Hi board members!Need some feedback from this board for my 82 year old uncle who came to me for advice.His question: How should I be investing my retirement savings?BackgroundAge: 82Cash: $580,000Home: $275,000 (no mortgage)Needs to generate $1,000 a monthRight now he has an investmenet account with a financial services/broker/investment bank etc. His present account is 50/50 cash and sercurities. He seems to be in good health, but believes that he may only have 3 or 4 years left. The current market situation makes him very nervous. He continually updates his losses daily (by hand). He has lost less than 5% of portfolio in the recent downturn, which he calculates into his the hourly wage he made 18 years. Even a twenty dollar loss on day makes him sick to his stomach.My advice to him was: Hire an independent advisor and or tax accountant who will probably tell him to sell his stocks for some fixed income securities and enjoy your remaining days.I haven't been able to find much advice for 82 year olds at the Fool, but I suggested that since his outlook is less than 5 years he might want to consider getting out of stocks.What would you do? Thanks.Tom
Tom,I have an uncle about to turn 102. That's a 20 year time horizon for your uncle, who's "only" 82. If I were your uncle, I'd be inclined to put 40% in Vanguard's Total Stock Market Index and 60% in a 5 year bond or CD ladder, then look at account values only quarterly. He could be in for a nasty surprise if he out-lives his money, and not defending against inflation could lead him to that surpise.db, who at 66 is planning for at least 105
He can make $1000 a month easily by investing in treasuries. The 10-year treasury is paying what, 4.3%? That's $24940 a year, with return of principal guaranteed. He certainly doesn't have to sweat out the stock market or take any risks other than inflation risk. Best wishes, Chris
Crosenfield writes,He can make $1000 a month easily by investing in treasuries. The 10-year treasury is paying what, 4.3%? That's $24940 a year, with return of principal guaranteed. He certainly doesn't have to sweat out the stock market or take any risks other than inflation risk. Inflation is a pretty big risk for a fixed income investor. That's why the yield on the 10-Year inflation-adjusted Treasury note is only 2.73%.At least a 2.73% yield will still get the 82-year-old the desired $1,000/month.intercst
I'm just another fool who's trying to make it through this bear market and really can't advise your uncle, but this is what we're doing.Although we're TEMPORARILY fixed income investors, we know inflation is something we have to factor into our retirement planning. We therefore plan to average back into the market when it starts heading in the right direction. Who knows when that might be? Right now we're concerned about the August 14th deadline, possible corporate scandals, believe we haven't hit bottum and are comfortable in cash.Your uncle really needs to spend less time looking at his portfolio losses. It's not good for his health! Chris
Author: Crosenfield Date: 7/28/02 4:32 PM Number: 8035 He can make $1000 a month easily by investing in treasuries. The 10-year treasury is paying what, 4.3%? That's $24940 a year, with return of principal guaranteed. He certainly doesn't have to sweat out the stock market or take any risks other than inflation risk.I agree with this advice. Even with inflation considered, $1000 a month is a very low withdrawal rate, and should be able to continue indefinitely at today's 10 year treasury rates.Then, your uncle's net worth will always be increasing. That should greatly reduce his anxiety, and maybe even make him live longer. RK
There seems to be good agreement that a person can withdraw 4% of their money and increase that withdraw for inflation and "never" run out of money. When the withdraw level is 5%, there is general agreement that sooner or later running out of money is a reasonable expectation. Between 4% and 5% opinions vary.Based only on the amounts of money existing and needed, it looks to me like placing the money in an index fund and pulling out $1,000 per month is a good way to go. Next year that $1,000 could be increased by the CPI number. i.e. If Social Security goes up 1.2%, then the monthly withdraw is increased to $1,012.I did understand watching investment values going down is very disturbing. The only consolation is this "4% withdraw" approach has worked in times like the 1970s when there was a big drop and then a rather long period where the stock market did not recover to the 1970 levels.Regarding the 1970's, you might want to look up the numbers and years, but I heard a retirement planner on CNBC last week and my recollection was the Dow Industrials got almost (or just above) 1000 and then dropped over a period of 2 years to about 600 in 1973 or 74. Then it took well into the 1980s before that index got above 800. The average 82 year old is can expect to live 16 years in terms of minimum allowed withdraws from an IRA. Some live longer, some die next week.gordon
Author: TwoCybers Date: 7/29/02 1:54 PM Number: 8041 Based only on the amounts of money existing and needed, it looks to me like placing the money in an index fund and pulling out $1,000 per month is a good way to go. Next year that $1,000 could be increased by the CPI number. i.e. If Social Security goes up 1.2%, then the monthly withdraw is increased to $1,012.What you say is technically correct, but, in this case, the man is looking at his portfolio on a daily basis and fretting over the ups and downs. That tells me that he has a very very low risk tolerance and should be in a very conservative portfolio. I think it is critical for this person to be able to look each day and see that his portfolio has increased even if by only a small amount. That can only be accomplished by investing in a 100% safe security, like the 10 year treasury note mentioned previously.IMHO, people with very low risk tolerance levels should not be subjected to any more risk than necessary to meet their withdrawal requirements.RK
Age: 82Cash: $580,000Home: $275,000 (no mortgage)Needs to generate $1,000 a monthI know it's silly, but if he needs to generate $1,000 per month, take the $580,000 cash, put it under his mattress, and take out $1,000 per month. The money will last 580 months, for 48.3 years. At that time, he will be 130 years old.To keep up with inflation, he will probably want to draw a little more each year, so the money might only last until he's 110.If he puts it in the most conservative investment possible - absolutely surety, like government bonds, he'll generate more than $1,000 per month, enough more to put the remainder back into the fund, and while that might not keep up with inflation, it would prolong the available cash by a significant amount of time, I'm guessing at least another 50 years. That would keep him in the dough until he was 190. Trimming that down if he elects to take more than $1,000 per month, over time, to compensate for inflation, it might only last until he is 150.I-bonds are paying around 2.5%, I think, with the "core" rate 2%, and the inflation adjuster at 0.5%. (Old information; I haven't looked in months.) Just kicking out the 2%, his $580,000 would spin out $11,600 per year, darn close. And inflation would presumably take care of itself, as the inflation adjuster moves with inflation.Unfortunately you can only buy $60,000 per year of I-bonds (I think), but he could get EE's or a ladder of munis (diversify, just like in stocks, remember Orange County?) and do similarly well.If he doesn't have the stomach for market gyrations, he can do just fine in fixed income. At his age, and given his depression era education, perhaps that would be best anyway.
How about Treasury Inflation-Indexed Securities?http://www.publicdebt.treas.gov/sec/seciis.htmAs I understand it, although it's not immediately clear from the description, TIPS offer unparalleled protection. You'll never get less back than the value of your original investment: it pays out inflation-adjusted dollars.Follow the links to Treasury Direct, too -- you can buy Treasuries directly from the gov't, via web or phone or even paper forms, with nobank/broker/whatever.Cheers,Wot
If he puts it in the most conservative investment possible - absolutely surety, like government bonds, he'll generate more than $1,000 per month, enough more to put the remainder back into the fund, and while that might not keep up with inflation, it would prolong the available cash by a significant amount of timeI should correct this, because I see that I somehow transposed it with a section below about government bonds.When he takes out $1,000 per month, the remaining $579,000 will earn around $1206 for the month (at 2 1/2% interest, you can do better.). That means that next month he'll take out $1000, and have $579,206 in the pot, which will earn $1207 for the month.At some point he will want to take out a bit more than $1,000 to keep up with inflation, which means that over the long long long haul, he will be taking out slightly more than he is returning, for quite a while it will only be a couple of dollars. Eventually it will be more, and more. At 3% inflation, he needs to add around $30 per month at the end of each year to keep up, so the above numbers change a little, but not much - although they continue to change year after year. It's like compound interest, it could get weird if he lives to be 134 years old.It's like a home mortgage. At first, of your $1000 mortgage payment, only 50¢ is going toward the principle. It seems to take forever, but eventually you turn the corner, paying a larger and larger part of your payment against principle, and a smaller and smaller portion against "interest", and it is quickly paid off.I am guessing that with fixed income (and particularly with an inflation adjuster in I-bonds or TIPS) his money will last for freakin' ever, nearly.There are plenty of other strategies, but I am most moved by his discomfort with the gyrations of his wealth at an advance age, and his modest requirements as you outlined them.If he gets in trouble after age 134, he can reverse mortgage the house and buy another 15 years or so. After that, he needs to go back to work, probably as a greeter at Wal-Mart.
Do let your 82 year old read all of these posts. It should be good for his health! Loved the reassurances that he has more than enough money to outlast him even in the safest of safe investments - and the sense of humor that shines through will give him the benefit of laughter - good medicine!Charlotte
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