Bank Accounts

Talk to your stock broker about brokered CD's, corporate bonds, or garanteed income plans. As an example, I just picked up $30K in 6% CD's, FDIC insured. My broker doesn't have that good of a deal all the time, but every once in a while, you can latch onto something good.

I always question leaving money laying around as an "emergency fund". That is too much money to have and not have it working hard for you. In addition, having money laying around is sometimes too tempting, and emergencies seem to pop up just as an excuse to spend it. I like to make the money work, then find something else as a short term emergency fund like a credit card or H/E loan. For example, if you ladder your CD's, you always have one rolling over in a few months, so you always have money to pay off the card or H/E loan once the emergency is over.

-john-

How old? What debts, if any, have you, and on what terms? When do you want to retire? Does your employer offer any sort of retirement plan? How much house might you be considering buying, in dollars? Have a budget laid out on a spreadsheet? Have health insurance?

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Extra return comes with extra risk.

If you plan to use some of this money for a down payment on a house, you can't afford to take chances with it. You have no choice but to accept a very low return in a savings account so that the money will be there when you're ready to buy.

The sames goes for using some of this money for your emergency fund. It belongs in a boring, safe, savings account even if the interest rate is low. If an emergency arises, you don't want this money invested somewhere that might require you to sell at a loss. That would be a double whammy.

Sorry to be the bearer of bad news. But if you want safety and security you have to pay for it.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Thank you for the quick response(s).

-- John -- What 'term' would you suggest the longest I go on any CD? Im sure if CD's are the way to go, I can look online..

-- Elle -- Thanks for the questions... Im 38, married with 2 kids (12,13) and one more on the way. There is no (longer any) credit card debt. Really the only debt is the house mortgage which I have a fixed 5.5% 30yr. My employer does offer a 401k plan to which they also put in a smidgeon amount.. the problem with it is that we dont meet some 'federal?' guideline, so they wont let me put in more than 5% and sometimes refund me back some money! I usually only get to put in $5- $6K a year. I currently have about? 100grand in that account. We do have health insurance through work for the family. I dont have a house in mind.. its kinda of if someone says here's a good deal check it out.. then I would see if it made calculated sense... other than that, I dont have a real interest in real estate.. unless it can yield more? I am on about 120grand a year at work but I am still claiming "1" on taxes, essentially letting the govt borrow my money until I get them back on taxes... My plan/desire is to shift the 'savings' Wells Fargo money to get a better return.. and then to open up something? a mutual fund or something recurring that I can get put money in every month.. I really appreciate anyone that has experience or advice in this area...

thanks again...

JACK

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

The pundits suggest building a CD ladder. You can do it by quarters or by years, depending on how much time you want to tie up your funds. For example, you can put in:

$20K for 1 year $20K for 2 years $20K for 3 years $20K for 4 years $20K for 5 years

Then each time a CD comes due, roll it over for 5 years. The trick is that you (a) are always getting the better 5 year interest rate, but (b) you always have money rolling over every year. So it behaves much like a 1 year CD but gets the 5 year rate.

The brokered CDs that I got a real deal on are long term, 10 years to start with, but are already 3 years old. They are callable after

1 year. Even if they do get called after I have them for a year, I still get a year of good returns. If they don't get called, then it serves as a good base for my financial pyramid.

-john-

Jack, as a financial planning newsgroup, many of us try to make sure any OP is on track for ensuring a healthy retirement. Beg pardon if much of this was not solicited or you know the following already.

My two cents is to save around $12k a year (or more) for retirement by continuing to use your employer's plan but also using Roth and/or Traditional IRAs and/or a taxable account. You likely will be limited for the Traditional IRA, due to your high income. This leaves the Roth IRA and a taxable account, which is not exactly desirable if one assumes your tax rate will be lower in retirement. Hard to say without more discussion, so ask away, maybe starting new threads as your interest allows. If you get savvy on housing as an investment (if you see a real deal, and so forth), I would not rule out investing in real estate as a small part of your retirement savings plan.

A crude estimate of how much you would need to retire today is about $1.6 million dollars. This assumes you (1) need 70% of your current income in retirement; (2) have about $20k of social security income; and (3) drawdown at 4% a year from your retirement portfolio. Excluding about 40 grand in emergency funding, you currently have about $165k in retirement savings. You can find various retirement planning calculators that state how much you need to save each year from age 38 to age 62 (say), assuming a return on investment of X, inflation of Y, and so forth. It appears if you continue saving $6k a year, and allocate your investments properly to achieve say a 7% return each year, you should be fine. But remember all the assumptions here. Remember to consider job stability. Will you continue to make $120k a year in the next 24 years or so? Who is paying for the kids' college educations? Health care costs, even with insurance, are so unpredictable these days. So lots of unknowns. I would be inclined to double retirement savings per year and reach your goal of $1.6 million dollars (or so) sooner rather than later, in case of emergencies.

Are you saving for your kids' college educations? This may throw a huge wrench into some of these calculations as well.

If you want to reserve the option to buy some real estate within the next few years, then as others say, pretty much the only route to go is short term CDs or a money market fund. Stocks are capricious for the short term. With stocks (or stock mutual funds, of course), one just cannot say whether the money will be there when you want it, given only a five-year or so timeframe.

I think the next question might be how much of your retirement portfolio do you feel comfortable investing in real estate.

I'd take six months or so to ponder this, simultaneously keeping an eye peeled for good housing investments, IF you are determined to buy real estate as an investment. Keep thinking about your retirement planning, too.

I personally do not like buying property. Too much risk. Historically, housing returns around 3% a year (not taking into account inflation). Given how much you have to spend (say well south of $100k), I'd almost rather spend any extra money on improvements to my own home, to increase its value, in hopes that, when I became an empty nester and wanted to downsize, I would reap some returns from this "real estate investing."

Do consider starting additional threads on being a landlord, or just holding real estate for profit. Several regulars here do promote real estate investing. We had a number of glowing reports (here at MIFP) on doing so circa 2004-2007. But I won't be nice and will offer my opinion that one helluva lot of people were gambling. They were irrational with their assumption that houses would continue to appreciate by a lot each year because of... What? Ultimately many (not all) found the emperor had no clothes. Simultaneously some of us cautioned that it appeared we were in a bubble; don't buy unless you are prepared to lose money, based on historical bubble measures. (Landlording is a little different.) Then the proverbial excrement hit the fan, no doubt as you have read, around early 2007. Sure now there may be some bargains, but I would not count on good returns from a housing investment for a while.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I'm guessing interest rates will be increasing in 2009 as the Fed turns it attention from the liquidity/subbprime problem back to inflation.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Did you mean that the Roth IRA would be less desirable as opposed to undesirable (which is what it appears you're indicating)? A Roth IRA is still useful even if your tax rates decline in retirement, but I'm guessing I'm misunderstanding you.

I think you forgot to factor in inflation here? $1.6M would be more like $700k in 24 years. He might need $1.6M to retire today, but he'll need maybe $3M+ to retire in 24 years to support an equivalent withdrawal rate as today. In which case the OP needs to save something like $40k+ per year. Or did I miss something?

-Will

william dot trice at ngc dot com

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

"Will Trice" wrote

Will, would you please compare the current pros and cons of contributing (1) to a Roth IRA (at age 38) when one expects to have a lower income tax rate in retirement (say in one's

60s); and (2) to a taxable account instead?

You are right. I used the two retirement calculators at fincalc.com , under "Retirement," 2nd and 3rd calculators, for my crude calculations. They have other assumptions that I failed to mention. For example, there is not a way to input a 4% drawdown rate, so I assumed the retiree would draw money from his account until about age 102 years.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Sure, Elle. Distributions from the Roth (assuming current tax laws hold and all other relevant legal caveats are met, such as minimum age, etc.) are not taxable, nor are gains along the way. In a taxable account, you will pay taxes on the gains along the way. In this sense, the Roth always wins no matter what the tax rate in retirement (even if it goes to zero).

Well, if the OP wants to retire on 70% of his current income, supplemented by $20k of social security, he'd be withdrawing $64k/year. To maintain that spending level in 24 years, when the OP retires at

62, the OP would need to withdraw $130,100 per year due to the effects of inflation (assuming 3% inflation). The calculators you mention above show that the OP will run out of money in 19 years given your assumptions above, not the 40 years you imply. If the OP increases withdrawals to keep up with inflation after the first year of retirement, they'll run out in 14.5 years. My earlier point was that I think you forgot to factor in inflation when you said that $1.6M would be sufficient for the OP's retirement.

-Will

william dot trice at ngc dot com

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Elle said he would need $1.6M _today_ to retire on 70% of his income minus SS, not when he's 62. If he had that quantity of money today, and it continued to grow at the assumptions stated above, the OP could retire on that amount today and the money would last 40 years past age

2. Perhaps more usefully: If at age 62 the Op began taking 0,098 (k adjusted for inflation) and he continued to increase withdrawals 3% for inflation (annually), he would need about .6M dollars by age 62 (assuming 7% annual return). To get to .6M from the 5k he currently has, he needs to be saving around k annually and earning

7%.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

"Will Trice" wrote snip for brevity; look back

You're right. My mistake came from too often comparing RIRA to TIRA. We are comparing RIRA to a taxable account, and so on.

snip

I said the $1.6 million would be sufficient to retire /today/, meaning if he quit his job /today/, the theorists state that he could withdraw 4% from his $1.6 million and never run out of money. This also assumes he could draw $20k from SS a year /today/, which of course with good health and at age 38 is not allowed. It's crude. It does not consider taxes, for example.

snip

One has to fool the calculators to get the sum of the portfolio income and SS income to be about 70% of age 61 income. To "fool" them, I put in about 50% for the "income replacement at retirement" figure. Also, I think I originally used 2.5% inflation, though using 3% does not change the result much. I think 2.5 was sticking in my head from a recent long term inflation calculation using actual SS figures.

Using the "Are My Current Retirement Savings Sufficient?" calculator, and assuming for input {age 38, current annual income $120k, no spouse, current retirement savings balance = $165k, saving $6k a year for retirement, 0% annual savings increase, 2.5% inflation, retirement age = 62, 40 years of retirement income (that's the most the calculator allows),

45% of income replaced, returns of 7%, "include SS benefits," and single} shows that the person would last beyond age 102 with significant room to spare.

But I prefer to argue for more conservative planning, since so much of planning is crude guesswork. E.g. I ignored taxes, health care inflation, etc. above. The calculators make assumptions as well. Saving around $12k a year is a ballpark I propose the OP consider for now, understanding that this should be revisited once a year or so. It was not intended to fulfill the 4% drawdown rule. I was using the 4% rule only for perspective on what he would need at age 38, etc.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I guess I was confused when you said,

"A crude estimate of how much you would need to retire today is about $1.6 million dollars. This assumes you (1) need 70% of your current income in retirement; (2) have about $20k of social security income; and (3) drawdown at 4% a year from your retirement portfolio... It appears if you continue saving $6k a year, and allocate your investments properly to achieve say a 7% return each year, you should...in the next

24 years...reach your goal of $1.6 million dollars (or so)..."

That sounds like your saying his goal in 24 years is reachable at his current savings rate of $6k - making the goal $1.6M under the assumption of 7% returns. But given kastnna's response, perhaps I misunderstood your point.

-Will

william dot trice at ngc dot com

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

"Will Trice" wrote snip for brevity

As always, my writing could have been better.

Lately I have been trying to use fewer paragraphs to express thoughts, plus trying to keep posts shorter in general. Hence the collision of a few notions in my earlier post.

I have reached a point where I do not really like the back-and-forth extrapolating of incomes to the future, mixing in the 4% rule and SS, returning to how much needs to be saved each year starting now, and how much it should be increased yearly, assuming X return and Y inflation and this much matching and that much taxes. Then one gets to explain the virtues (hm... ) of never depleting one's portfolio via the 4% rule and why on earth we should assume the person's income rises only by inflation each year. I am trying to send people to the online calculators that tend to include things easily missed. I like fincalc.com because it delivers a spreadsheet with year-by-year results, so one can usually do some kind of common-sense check and experiment and see what makes a big difference and what does not. The idea being to give a person some kind of loose handle on what is realistic.

Most importantly, has the OP flown the coop? Is he now totally baffled? Can't blame him.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

comments lately have been very incisive. One of the old rules of writing is that if you can't get into the meat of a story/idea on page one, you'll lose the reader.

Writing or speaking on financial planning is no different. Some get to the meat of a matter quickly and speak/write simply, others wander forever. Practice, practice, practice.

-HW "Skip" Weldon Columbia, SC

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Actually... to the contrary, I've just been super busy with work.. but I've read all of the posts with great intrigue. Living in southern California it just is not realistic to save $24k a year, while living in a house, gas, bills, a wife, 2 kids and another one on the way... I could probably double the $5K (because of the 401K limitation my company has) to $10-12K... What I'm taking from all of this is that I will increase my savings to $12K/year, with the non 401K being put into a RothIRA (not mutual funds, right?)

The 105K that is in savings...? Should I a) leave it where it is in horrible WellsFargo savings. b) find a higher savings interest bank like E-Trade or online? c) put into a mutual fund? d) CD's (laddering?) e) something else..

Thank you for all your insightful help. JACK

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

"JACK-UK" wrote

Why not mutual funds? A Roth IRA is an account you open up with a financial institution such as a bank or stock brokerage house. Once you have put the money into the Roth account, then it will most likely sit in a money market fund until you select mutual funds, stocks, CDs, etc. to buy with the money in the Roth IRA. For you, I strongly suggest index mutual funds or index ETFs.

So you have to start considering an allocation plan. For ideas, on some weekend try some of the free, interactive online tools linked at

I suggest abandoning buying real estate with any of this savings. The reason is that you have three kids, and real estate still seems to me to offer too much risk for too little return, especially if one has not a lot of time to research particular properties.

I would allocate the $105k as follows:

--$40k as emergency fund in a money market account or three-month CD.

--$10k as a Roth IRA contribution for 2008 for your wife and you. You did not say whether your wife had income. If she does, more discussion is necessary. For now, I am taking the $120k of income you mentioned earlier to be close to your Married Filing Jointly form 1040 modified adjusted gross income.

-- $55k to index mutual funds in a taxable account, allocated per a plan you determine.

Other things to consider:

-- life insurance (if you do not have any)

-- paying down the house sooner rather than later. Though given the low interest rate on the mortgage, I would be inclined not to.

-- saving in special tax-advantaged plans for your kids' college education.

Further comment on how much to save, improving on the crude calculations of earlier: Go to

click on "Consumer Calcs" on the left, then on the right select "Are my Current Retirement Savings Sufficient?" Put $12k for your savings; put 40 years for how long your wife and you plan to be in retirement (say age 62 to 102); 70% income replacement (Will Trice, yes another boo boo earlier); 7% return on investment; and include SS benefits. The result "looks fine," especially considering that by retirement, you hopefully will not have mortgage payments, mouths to feed, etc. You may be tempted to save less, even. But if you can comfortably do $12k a year, I would.

"Looks fine" is in quotation marks because it is somewhat subjective.

Revisit this plan yearly. Things change, like health care costs, kids' needs, spouse's employment, etc. It is perfectly appropriate to contribute something other than $12k a year, depending on your needs and ability. Though you should anticipate possibly needing to catch up at some point. Or maybe cutting back on saving and, say, taking a big vacation. It depends. This is not an exact science. Personally, I think folks should save like crazy in their first ten years or so of employment. Doing so develops good habits, and it gives peace of mind. Then if and when it becomes apparent that they are rolling in dough, they can cut back and spend on more recreation, jr.'s college education fund, etc. For you, I would save like crazy until at least age 45.

Do consider posting separately on some of the individual themes here, like asset allocation or college savings plans. The moderators urge short posts. Rightly so, since for one, I think it helps keep focus. This post is too long.

Two cents. Others often chime in here to offer a whole other plan or, more likely in this case, refine the basic ideas here. (Or fix the blunders in a post!)

Disclosure: I have been investing in stocks, mutual funds, bonds, and CDs for some 25 years so as to secure an early retirement. I have never received compensation for financial advice.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I posted a sheet at my site,

download. Elle's advice is sound, I just prefer a different format for the calculator, a spreadsheet vs a calculator that doesn't show year by year. My sheet allows you to input your current assets next to your current age, income, savings each year (as a percent of income) projected inflation, and it will track your ratio of savings to income. If we presume a 4% withdrawal rate is the safe level for the first year of retirement withdrawals, and you need 70% replacement, your target would be about 12.5X current income at retirement. (This assumes SS will replace about 20%) Elle suggests using 7% as a rate of return. Many advisors suggest higher but here's why I am in Elle's camp - if you use 8-10% and the market returns 6-7% over the next decade, it will be far harder to catch up to your goal than if you use that 7% figure. If the market indeed exceeds the 7%, you'll face the tough decision of early retirement, or as you get into your 50's increasing your lifestyle a bit. (please ignore that the sheet offers 8%, I wrote it some time back)

Joe

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Hi Joe, did you scroll down on the output for the fincalc.com calculator? I saw a year-by-year breakdown. Though I would like to urge folks to try as many reputable calculators (like Joe's and I think fincalc.com's) as possible, because experimenting with them teaches some fundamentals.

What I think may be confusing is that this is something like a moving target, or it is vague. He wants 12.5x current income in today's dollars? Or in dollars five years from now? Or in dollars 24 years from now? I think what folks need is a target for each year, accompanied by a projection that continued savings at such-and-such rate will result in Y% of current income at retirement.

Plus many economists and financial gurus expect a return somewhat less than the historical return of about 10%. There's really no saying, except to err on the safe side for many years before retirement.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.