, Pat will correct me if I'm wrong.

The 20,000 dollar plus maximum contribution is only for "before tax" contributions. If I'm understanding what I read at the time, the law/IRS rules allows one to contribute to a 401(k) way beyond that amount. Iirc it's somewhere north of 50,000 dollars. The caveat is that you have to contribute any further amount on an "after tax" basis and, of course, it's unmatched.

If Pat sees this post he can either corroborate this or tell me I'm full of shit. But, at the time, that's the way I understood it. Most of the people I spoke with at the time were unaware of this, including my wife who is VP of finance for her company.

[jwaggs]

Interesting piece and ongoing column:

Why I'm Not Buying the Retirement Gloom

Essentially, this has been my attitude for a while. It's why I planned to find a PAID part-time job after I left my full-time job.

The difference for me is that I have kids, and I am not convinced that they will have social security when they retire. I'd like to pass along a few bucks to them after I shuffle off the mortal coil. My wife's dad did that for her -- we got the farm (no mortgage) and a few $$ -- and it has helped us quite a bit.

[jwaggs]

Jeff, I found out something interesting a couple of years before I retired. Hopefully, Pat will correct me if I'm wrong.

The 20,000 dollar plus maximum contribution is only for "before tax" contributions. If I'm understanding what I read at the time, the law/IRS rules allows one to contribute to a 401(k) way beyond that amount. Iirc it's somewhere north of 50,000 dollars. The caveat is that you have to contribute any further amount on an "after tax" basis and, of course, it's unmatched.

If Pat sees this post he can either corroborate this or tell me I'm full of shit. But, at the time, that's the way I understood it. Most of the people I spoke with at the time were unaware of this, including my wife who is VP of finance for her company.

I think you might be right, but my employer stopped depositing $$ in my 401(k) once I hit the before tax max. Last year, I put $23,500 in my 401(k) and $6,500 in my Roth IRA. I won't be saving $30,000 this year. My goal is $18,500. If I keep a part-time job, I should be able to hit that.

[stonemonkts]

Jeff, I found out something interesting a couple of years before I retired. Hopefully, Pat will correct me if I'm wrong.

The 20,000 dollar plus maximum contribution is only for "before tax" contributions. If I'm understanding what I read at the time, the law/IRS rules allows one to contribute to a 401(k) way beyond that amount. Iirc it's somewhere north of 50,000 dollars. The caveat is that you have to contribute any further amount on an "after tax" basis and, of course, it's unmatched.

If Pat sees this post he can either corroborate this or tell me I'm full of shit. But, at the time, that's the way I understood it. Most of the people I spoke with at the time were unaware of this, including my wife who is VP of finance for her company.

Jimmy - I'd be full of shit if I pretended to know, because I don't. My focus is mostly on what to do with the money. IRA and other retirement account rules, aside from the basics, are not in my wheelhouse. I rely on Fidelity's experts to answer questions such as that one you cited, or whichever financial institution applies in this case.

[moldyfigg]

I've been out of the retirement business for about seven years but back then the pre-tax contribution was limited, maybe $40K, after that any contributions were after tax but created a cost basis when distributions were taken. Earnings are not taxable until distributions are taken.

[Jimmy Cantiello]

Now that I think about it, I was wrong on one point. Again, iirc, as with Jeff, my before tax contributions were automatically stopped. However, I called Hewitt, the administrators of the 401(k), and restarted the contributions that were matched. Even though I had to contribute those amounts after taxes I still got the advantage of having them matched. In my case it was 50% match for one account and 75% matched for the other account. Imo, that was free money for the duration of the year.

It was interesting that Hewitt automatically stopped all contributions after you reached your before tax maximum. Fidelity, the previous administrators before my company switched to Hewitt, kept on deducting the contributions (after taxes) even after reaching the before tax maximum. With Fidelity, you had to call them to stop deductions.

[BFrank]

The way that 401k 'matching' usually works is that a company will match a percent of a percent of your salary (e.g. 50% of your contribution up to 5% of your salary). You can contribute much more, but it won't be matched. The numbers involved are typically the decision of your company's HR Benefits department in conjunction with the plan administrator. In the case of Hewitt, they're an HR consulting company, so there might be a consultant involved to design the plan, too.

[jwaggs]

Fidelity was our plan administrator. I just know that a few of us would contribute a percentage that would take us to the max before the end of the year. Then, around the first of December, our contributions would end, and that money would wind up in our pay checks (after taxes). We'd use the extra to buy Christmas gifts.

I assume I could have asked them to keep dumping it, after taxes and without match, into my account. But I didn't think about it, and I wouldn't have had the $$ for stocking stuffers.

Clint, if I am not mistaken, the contribution limits are higher for self-employed folks than they are for employed folks. I think the idea is that self-employed have to save enough to create their own pensions. The plan is "SEP." You had your own business, or were self-employed, no?

[BFrank]

If you were self-employed you wouldn't have a 401k, you would have an IRA. They have different rules/limits. SEP-IRA is for small businesses.