wodehouse
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Post by wodehouse on Feb 10, 2011 12:05:00 GMT -5
A quickie, not well-formed question here, but wanted to get this out there quickly.
I have $100,000 cash that I might put into the stock market right now. I also have available $2241 cash monthly that is going into private "retirement savings" (in addition to what goes into my 401K; and I can no longer contribute to my Roth, my income is above the ceiling...I don't want to mess around with putting into IRA then converting to Roth).
I also have other large lump sums of cash such as $42K in savings, $40K in 'new car fund' savings (and that won't be around much longer), $36K in reserve funds for expenses upcoming over the next several years.
I've gotten to rather like having a huge sum of cash available to me. And the $100K acts like an emergency fund as well. So I see two courses of action: (1) invest the $100K cash now, and just save up the $2241 each month in cash. (2) keep the $100K and invest the $2241 each month. Or invest some portion of the $100K in stock funds and keep the rest in cash, and buy monthly with the $2241.
Other info: current equity funds in all accounts: $591K; $100K equity in house, $270K mortgage, age 58. Married, one income, no kids.
Comments and insights? Thanks.
("I'm not as concerned about the return on my money as I am the return of my money.")
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Gardening Grandma
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Post by Gardening Grandma on Feb 10, 2011 12:51:22 GMT -5
$100K is an awfully big EF.... Personally I'd dollar cost average it into the market instead of putting it all in at once.
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Deleted
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Post by Deleted on Feb 10, 2011 13:18:58 GMT -5
"Personally I'd dollar cost average it into the market instead of putting it all in at once."
Well, that would be the smart way to do it, lol.
We're in a similar boat. You can check out my thread under Start Investing: "Need Help with Asset Allocation"
Really you need to take a holistic view of your situation. How long to retirement? Any big outlays in the 5 year horizon like college for the kids?
What's your existing asset allocation?
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Urban Chicago
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Post by Urban Chicago on Feb 10, 2011 13:21:42 GMT -5
No kids, any other big spending like Home improvement or a new car? If not, I'd be more willing to invest it all in the market. If so, consider CD stacking with at least some of the 100K.
And I'd keep 6 months worth of expenses easily at hand (Savings account or some cash at home).
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wodehouse
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Post by wodehouse on Feb 10, 2011 14:02:05 GMT -5
yep, holistic view is what I'm trying to do. As I mentioned, this was a quick exposition of the question, prompted right now by needing to rejigger a monthly auto-purchase for a mutual fund.
I figure I am about 10 years from retirement. My normal SS age is 66, I plan to go another 3 years if possible (and we all know the best laid plans...). But considering my age (58 now) I want to keep some assured cash or assets in case the market craters again in the next few years. This crash hasn't hurt me badly at all but I want to make certain things stay that way.
I don't like bonds right now with these low interest rates. I may put some cash into some of the high yield savings, or CD ladders. This would be my "just in case" money. I see my "just in case" might be if I lose my job or cannot work and then that's it, I'm retired at some earlier age, like it or not.
If I expect the market to be up 10 years from now then I should just jump in now; doing the monthly thing may not be as profitable. OTOH, going all in now reduces my "just in case". Maybe the thing to do is put in 1/2 of this cash now, ladder the rest, and bump up investments with the monthly cash.
No major expenditures anticipated over the next few years other than a new car, and that is budgeted for. My budgeting includes a reserve for home repairs...been there, done that.
I guess I concern myself over being too heavily weighted into equities. But I don't like bonds and the cash has served as a counterweight to stocks over the past few years. (There were some special reasons as to why this huge cash store built up over time.) Maybe I need to become a landlord, but I am too lazy to do that.
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Deleted
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Post by Deleted on Feb 10, 2011 14:04:09 GMT -5
I would not lump sum a huge dollar amount into the market. I would DCA to some degree.
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Peace77
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Post by Peace77 on Feb 10, 2011 14:13:37 GMT -5
I would pay down the mortgage with some of it.
You are paying more in interest than you would receive in a high yield savings account or CD.
With the remainder, American Express high yield savings accounts were paying the best rate the last time I checked.
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Peace77
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Post by Peace77 on Feb 10, 2011 14:15:25 GMT -5
If you want to invest in real estate without being a landlord, an REIT (Real Estate Investment Trust) is a possibility. It works in the same manner as a mutual fund.
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wodehouse
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Post by wodehouse on Feb 10, 2011 14:22:49 GMT -5
Good point about paying down my mortgage. Just bought the house a year ago with 4.75% mortgage. Low rate but I'm earning even much less. And my concern nowadays isn't so much "the return on my money but the return of my money". I was never too interested in prepaying a mortgage but maybe now is the time.
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runewell
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Post by runewell on Feb 10, 2011 17:03:03 GMT -5
From wikipedia's Dollar Cost Averaging entry:
Criticisms:
While some financial advisors such as Suze Orman [5] claim that DCA reduces exposure to certain forms of financial risk associated with making a single large purchase, others such as Timothy Middleton claim DCA is nothing more than a marketing gimmick and not a sound investment strategy.[6]
Middleton claims that DCA is a way to gradually ease worried investors into a market, investing more over time than they might otherwise be willing to do all at once. Others supporting the strategy suggest the aim of DCA is to invest a set amount; the same amount you would have had you invested a lump sum.[7]
Analysis supporting dollar cost averaging has been criticized because it often ignores transaction fees,[dubious – discuss] which can be substantial. Numerous[citation needed] studies of real market performance, models, and theoretical analysis of the strategy have shown that in addition to having the admitted lower overall returns, DCA does not meaningfully reduce risk when compared to other strategies, including a completely random investment strategy.[8]
FYI starting another thread for this.
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Post by debtheaven on Feb 10, 2011 17:20:53 GMT -5
I'd like to second Peace's comment on pre-paying your mortgage SOMEWHAT.
I'm NOT suggesting you that 100K nor the 2241/mo into it (let alone both!) But at 58, with that sort of disposable income, and a 270K mortgage, you might want to prepay it TO SOME EXTENT.
You say you have a 270K mortgage you took out a year ago, and another eight-to-11 years to retirement. I don't know if it's a 15Y or 30Y mortgage, but why not attempt to have more or most of it paid off by the time you think you will retire? Whether that means eight years, or 11?
You are in a great place, you can afford to do both, invest extra and get your mortgage down. I HAVE integrated what everybody has said about pre-paying your mortgage and how you have more options with cash in the bank and other investments, but you already have all that! You can afford to do both!
ETA: I'm 51 now, DH is 54, and I'm hoping to (more or less) retire at 58 when our youngest child finishes college. I do plan to continue to work after 58, but frankly, very PT LOL. I may stretch that to 61 until our youngest is done with grad school. Again, that is just me.
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phil5185
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Post by phil5185 on Feb 10, 2011 18:53:20 GMT -5
Wode, it looks like the 401k has less than $300k? At age 58, you are allowed to contribute $21,500/yr - is that the plan? That might be a way to get the 401k above $500k before you retire. Unless you have a super pension, you might not like living on a $300k retirement fund and SS.
I wouldn't prepay that mortgage, I would keep it and invest the money elsewhere (I refinanced one house at age 64, I don't plan on prepaying it).
I would invest the extra $27,000/yr plus the $100k lump, into a total market index fund, at least for the 5-yr period from age 58 to 63 - and then back the allocation down as you approach 70.
New car? LOL - that $40,000 will be reduced to $15,000 in about 3 yrs. That's why millionaires drive older cars. What are you getting?
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Post by debtheaven on Feb 10, 2011 19:14:43 GMT -5
Hi Phil! You used to talk about people going from "wealth building" into "wealth preservation" at some point. I don't remember the exact age you mentioned at the time, but I do remember it was in one's 50s, not in one's 60s. Yet here you are now talking about 63.
I do realize we are too conservative. But I'd be interested to know why you changed your recommendation from one's mid or late 50s to one's early 60s.
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phil5185
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Post by phil5185 on Feb 10, 2011 21:16:48 GMT -5
But I'd be interested to know why you changed your recommendation from one's mid or late 50s to one's early 60s. I tailor the age transition to the amount of accumulated wealth. Eg, if you have accumulated maybe $2M by age 55, then I would start into preservation and not put the $2M at risk. Conversely, if you don't yet have enough wealth to preserve at age age 60 and plan to work for several more yrs, then it might be better to use more risk for a few yrs - and then switch to wealth preservation.
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wodehouse
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Post by wodehouse on Feb 10, 2011 21:55:16 GMT -5
Phil, I figure my "retirement money" is worth about $714K, distributed between 401K, IRA, Roth, and non-tax benefitted accounts (plain jane taxable accounts), including $104K cash. Then there's about $100K house equity, and $120K non-retirement money; totals around $940K with some other money laying around.
The 401K is worth only about $96K at the moment; 401K from previous jobs were transferred to IRAs; I kept tranferring the Simple IRA from current job into private IRA; I plan to transfer the 401K balance into a private IRA at 59.5 yrs age so I can have better fund choices. After that my 401K balance will be maybe $2K, but growing.
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wodehouse
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Post by wodehouse on Feb 10, 2011 22:11:56 GMT -5
Ahh, the things we don't want to hear.
I don't like my 401K plan and its offerings and I've limited my contributions to the minimum needed to get full matching (my 5% plus 4% matching). I guess I've been hesitant further because of the uncertainty over future tax rates, all those 401K withdrawals are taxed as ordinary income, like a regular IRA. The Roth is such a better deal in my eyes. So I just had a flash that maybe I should again play with my "budget for life" Excel workbook and see how things look with larger 401K contributions. Maybe it'd work out.
And since future tax rates concern me maybe I should check into the trick of putting money into nondeductible regular IRA and then immediately converting to a Roth...that sounds like such a pain though, and I'm a bit gun shy due to having had to roll back Roth contributions for 2 years in a row due to being above the ceiling. But...to make money you have to exert some effort.
So, maybe a little bit of each...more 401K, traditional IRA -> Roth, some extra to mortgage, some regular investment, and some cash savings. For 2010 I put away about $66K in long-term savings with 401K, bonus, etc. This year I expect about the same or a bit more, and I'm putting away an extra 2% anyway from that temporary reduction in FICA payroll tax (but only 2% up to the ceiling...anyway, that has all been figured out and put into my automatic plan).
Okay, this may be interesting. Thanks all!
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Deleted
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Post by Deleted on Feb 11, 2011 2:56:37 GMT -5
Hi Wodehouse, I think your scatter approach makes a lot of sense. It's kind of its own diversification and dollar cost averaging (DCA) plans all rolled up into one comprehensive plan. After spending a lot of time over the last few weeks analyzing our situation I am inclined to agree with the camp that likes the paid off mortgage in retirement. It is much easier to live on retirement earnings if you don't have to generate a pre tax earnings of $1500-$2000/mth. Also drawing earnings at $65-$70k is likely to have you at a lower income tax bracket than $100k. And although we respect Uncle Phil's advice we do tease him because Mrs. Phil made him pay off their personal home mortgage several years ago. You can essentially DCA those pre-paid principle mortgage payments and if interest rates rise over 7% stop making them and play arbitrager to make more money . A quick and dirty look at FNMA's 40 year historical mortgage interest rates suggests a historical average of around 8%. You're old enough to remember 18% interest rates in 1981, right? I sure hope we don't see those again! Good luck!
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phil5185
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Post by phil5185 on Feb 11, 2011 8:22:38 GMT -5
I plan to transfer the 401K balance into a private IRA at 59.5 yrs age so I can have better fund choices. Most companies won't allow this, you must retire to get access to the 401k. But, as it turns out that is a small % of your NW - not a big factor for you. The Roth is such a better deal in my eyes. I would recheck that, in most cases, in your tax bkt, the opposite is true. You should be able to get current tax break in the 40% to 50% range (state & fed). And pay in the 20% range when you take it out. In general, if you have a low salary it is best to pay tax now and get tax-free money in retirement - you are the opposite. The Traditional should be better for you.
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Post by debtheaven on Feb 11, 2011 16:48:09 GMT -5
I tailor the age transition to the amount of accumulated wealth.Got it! Phil thanks for your answer. I never understood why the age always varied LOL.
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Clifford
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Post by Clifford on Feb 11, 2011 17:28:48 GMT -5
Large cap stocks with consistent dividend yields can go a long way toward off-setting market-fluctuation risk. If you decide to invest and are more interested in at least keeping what you have but benefiting if the market climbs, several Pfizer's, ATT's, or other solid dividend stocks may be a way to hedge your bet.
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schildi
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Post by schildi on Feb 11, 2011 22:08:47 GMT -5
Wode, it looks like the 401k has less than $300k? At age 58, you are allowed to contribute $21,500/yr - is that the plan? That might be a way to get the 401k above $500k before you retire. Unless you have a super pension, you might not like living on a $300k retirement fund and SS. I wouldn't prepay that mortgage, I would keep it and invest the money elsewhere (I refinanced one house at age 64, I don't plan on prepaying it). I would invest the extra $27,000/yr plus the $100k lump, into a total market index fund, at least for the 5-yr period from age 58 to 63 - and then back the allocation down as you approach 70. New car? LOL - that $40,000 will be reduced to $15,000 in about 3 yrs. That's why millionaires drive older cars. What are you getting? Phil you keep on forgetting to mention that you are not following your own advice with your own primary residence. If I remember correctly, your house is paid for in full. No? I also think that the $40K to $15K in three years is a very very rough calculation and not always true. Sometimes not even nearly true. I wish it was that way for "good" cars, I would buy used then. Here is an example: I paid $26,200 for my current ride new in January of 2006 (sticker was $30,800 before dealer added junk, so retail I guess). It is now worth about $18,800, five years later. That is the trade-in value. At only a $7,500 discount, I'd buy new again, any time! Yes, they do sell at those prices. A neighbor just bought one, LOL. But I'll drive mine another 10 years most likely ....
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