IRA for almost 60 year old

[yogiii]

Kind of a long story but a family member has a pension that is not indexed to inflation and currently works part time bringing in <8k/year in additional income. She does not have much saved, <100k but it seems that maybe 70% of that is in something earning ~4% and she'd like to leave that as is. She has some IRAs in a CD ladder (this is the other 30%) and is looking to open an IRA for 2012. I suggested she open an IRA at Vanguard and as the CDs mature, transfer them to this Vanguard account. She is very nervous about losing money. I've been trying to look at funds for her and have come up with these choices

VASIX (Balanced, Life strategy), VBIRX (Short term treasury bonds), VTINX (Target Retirement), VBMFX (Total Bond Market). VASIX and VTINX just invest in other vanguard indexes, I'm leaning towards one of those. Does anyone have any other thoughts or suggestions?

[Deleted]

I am not 100% clear on what you are suggesting. It sounds like a transfer from the current IRA, in CDs, to a new IRA at Vanguard, invested in something else.

If that is the case, I am a big fan of vanguard for IRAs, especially compared to banks, so i like that. Deciding what to invest it it in is another matter. I like and own the STAR fund for a stable fund.

[Deleted]

Jan 4, 2012 14:30:25 GMT -5 @toughtimes said:

Why would anyone give this kind of advice to someone who has no money and is near retirement age? Are you really serious? Especially in an environment of historically low interest rates? The game isn't worth the candle. Keep frosty until interest rates pick up.

Me?

i am not sure what you mean. I much prefer an IRA to be held at Vanguard rather than a bank, no matter how old someone is.

[Deleted]

Jan 4, 2012 14:33:18 GMT -5 @toughtimes said:

Archie, these are BOND Funds and they are not short-term bonds either. You can easily see drops of as much as 20 or 30% in the value of a long-term fund if interest rates rise as little as 1%. This is crackers.

She doesn't have to invest in bond funds. There are money market funds as well.

[Deleted]

Jan 4, 2012 14:47:27 GMT -5 @toughtimes said:

Yes, but bond funds are what are being suggested. In the meantime, many money markets are flat at 0%. There is no reason to give up FDIC insurance for results like that.

Maybe. I like the STAR fund, though.

[yogiii]

toughtimes, she has a pension too. Currently she spends the pension and saves the money from her other job (while not trying to cut expenses). She is not very "with it" when it comes to financial matters, obviously. I'm open to suggestions which is why I started this thread. She's annoyed at the crappy rates of CDs. Lets just say her expectations are pretty high and I've tried to explain she can't just be guaranteed 5% returns in a short term scenario. I'm just trying to do something for her that is fairly conservative but yields better than a CD ladder with rates from 0.5%-2%.

And yes, she isn't rich but she isn't quite a pauper either.

[yogiii]

Well I'm happy for you .

So we have 1 vote to keep the IRA as CDs and one vote to move to something like the STAR fund.

Anyone else?

btw - toughtimes, I'd be very nervous if I was her but she seems to think she has enough. Ignorance is bliss I suppose?

[The Virginian]

Why even bother with Funds at All? - Take the money and invest it in Name Brand ( Household Name) Dow Dividend paying stocks.

With 30 K she could buy 20 big name stocks ($1500 each) paying dividends of 3% and more. It's not hard to average 4-5% in dividends. The Funds just suck up your earnings.

[The Virginian]

Your relatives best investment will be in maintaining her health through diet, exercise and good habits so she can work into advanced age.

Sure glad you are not my Financial Adviser! It's bad enough to hear that crap from the Health Nuts!

If you buy and hold Stocks in an account you only pay for the purchase of each stock. Re-invest the dividends and there is no charge. An almost 60 year old is reasonably looking at 20 + years. Purchase the right stock and she could have a substantial sum in 20+ years!

[IPAfan]

I'd be investing in individual stocks, distressed bonds, or distressed preferred pretty much regardless of my age.

I want to invest with a margin of safety, and buy companies that are going to grow at an acceptable rate going forward. If I accomplish both of these goals then I should avoid permanent impairment of capital and earn a good long term return.

If your relative needs all the money within 5 years then you may as well stay in cash or CDs, or take some serious risk with making short term investments in stock.

One good option might be to write cash secured PUTS on good dividend paying blue chips. She can probably make 7-9% a year on put premiums while writing options substantially below the market.

The "risk" of this strategy is that you might end up getting "put" the stock. This just means using the cash to purchase shares at a given strike price. So you can essentially have a conservative put writing strategy where you make more than bonds, if stocks fall you'll end up buying low.

If we get with another great depression with the requisite 90% drop in stock value, then you're going to get screwed. A 20-30% drop in the stock markets and you're going to do way better than putting the money straight into stocks. A 20-30% increase in the markets and you're going to make significantly less than putting money straight into stocks.

I'd consider companies like PM, MO, JNJ, INTC, DELL, AAPL, BRKB, CB, BUD, MDT, ABT. I'm not advising this as a list of buys, but just to look into trading options on companies like this. In fact, I'd look at writing PUTS on any of wxyz's model portfolio of 20 stocks.

[The Virginian]

When you purchase the stock you pay a commission

With Schawb I Pay $8.95 a trade regardless of # of Shares bought or sold.
With the automatic dividend re-investment option I pay zero and they roll in every quarter!

What risk? She's almost 60 not almost dead!

I tell you what - You eat carrots and go for a walk and I'll invest in my stock and let's see who does better!

As for the financial adviser - they are useless. They do nothing most couldn't do for themselves and steal their money.

I never said she could retire on her 100K but she doesn't have to roll over and play dead either.

I would suggest she read the Long term investment thread and the Dividend thread and learn how to make a little more money.

[The Virginian]

You don't have to be a "genius" or an "expert" to get a decent return on your money.

Go to the Dividend thread and find the Dividend Aristocrats list or Goggle "Dividend Aristocrats"

Pick the twenty name brand Stocks you want to invest in.

Open an account at Schawb or another on line broker.

Purchase the stocks - 20 Stocks @ 8.95 = $179 in Fees. Choose the Reinvest Dividends option.

That's it - That's all you have to do. Now she might not get rich but it's a lot better than doing nothing. If she does that I assure you she will get a good and fair return on her money with very little risk. Dividend stocks have beaten the S&P by 2.5% over the last 36 years.

Twenty stocks if spread over different Categories like Energy, Tech, Consumer Products, Health will give her a good diversity.

[The Virginian]

Well Okay - Maybe she should just put it in a jar and bury it in her backyard. ;D

[IPAfan]

If she has "no horizon" then stocks are good. If that $100,000 will throw off a stream of dividends paying $3,500 a year and grow those dividends at faster than inflation, then this person is left with an extra inflation adjusted $300 a month of income.

Invest in companies like the ones above and you can get a 3-3.5% yield and still see annual dividend growth of 8%+.

Just look at companies like PM, JNJ, MCD, etc.

[The Virginian]

Toughtimes are you being intentionally Bull Headed?

I think she can beat $3500 a year but even at that it's an extra $70,000 over the next 20 years. Factor in compounding and she will have doubled her money to over 201,000.

Historically a 7% return is not unexpected = $7,000 per year.

Untouched for this percentage produces over $400,000!

Doing nothing or eating carrots produces $0.00 dollars for her!

[IPAfan]

Jan 4, 2012 23:26:08 GMT -5 @wxyz said:

Yogii

I would keep her in the CD's. Over time we should see some better rates in perhaps 2-4 years down the road. If it was me I would keep her in two year or less CD's. I see lots of "danger signs" of someone that should ABSOLUTELY NOT be in stocks or funds in your posts above.

FOR EXAMPLE:

*She is very nervous about losing money.

*She is not very "with it" when it comes to financial matters.

*her expectations are pretty high and I've tried to explain she can't just be guaranteed 5% returns in a short term scenario.

Sounds like a recipe for disaster when or if the market goes down 300/400/500/600 points in a day or we have a period like we did last summer. There is a lot of potential to also lose principle in the bond market and bond funds.
Some people are NOT cut out to invest in anything but CD's or other very safe vehicles.

Agreed that some people aren't cut out for stocks. But could that be why she's almost retired and only has $100,000 saved? It's not too late to change investing habits.

toughtimes - The idea wasn't to 'live on" $3500 a year. The idea is that she's got some sort of SS income / pension already. You can at least provide an income of $3,500-$4,000 a year that's going to grow faster than inflation if you invest in dividend growing stocks.

You can also draw down principal and leave it in CDs. Like V says, over 20 years, you'll get a LOT more bang for the buck on the dividend increasing stocks.

[IPAfan]

LOL I never said to "trade options" which is ridiculous. What I said was to sell cash secured PUTS which is simply a means of buying stocks with a margin of safety. There is no trading. You sell the option, and it either expires worthless or you end up with the stock. No sell required.

[yogiii]

Thanks everyone. Yes, part of the problem is that I can't go back in time and say "don't retire" or "save more money". What is done is done. I think I'm leaning toward suggesting she keep the CDs and that she opens a Vanguard account for her 2012 IRA contribution and she can see how that does in a fund. Then she can decide what she wants to do with her 2013 contribution.

ETA - if I had a beer name it would be stoutfan

[IPAfan]

Jan 5, 2012 10:26:55 GMT -5 @wxyz said:

IPA

I see you have moved up in the world. You used to be plain old "beer" fan, now you are "India Pale Ale" fan.

The only REAL beer

[Deleted]

IPA,

I just picked up some Lagunitas sucks Holiday ale... wow. great beer. Have you had it?

[IPAfan]

I have. Lagunitas is one of my top 5 favorite breweries along with Dogfishhead, Sierra Nevada, and Maredsous (Trappist monastery). Actually drawing a blank as far as a #5. Maybe Stone.

[IPAfan]

yogiii -

My DW could be stoutfan. She loves her stouts, porters, and brown ales.

[Deleted]

yogiii my ex MIL had almost the same problem (oddly almost exactly the same). Her husband died with a life insurance policy of $100,000 & she contacted me as to what to do with it for an income. I gave her advise & it worked out ok for her.

Some questions though.

1. What's her income each month & how much does she need to live on now? (income not counting on what she earns). Is her house paid off?

Some problems that I had with her though. She worried a LOT until she started making money (& I had to "hold her hand" during drops in the market).

When the market was up & she made money (on paper of course) she tended to want to spend it. She had a hard time understanding that she needed that money to make other money.

Oh & something I didn't see that anyone addressed was the fact that if she lives another 20 (or more) years any low paying (but safe) account will guarantee that she will run out of money.

I'll try to check back but if I don't feel free to PM me.

[IPAfan]

toughtimes -

That's nonsense. It is NOT ramping up the risk to buy quality companies with a long history of growing their earnings and paying out dividends. So long as she doesn't overpay for these investments then the main risk is short term market fluctuations. Who cares about short term market fluctuations if you're: 1) in it for the dividend stream and not out to sell stocks; and 2) holding onto companies with rock solid dividend payments.

Seriously I think she can get an income of $4,000 a year and see it grow by about 6-7% annually. Maybe when she's 80 she could look at selling stocks, but realistically at 80 she'd need less income than at 60. Why not just hold stocks for income until dead? I personally plan to live on the income from my investment portfolio without selling off my investments in retirement. Selling off investments (whether they're cash, stocks, bonds, real estate, or whatever) is just going to increase the risk of running out of money.

Holding long term investments for the income make it far LESS RISKY over the course of retirement IMHO.

Also, I'm assuming she has other sources of income such as social security or possibly a pension. If NOT then she better get ready to move to Africa, because that's the only place in the world you could retire on $100,000 with no other income.

[IPAfan]

I CAN ARGUE DIFFERENTLY. I think it's significantly ramping up the risk by leaving money in CDs or cash. Someone who's not even 60 has 30+ years left. I'm suggesting a buy and hold approach with quality stocks that pay growing dividends. For an amateur investor stocks can be sold when the dividend drops or the payout ratio goes above a set ratio.

I think its risky to give yourself no income and put your hands around your ankles by staying in cash. Inflation is going to come have its way with your small portfolio. You need to be invested in businesses (stocks are the easiest ways to invest here) that produce income and high return on their invested capital. Companies like JNJ, PG, MDT, PM, MO, KO, PEP, KMP, MRK, WM, VOD, etc. would all fit this category. It's not going to require much trading at all....just sit and collect the growing stream of income.

EDIT:

I guess I'm thinking of real value of the $100,000 over time. I think it's more risky to the real value to leave the money as cash or cds over that period of time while withdrawing principal to live on. If you took $4,000 a year inflation adjusted out of your $100,000 you'd likely RUN OUT OF MONEY before you died. I'm suggesting a portfolio that should be able to grow its dividends AND principal value over a long period of time.You should be able to get the income stream AND have more capital as you age.

So I really do think it's more risky to keep the money in cash.

[Deleted]

I don't believe 100K provides sufficient diversification for direct investment and again, I hesitate to jump on board a program of investing in dividend-payers backstopped by options.

I agree about the diversification. The simple truth is that this person waited way longer than she should have to invest. Because of that wait she is going to have to assume a lot more risk than if she invested 30 years ago. The way I see it she has to "assume" that she will live to be 85 years old & to invest accordingly. She simply can't afford to invest in CD's & other "safe" investments because by doing that she is in fact setting the stage to run out of money.

My advise (without knowing more) is cut expenses & start saving if possible. Invest 50% of the money in the stock market by way of Mutual Funds (about 3 different funds with different degrees of risk but all of them with some growth). Put as much of possible of what's left into CD's or whatever getting the most return possible. Keep some as an emergency fund in an interest baring account somewhere local. She should also hope ot be "lucky" in that she can hold on long enough that the stock market has a good return. Yes, I used the word luck in investing & yes she needs some. The simple fact is that she dug this whole & jumped in & has limited options now because of her decisions that she had made in the past. To often people like this think $100,000 is a huge amount of money, it's not. Without a good bit of growth she will be totally out of money in 10 to 15 years.

My ex MIL did (more or less) just as I said above. She was lucky. She lived on the money (lived cheaply) with a few extras every now & then (& a few dumb moves along the way like $3,000 loss for a house that she didn't buy). She died with $20,000 (something) in the bank & gave away 80 to 110 thousand dollars (I don't know the exact number) in the last year (buying her way into heaven by giving to charities & churches).

Would her case be typical...I doubt it. I got her into one really hot MF & she made huge returns on it for 3 or 4 years.

[IPAfan]

I'm open to the right sort of mutual funds too, don't get me wrong. I just think that the average investor can create a fairly passive investment stategy that will perform well going forward.

I think 20 positions is adequate diversification. $5,000 position sizes lets you spend about 0.15% of the position on transaction costs. If your average holding time is 10 years this works out to ridiculously small transactions costs, and it is much cheaper in management fees than even the lowest cost index funds. The reason I like holding individual securities is that it lets someone focus on stocks that are more likely to meet their needs (steady growth, growing yield, good initial yield, etc.) There are a lot of "safe" equities that can provide a growing stream of income to supplement social security.

I think some mutual funds would be OK. like VIG would seem appropriate, but the yield is fairly low at only 2.2%. I'd rather focus on companies yielding closer to 4% on average that have low or sustainable payout ratios. Once you find these companies you don't NEED to do a lot of trading. You just buy and hold until the business fundamentals deteriorate. Right now this approach would include companies like WMT, PM, MCD, etc. You get a 3-4% yield starting now, growing at about 8-12% a year. With 20 positions you might be making one or two changes a year, but can still keep very low turnover.

I view the social security and pension as an equivalent to fixed income, so it seems that a reasonable diversification into equities makes sense.

[yogiii]

Just thought I'd give an update ...

Well she became a little more insistent on getting her IRA money out of CDs as a few are coming up to renew in the 0.85% for 2 years range. So I opened up an account at Vanguard and I'm in the process of transfering them over into a target retirement account geared towards people already retired. The 10 year return is in the 5% range. It's about 60% in bond funds if I remember correctly and I know bonds will be on the decline soon but we'll see how the fund managers adjust this fund as that happens. I'll be periodically checking how her stuff is doing, so I can trade if needed.

It is hard to deal with someone who does not want to see/doesn't understand the reality of their situation. I really don't want to deal with putting her money in stocks and holding her hand through losses. I'd rather just get her a return better than the CDs and save my own sanity.

So thanks everyone who commented, it certainly gave me more things to think about.

[The Virginian]

It seems like you tried your best YOGII.

[zinruff]

Thanks for the post and update, yogii. I am in the 60 range, and I had been considering a Vanguard bond fund, so it was interesting reading all the different viewpoints here.