Advice To A Reader Retiring In 16 Months: Financial Advisors' Daily Digest

Dec. 26, 2017 12:35 PM ET55 Comments
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SA For FAs


  • A reader planning to retire in April 2019 asks when to sell her funds prior to roll them to an IRA and how to invest them afterwards. We offer some.
  • Ron Surz: Older people need to have a plan to make their money last, and taking it to Vegas should not be part of that plan.
  • Jeff Miller offers a brief annotated list of resources for those doing their own investment research.

The transition from work to retirement comes with a fair amount of anxiety. After all, we only do this once, and we want to make sure we’re doing it right. We don’t all have the required expertise, and we don’t know what we don’t know. So there’s room for jitters. One of our regular readers contacted me over the holiday weekend with a number of questions related to her own imminent retirement. I will offer my own ideas on how to approach her situation, with the proviso that I am not a professional financial advisor, but rather a mere financial journalist. There’s so much that I don’t know either, so I ask that she bear that in mind. I am also hoping that financial advisors and knowledgeable retirees out there will chime in with their own thoughts. Here’s what she wrote:

In about 16 months I will retire and move about $700k that is currently invested in mutual funds in 3 different 403b and 457 plans into a Rollover IRA so that I can manage my own investments. I learned yesterday while talking to a Fidelity rep that the transfer would have to be done as cash, so I'll need to liquidate.

I'm seeking advice on all aspects of doing this....what to liquidate over the next year....should it be done gradually or all at once. Should it all roll into the same Rollover IRA (what about the $250k FDIC insurance)? How quickly to reinvest once it's in the new account(s).

The ultimate goal is to create a self-managed income-generating portfolio comprised of dividend stocks and some bonds. (I have very little understanding of bonds....I have some bond mutual funds in the 403b, but my personal experience is with equities).

…Retirement date is 4/15/19. I'll be 59.5 and will take SS at 62. Modest expenses of around $43k/yr, not including mortgage, property tax (2% of market value), or federal income tax. Selling my $250k home and buying a $150k condo outright is likely.”

The very first thing I’d like to say in response to the above is: Congratulations on a fine job in preparing for your retirement! My sense is you’ll do just fine given the impressive amount you have managed to save and the modest amount you intend to spend.

Naturally, I do not know (and neither do you, nor even the actuaries) how long you need to make these funds last. But a simple calculation reveals that $700,000 plus $250,000 for your home totals $950,000. Without even factoring in your Social Security income, the amount you intend to withdraw annually is about 4.5%. While there are no totally reliable retirement withdrawal rules, William Bengen’s famous 4% rule works as a rule of thumb, and it should be noted that Bengen himself raised the figure to 4.5% for those including an allocation to faster-growing small-cap stocks.

Sure, one can argue that his period of study took place during a healthy market, while it is possible that the period of your retirement will be less robust. Still, I’m not so concerned for two reasons: the approach I will recommend does not rely totally on the stock market and secondly, I am not advising necessarily that you withdraw 4.5% in perpetuity – just that you start out that way, making tweaks along the way if needed.

Your first question was whether you should liquidate gradually or all at once. In my opinion, you should liquidate all at once and do so now, not 16 months from now. I suggest this not because I expect an imminent market crash. My reason is just to remove a major risk as you enter this unique phase of the lifecycle. You already have what you need anyway, so why take the risk that between now and 16 months hence your whole financial picture changes for the worse? Apart from derisking at a point of maximum financial vulnerability, I think it is psychologically more satisfying to sell in rising market than one that is falling – even if at the same distance from the peak. You don’t need to know or care how much higher the market goes up after you sell – just be glad you sold at a high point in a historic bull market and then acted prudently to defend your retirement.

You also asked about whether to roll over to the same IRA or to multiple IRAs, citing the advantages of FDIC insurance. The FDIC does not insure accounts that are invested in investment securities. However, if you’re keeping funds in an FDIC-insured institution and maintaining more than $250,000 in cash – and I think that in your case, it could be worthwhile to keep $300,000 in cash (see below) – then, it might indeed make sense to roll your retirement funds to two separate IRAs. Note however that you don’t get the advantages you’re seeking if the two IRAs are custodied at the same institution. You need to roll over to two different institutions.

Your third question concerned how quickly to reinvest. In my opinion, you should reinvest into stocks only gradually, but you should make real estate your initial retirement investing focus. The primary reason for my thinking this is that stocks, by most measures, appear to be highly priced right now; real estate, depending on where you intend to live, may be more reasonable, and will also heavily influence both your retirement lifestyle and (as I reason below) your retirement income.

Here’s how I would approach your retirement investing. As regular readers know, I advocate keeping as close as possible to one-third in equity, one-third in real estate, and one-third in cash, which in my view will provide you growth, stability and endurance. Consequently, I’d suggest you initially look to allocate your $950,000 balance sheet as follows: $325,000 in stocks; $325,000 in real estate and $300,000 in cash.

Important note to readers: I asked our retiree if she has any debt, dependents or heirs, and her response, just before press time, was:

No dependents, no heirs, $70k mortgage balance is my only debt, and SS income should be in the neighborhood of $25k yearly… mortgage payment is $1100/month and payoff date is in early 2023. I think I could probably afford to keep my house but the plan has a lot more wiggle room if I downsize. I hope to spend several months each year living in Edinburgh, Scotland if I can make that work out...”

So with Social Security income of $25,000, albeit when you turn 62, you can aspire to a nicely balanced tripod of $325K in stocks, $325K in real estate and $300 + $25K in cash. Your intent, admirably, is to downsize to a $150K condo. My suggestion would be to find a duplex, twin condos or the like that total $325K or so. Given your above-stated “ultimate goal” of an “income-generating portfolio,” you’ll gain greater income diversification, potentially higher income, and potential tax advantages (check with a CPA) by renting out a housing unit in addition to your dividend-paying stocks and Social Security income. I’d recommend buying this second dwelling nearby for easier management. Also, I wouldn’t recommend buying the second dwelling in Edinburgh. Chances are not inconsiderable that Jeremy Corbyn will be the next U.K. prime minister, and if he carries out his ideas on rent control, that plus other aspects of the U.K. property scene could dampen your income prospects and make it hard to move into your Edinburgh home when you want to (as eviction might prove difficult if you rent your place during your absence).

As you acclimate to your new life as a retiree, the $300,000 (and eventually $325,000) in cash will help you ride out any market drama in your first few years without taking any crushing losses.

Finally, you can start building a stock portfolio. I would recommend doing so gradually so long as the market appears pricey. A conservative approach might be to invest $10,000 into stocks each month. At that rate, you will be fully invested within three years. If the market provides you with buying opportunities along the way, then plan in advance to invest $20,000, $30,000 or $40,000 – whatever you feel comfortable with – in months when stocks appear cheap. If the market crashes, you may end up fully invested in stocks in one or two rather than three years.

You also asked about bonds, expressing apprehension because you have “very little understanding of bonds.” In your case, that’s not a bad thing. With income from Social Security and real estate, and a focus on dividend-paying stocks, you will soon be fixed-income heavy. It would be worthwhile investing in growth-oriented stocks (including even small-caps, per Bengen above). But, if it’ll make you feel better, it could be a good idea to purchase the maximum allowable I Bonds, and some TIPS, provided you do so using your cash fund. These are cash-like securities, but offer some return. You could even allocate 5 to 10% of your cash portfolio to a gold ETF, selling its shares at some point of market panic during your retirement when they have risen high in value (just know they’ll probably fall in value along the way as well; gold is highly volatile). But beyond that, steer clear of bonds because their after-inflation and after-tax return will be low to zero, and you need some part of your portfolio to be growing. All of the cash and real estate income should give you the stability you need to not pay attention to the swoons your stock portfolio is apt to produce. The goal of your stock ownership will be to keep your portfolio viable decades from now.

All that I have written above pretty much flows from all that I have written in previous articles on retirement. But I emphasize again that they are the thoughts of a journalist. A financial advisor would provide a plan with lots of dates, numbers and quantitative precision (if also with a myriad of assumptions), and brings day-to-day practical experience on the basis of real-life clients retiring.

One more bit of advice. Make it a point to rejigger your financial plan each year, perhaps on April 15, the date you gave as your expected retirement date. Things will change in ways you can’t foresee. If returns are high after one year, you may want to (though you are not obligated to) enjoy a higher withdrawal rate the next year. If your portfolio performs worse than expected, it might be wise to tighten up accordingly, to preserve its longevity.

I hope the above has provided some food for thought. I also invite readers to chime in with their own advice and experience, and most especially, to warn her against any serious errors I might have made. Enjoy your well-deserved financial independence!

Please share your thoughts on this in our comments section. Meanwhile, below please find links to other advisor-related content on today’s Seeking Alpha.

This article was written by

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GIL WEINREICH - Author of "The Mentor," a unique parable for financial advisors and those who aspire to become one. I have worked in the FA arena since 1997, and during that time, the New York State Society of CPAs twice awarded its prestigious Excellence in Financial Journalism award to me for a monthly column I wrote on business ethics. Previously, I reported on international news for Voice of America (where I was awarded a newsroom writing award) and prior to that worked as an editorial assistant at U.S. News and World Report. I live with my wife and children amidst the verdant and vibrant hills and dales of Jerusalem.

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