If you want to reduce the risk of a major downturn just after you invest, you can transfer the 401(k) into a money market fund, which earns interest, and then transfer funds from that into your stock and bond funds a bit at a time, say 5% or 10% per month or quarter. Since the stock market generally outperforms money markets over the long term, you won't want to take too long to make the transfer, but a few months won't hinder your returns too much, and you might sleep better in the meantime.
That the market is overvalued is my feeling, too. OTOH, I have been saying this since the Dow was at about 11,200. It, with other broad stock indices, shot up in the last couple of months, making stock in my mind even more overvalued. As a crude but to me, meaningful, measure, the historical average of P/E for the S&P 500 is about 15. Now it's at almost 19.
I justify my decision to buy very little (and sell and take some gains) right now on the writings of one Benjamin Graham. He is the father of "Value Investing," which emphasizes never overpaying for a stock, and counsels that "defensive investors" should buy only older, large companies' stocks that have paid a dividend for decades. I think it's something a relative newbie could skim and appreciate. Though I get the feeling you are not exactly a newbie, or have the smarts to quickly improve your understanding of investing in business via stocks and bonds. Look for _The Defensive Investor_ by Graham, latest edition with commentary by one Jason Zweig, if you want guidance and support on holding off on buying into stocks just yet.
Ditto. I just hate to be accused of timing the market, because to me what is usually meant by "timing" is the practice of "numerology"--following strictly and often solely stock price trends, without examining company fundamentals and management. That's gambling AFAIC.
Of course, the market could boom on up in another (and AFAIC, tragic) fit of irrational exuberance yada like we saw in the late 1990s. But I am happy waiting for a correction, or at least letting earnings catch up to prices and then buying into stocks again. A 5% yield is not so bad on my cash positions. I still have a pile of stocks that I am just letting ride, besides.
As for bonds, because the yield curve is inverted or flat now (a rare occurrence in history), buying short term maturity investment grade bonds (or a similar short term bond mutual fund) is perfectly prudent. Yields are around
5%. As the curve returns to normal (longer maturities paying higher yields), then one should consider a bond or CD ladder going out about 5 years, IMO, and based on many discussions here. I adore the following site's graphics to explain this strategy for bond investing:
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Maybe start your studies with the site above, get set in a
5% or so yielding bond vehicle (buncha CDs, short term bond mutual fund, or similar), then continue studying how and if you still want to invest in stocks, via the suggestions folks here have given, for one. Like the others here, I do recommend continuing to study why stocks have made sense in the past for people wanting to beat inflation (by a lot) and make the nest egg last. Index funds are something you should consider closely, IMO.
The "total investment amount" (or principle balance) would tell you if the 5% return you are getting now is enough to sustain you for 35 years. I think Joe mentioned creating a spreadsheet... and I would second this suggestion.
in 4.5 years, how much money will you need for that ONE year. Living expenses, bills, leisure expenses, healthcare expenses etc...
Take this amount you need for the one year, and every year add 3% to it (the 3% represents inflation). Do this for 35 years (adding 3% to the income needed each year) and you should see that the money which is needed for income doubles 24 years into retirement. Meaning if you needed $30,000 to live off at age 59.5, 3% inflation suggests you would need $60,000 24 years later. Does the principle amount supply the amount needed 24 years later at a 4%withdraw rate? (Does withdrawing 4% of principle look more like year 1 or year 24 of retirement?).
If you are comfortable with these numbers, then the 4.5-5% annual gain in the stable value fund is a good thing. This also means you did an excellent job of saving, keeping spending low and investing when you were young.
A 40-60 stock bond mix sounds like a good fit for you. A third piece might be a cash component for "next year's expenses". meaning withdraw your yearly expenses a year before they are needed. To reduce risk even further, withdraw 4-8 years cash and leave this cash in accessible accounts/ get it out of the market. (My plan is to have 7 years expenses in cash during retirement- in CDs, inflation bonds, government bonds or money markets). Take the remainder of assets and invest 50-50 in stocks and bonds... the cash component allows you to take more risk with stocks, and by increasing the amount of stocks you boost your returns... in any down market you would not need cash for the next 7 years (it's in the bank already). Same issue with bonds- if bonds tank, you would not need this money for 7 years if you had 7 years expenses in a cash account. If markets "skyrocket", lock in the gains by withdrawing 1,2 or 3 years of future expenses.
Steve, Simple is fine and maybe you'll end up with that 50/50 mix. But it sounds like you would benefit from doing a bit of reading before making any leaps. If your 401k is in a stable-value fund there's no rush really, better to make an informed choice that you'll stick with.
I'd suggest reading up on the Vanguard site about the risks of different asset-class mixes, they have some well-written materials ("asset class" just means "type of investment": stocks, bonds, cash, real estate are the commmon top-level ones, with each of those divided into sub-groups). In particular you might compare their Balanced Index Fund to their LifeStrategy funds...the latter blend a variety of asset classes in a single fund. There aren't necessarily the funds you'd buy but the discussion of the relative risks of each will be helpful when choosing a mix of asset classes -- the expected differences between 60/40 and
80/20, etc.
A couple of good books that will help with these decisions are Bogle's "Common Sense on Mutual Funds" and Bernstein's "The Intelligent Asset Allocator." Actually, you might start there before looking at specific funds.
A few themes to watch out for and learn about; each of these may suggest deviating farther and farther from a stable-value fund with more of your assets:
inflation as a primary risk for a long-term investor; stable-value investments as treading water or losing vs. inflation
investment volatility as something of lesser concern for longer-term investment periods (5, 10+ years) and something reduced by diversifying into different asset classes (some go up when others go down)
short-term bonds as having lower risks than long-term bonds
potential benefits & risks of value stocks
potential benefits & risks of international stocks
If you have the interest you could well put together a mix that is likely to net more cash than a higher-cost guaranteed product -- significantly more. As long as you're willing to forego the "guaranteed" part.
Thank you Tad! I have gotten so much useful information here on this group that I will need to copy all these posts and try to redigest every one of them. I am amazed at how everyone here has been so giving of their knowledge and time! I truely appreciate each one. I will definitely be checking on the Vanguard site to see what they have to offer as well as do some additional readings.
Steve
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Thank you! I am actually sort of doing this now but instead of 4-8 years of cash in accessible accounts, I am only at about 2.5 years in laddering CD's. I also have hopefully about 2.5 years (depending on the fund's performance) in various low risk mutual stock funds that I had been planning to sell as needed until I can access my 401K. I think I am ok with that part which I had been calling my "bridge." My big dilema(sp) will be what to eventually do with the 401K......which at the current return of @4.5% should put me somewhere about midway between year 1 and year 24 at a 4% withdrawal rate. I also own some real estate that I could use as a parachute if necessary.
Do I understand that you have calculated that you will run out of money
12 years into retirement? This is a big risk... consider doing more research as mentioned by others. I would not ingore this... if you have calculated that your 401k would only provide 12 years of retirement income, consider getting more aggressive with a portion of the 401k.
T Rowe Price and Vanguard have excellent websites... run through their draw down calculators... do a Monte Carlo analysis (this will tell you probability of success with 75-25, 50-50 and 25-75 equity-bond mixes).
Many of us here also have spreadsheets which we share. I have a spreadhseet to calculate "how much income" I'll need. I have others which calculate "how much principle" I need, and even more which simulate various "withdraw strategies".
I second the "read more" advice already given, paying close attention to inflation, withdraw strategies, amd how long money is invested.
I hope this was just an oversight. The way the above is worded suggests to me that taking more risk is a way to ensure higher returns over 12 years or likely less. Being more "aggressive" in one's investing is not a panacea for the short run.
If the OP said what you infer, Jim, then I think he'd be better off postponing retirement, living more cheaply, maybe downsizing his housing (which the OP notes is a parachute, so I think he's due a little more credit here, re his knowledge of his situation), etc. Ultimately I think it preferable that he and his wife find a means of saving enough so that a "reasonable" allocation will allow him to live "forever" off his retirement portfolio.
Very sorry, I guess I didn't say that right. In about 4 -5 years or whenever my "bridge" runs out, if I do nothing more with my 401K - just let it chug along at 4 - 5% interest, I could just start withdrawing only interest (40K-45K/yr) and never run out. I hope!
I don't know why my posts are taking so long to get on here but I sent a post early this morning back to Jim saying that I was sorry for not making myself more clear on replying to his post. In case that post got lost in space I will try again:
Very sorry, I guess I didn't say that right. In about 4 -5 years or whenever my "bridge" runs out, if I do nothing more with my 401K - just let it chug along at 4 - 5% interest, I could just start withdrawing only interest (40K-45K/yr) and never run out. I hope!
Keep in mind, if you have, say $100K, and only need $4K first year withdrawal, you still need a 7% return to keep up with inflation, otherwise, as has been posted, your withdrawal will be worth less each year, and half by 24th year of retirement. The often quoted 4% withdrawal rate is a first year rate, assumes inflation increases each year, and assumes an annual return in that 7%+ range.
If you have enough invested to live off 4% forever, the question is "how long is forever" and the second question needs to be "what about inflation". Taking out 4% in year 1 might get you 40k... but at 3% inflation (this is moderate assumption), in 24 years that 40k will get you half (20k worth) of goods/services. So by year 24 you would need to consider taking out around 80k to keep up OR spend less.
So back to secondary point... if you are going to invest in a 40-60 bond mix, run a Monte Carlo analysis and see what your probability of success is. If you expect to live in retirement for 35+ years (that was in another post, right?) and your wife will need this savings too, the risk is "when" will you run out of money.
I make most of my predictions for myself using 4% inflation (to be conservative). I like my Monte Carlo simulations to be at around 90% success rate as well.
I think it's important to point out that Monte Carlo simulations like the one you propose simply use historical data from the stock and bond markets. What a person computes them is what the probability of success /might be/ if one lived in the period from which the MCS draws data. IMO, this is a particularly important caveat these days. Neither Jeremy Siegel nor Robert Shiller (often quoted market experts and UPenn and Yale professors) currently subscribe to the view that future market behavior will imitate the past. They argue it will be quite different. Both now promote strategies very different from the conventional allocation strategies, with Siegel arguing for way more international stocks (of particular flavors) in one's portfolio, and Shiller favoring inflation protected bonds, maybe some real estate, and only a small fraction of one's portfolio in stocks.
Thanks again. I know I need to do more research on this for sure. I'll have to look up that "Monte Carlo" analysis. I also need to do the spreadsheet as mentioned before. I somehow need to plan for 30 -
35 years of retirement although I hope not to let the nursing home get their hands on it if, or when that time comes. I also do not worry about leaving a huge estate for anyone as long as my wife is looked after when I am gone. Therefore, forever, for me is in that 30 - 35 year range. I know that I need to get my 401K more diversified and that is my goal. I know I need to allow for inflation and also other unknowns that may happen along the way. But at least from the support I have gotten on this topic from everyone here that I do NOT need the "help" anymore of my current investment representative. And I definitely will not be thinking the "A" word again! Steve
Thanks Joe. I understand that moderated means "be patient!"
I certainly would be more than happy to achieve a 7% return! That will be my goal to find a relatively safe way to do just that. I know that my simple figuring above does not account for it.
supports that view (that we are currently at a point in history where future returns will be on the lower side of average. The article "waiting for average" can be found directly at
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post that as the sight is pretty busy with papers. When playing with the numbers (the assumptions for market returns) the difference over time is quite dramatic.
It takes 8% return for someone to replace their income 100% at 62, having saved 15% of salary between their contribution and company match.
Bump that to just 10% (the number often tossed around) and you will achieve the 20X salary by 54.
Reduce it to 6%, and at 62, you'll have only 12.5 your income saved.
So to Elle's point, Monte Carlo will address the random aspect of the market, but centered around the long term 10%. This can be misleading if we are in for lesser returns these next 10-15 years. JOE
When you refer to "15%", do you include the company match as part of gross income? Or, if the company matches 50% of the first 10% of gross, does that sum equal 15% of gross?
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