Recently, I received a phone call from my father, and he told me that the company he worked for during the first 20-ish years of his career would no longer let him leave his old IRA there. He wondered if he would be better off rolling over his money into the same mutual funds that his IRA was invested in, or if he should branch out and make other investments. If so, where should he put his money? Stocks are too dangerous for retirement funds, right?
In today's economy, employees are finding themselves in this situation more and more, and it can be a scary task deciding what to do with one's nest egg, especially when you are only a handful of years away from retirement, like my father is. Being financially minded, I can't think of a greater opportunity than to have the restraints of a generic basket of mutual funds lifted, and to be told that I could invest my hard earned money however I see fit.
I told my dad that I wanted some time to think about what I would do in his situation (mid-50s, having a large chunk of money to invest that will determine the level of comfort in retirement). I should also say that my dad is a relatively novice investor, generally relying on mutual funds for his investments. Usually I write about advanced strategies, so I wanted to come up with a few basic ideas for rolling over old retirement accounts. Since the same principles that apply to him also apply to the situations of many American 50-somethings, I decided to share what I told him with everyone else. Below is the email I sent him after I had time to think about it:
Here are a few suggestions of possibilities with your old IRA. Let me know if you have interest in any of these and I can discuss them with you more in depth. In my opinion, more important than the individual things you invest in is that you diversify your holdings properly. Earning at least 5% in returns annually and maintaining a reasonable level of growth, as you said was your goal, should be no problem if you do this. There are several categories of investments that can go in an IRA, so I'll just list my favorites in each.
1.) Dividend-paying stocks (about 25-30% of portfolio): Think big names with growth potential. I know you already own some Verizon (VZ), and that's actually one of my favorite examples of this category. It has had a fantastic run over the past year or so, from $35 to around $45, but it's still yielding 4.5%, so its still on my list. Again, even within this category, it's important to diversify. Here are my favorites, by sector:
Tech - 1. Garmin (GRMN), the GPS people. A little volatile, but pays a nice 4.5% dividend and has room to rise as the technology develops further
2. Intel (INTC), very stable and pays about 3.5%
Healthcare- Bristol-Myers (BMY) is my favorite, they pay around 4.2%. Pfizer (PFE) and Novartis (NVS) are good ones too, but BMY has better growth prospects, in my opinion
Financials - Wells Fargo (WFC) is best-in-breed here. They only pay a little over 2%, but that should change in the future.
Energy - Conoco Phillips (COP) yields almost 5% and is very stable and has a great track record of raising dividends
2.) Income funds (25% or more, depending on how much income you need) - REITs also fall into this category. No growth, but excellent dividend yields. There is no reason to buy any REIT with a yield under 6%, there are plenty of very good ones that pay much more.
Favorite REITs and their yields include: 1. Investors Real Estate Trust (IRET) - 6.44% yield, 2. Inland Real Estate Corp (IRC) - 7.14% yield, 3. Government Properties Income Trust (GOV) - 7.63% yield, and my favorite, 4. PennyMac Mortgage Investment Trust - 9.96% yield
There are many more good income funds, and if you decided to invest in these, I would recommend spreading your money over a bunch of them (a dozen or so). Just a cautious approach to creating steady income in perpetuity.
3.) Cash and Cash Equivalents (5-10%) - Including treasury bills. I recommend putting at least a small chunk of money in TIPS (inflation-protected government bonds), so if inflation goes out of control for whatever reason, your income from these increases accordingly.
4.) Gold/Silver, etc. (5%) - Most advisors will tell you need to own at least some precious metals "just in case" the economy completely collapses. I don't buy it, but it's your call on this.
5.) Investment-grade bonds (20% or so) - These are essentially IOUs where you purchase debt of a company, city, etc. There are literally 10s of thousands of these, and good ones generally yield 4-6%. Riskier companies can yield upwards of 10% (some of General Motors' (GM) corporate bonds yield around 12%), but are not for retirement portfolios. In my IRA, I own corporate bonds issued by Wells Fargo (WFC) that pay around 6.2% interest. "Preferred Stocks" also fall into this category, and may be a better choice. They trade like stocks, whereas bonds generally require a $5000 minimum investment in a single bond.
There are plenty more choices than what I have written here, and the ideal percentages vary based on age and proximity to retirement. In my own IRA I have about 50% of my money in 5 stocks (VZ,INTC,BMY,WFC, and COP), about 20% in REIT's, about 20% in those Wells Fargo bonds I mentioned, and about 10% in TIPS.