Put 401K into an Annuity?

Steve wrote: We do not want any unnessary risk at this stage


Wow! I would never have thought I would be generating this much attention! Thank you everyone for your input. I can see there are alot of good people here who are alot smarter than I am on these matters! I think we will NOT be going the guarranteed annuity route for one thing. The guaranteed part sounds good but the initial cost and annual fees would begin to eat at me. The idea of the Vanguard Total Stock Mkt Index and Total Bond Mkt Index Funds at a 50-50 mix look attractive and is "simple." That is the way I am. But with my low risk tolerance would a 60-40 Bond to Stock mix be better for me and accepting a probable overall lower return? We are now ok with our 4.5%-5% current stable return but as we can all expect that somewhere down the road those kind of returns will not be sufficient to cover everything. I will be keeping my eyes and mind open for any more discussion on this issue! It means alot to me. Steve
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Absolutely. It's a matter of personal comfort. Also, simplicity is a perfectly valid approach to financial planning. Fact is, some people get so wrapped up in short term returns and thinking complexity will gain them more money that they lose money big time. A so-called "simple" plan of investing some in the overall stock market, and some in investment grade bonds, is very sound (meaning returns have been very good, historically, from such an approach).
In your case, I recommend studying these matters for another six months before making any major changes. A 5% return right now is perfectly good; do not knock it for the short term. Study by reading financial planning web sites designed for education purposes; asking questions here and at similar fora about what you read. Maybe try skimming some of the books Joetaxpayer lists (and which I also happen to like) at www.joetaxpayer.com . For fun, and as an introduction to notions on asset allocation, you might want to spend a day or so experimenting with the free online asset allocation tools linked at http://home.earthlink.net/~elle_navorski/id8.html . They try to factor in a person's risk tolerance and timeframe. Also, the Retirement Withdrawal Rates page at the site above may help you in your decision-making as well. The articles it links reinforce some of the ideas Joetaxpayer and Joe W. mentioned, for one.
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Elle wrote:

Thanks for the information!
Another couple of questions that come to my simple mind is with the stock market at it's current all time high, would it be prudent to wait for some type of correction to put a bunch of money into it? Does it matter what level the market is at to go into the bond funds? Also noting that I am not really in a hurry to make changes, I'm sure there's going to be some type of correction in the next year or two???
I have heard it said that you can't time the markets but to put a bunch of money at one time into even mutual funds is not wise to me.
Steve
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Steve wrote:

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.
Dave
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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: http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve
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.
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Elle wrote:

I think you meant the sections on defensive investors in Graham's book, _The Intelligent Investor_. I concur that this is a good read.
-Will
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snip
Mr. Trice is correct. Beg pardon.
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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.
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jIM wrote:

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.
Steve
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Steve wrote:

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.
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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.
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Elle wrote:

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!
Thanks again and will stay tuned! Steve
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Steve wrote:

Board is moderated, posts don't hit in real time.
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.
JOE
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joetaxpayer wrote:

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.
Steve
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jIM wrote:

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!
Thanks again and will stay tuned! Steve
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Much clearer, now. Thank you.
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.
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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.
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Elle wrote:

A paper hosted by www.crestmontresearch.com 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 http://www.crestmontresearch.com/pdfs/Stock%20Waiting%20and%20MPT.pdf I 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
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I agree this paper is an interesting read. It's only four pages long, so one cannot lose by taking a look at it. Combining it with some of Jeremy Siegel's arguments about how the change in demographics (baby boomers retiring) will reduce demand for stocks further suggests we should not count on 10% returns, on average, in the next few decades, from domestic stocks. Though a point I think you made recently, in a private email, Joetaxpayer, is still on my mind: What fraction of the population participates in stock purchases and sales? And hasn't this fraction been on the rise, as people become more educated? So more people will be in retirement and shifting stocks to bonds, say, but an increasingly larger fraction of younger folks will have the smarts to invest in stocks, too, no? Not sure if Siegel said anything about this.
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Elle wrote:

I got though Siegel's "The Future for Investors" and you are right. He does discuss the aging demographic in the US, and goes on to suggest that growth (i.e. demand for stock) will come from abroad. It would take more analysis than a post here can offer, but I do believe that the willingness for the next generation to own stocks (the pension reform act helping to push the savings rate right from the time of hiring) directly as traditional pensions fade away and defined contributions being the way of the future. Also, as you allude to my email above, one must consider the distribution of wealth. Most people who retire simply have no assets to sell, the numbers are alarming. The wealth controlled at the top (the top 1% own what percent of assets?) is not going to be sold to fund retirement, it gets passed along in tact.
I'll maintain that the prudent path is to assume the lower rate of return (7-8%) and if that leads towards over funding one's retirement, then so be it. The alternative is to assume 10-12%, and realize at 50 that retirement is still 20 years away. JOE JoeTaxpayer.com
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