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I apologize if this is posted to the wrong board. If so, please point me to a more appropriate board.
My mother,73, recently asked me to help her with her investments.
After my initial review, I think there are two areas that might be better for her.
From a very cursory exam of her income, I know her tax rate is more than the minimum 15% but less than the 28% rate. She has money invested in fed tax exempt govt securities mutual funds  two to be precise. I believe she'd be better off moving that investment into the short term bond fund she already owns  Morningstar ranks her short term bond fund as five star. Does this appear to be a better direction or is there some other issue I should look at. My mother's mutual funds are not held within an IRA.
Also she was talked (I prefer the term scammed) into rolling over my father's Keogh Plan into a Variable Annuity IRA. I know very little about VA's because I can not see them meeting a need I have. From the little I have read on Motley Fool, VA's within an IRA make about as much sense as buying Tax Exempt Bonds for an IRA.
My mother, I believe, has held the VA beyond the initial 5 year surrender fee. My questions are:
Can my mother roll out of the VA into a mutual fund still within the IRA? If so, how is this done?
How do we calculate her annual withdrawal from an IRA now that she is past 70 1/2? Or will the IRA mutual fund make that calculation?
Does it make sense for my mother to keep her funds under a standard IRA umbrella? Does rolling it into a Roth make any sense?
My mother still invests from time to time. Can she invest under a Roth if she is retired? Even if she is not employed?
My mother's health is reasonable at this time. She has asthma and congestive heart problems so I estimate she has 1015 years maximum. Is there a mix of equity and income which makes sense for her situation.
Are there others who are trying to help their parents with their retirement savings? Is there an board to help retirees or those trying to help retirees?

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Greetings, BGPenhollo, and welcome. You wrote:
<<My mother,73, has recently asked for my help with her investments. Initial review indicates that she should shed her Govt (Tax exempt) Mutual Funds  Her tax rate is (I think)18%. It's above the minimum but not the 28% bracket. She holds a 5 star Short Term bond fund which looks like a good candidate to move to. Is moving from Govt Mutual Funds to Short Term more appropriate for her retirement.
The area I need some advice is she was sold (I prefer to believe scammed) into rolling over her IRA into a Franklin Variable Annuity. I believe she should be invested elsewhere. She is beyond the 5 year surrender fee but how does she roll this back into a mutual fund and keep it under the IRA umbrella or at her age should she keep the IRA at all. If she keeps the money invested in an IRA acct, how do we calculate her yearly minimum withdrawal now that she's over 70 1/2?>>
If she's 73 and if the annuity is inside an IRA, then she has already begun mandatory minimum required distributions from that IRA in the form of a term certain or life annuity. You would need to check with the issuer to see what payout method they are using. If it can be surrendered for remaining cash value, then that's the payout method you will have to continue using in the new IRA.
<<Isn't putting a VA in an IRA much like buying Tax Free Bonds for an IRA. Is there any place to report agents who sell inappropriate investment products?>>
Well, it is rather like wearing a raincoat indoors when it's raining outside, but you would have a hard time proving that a vehicle that provides a reasonable stream of guaranteed income for someone for someone your mother's age is an inappropriate product. Indeed, many would argue that an annuity is a very appropriate product in that situation. We Fools don't necessarily agree with that, but the rest of the world may.
Regards..Pixy

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Are there others who are trying to help their parents with their retirement savings?
Absolutely. Unfortunately, because my mom is playing catchup, she won't tap the 401k until 70 1/2. And even then, it will provide extras, not an income.
I wish I could help you with your annuities question. Perhaps the best thing to do is to read the agreement to see how you can pull the money out as quickly as possible. You should also search for peppermintpatty or dharmadollars. They seem to be financial people and have answered questions regarding annuities in the past.
If you can't get the money out of the annuity as quickly as you'd like, look into a '1035 transfer' to move it out of where it currently is (assuming that it is incurring relatively large fees) to annuities being sponsored by Fidelity, TRowePrice, and other mutual funds. They are supposed to charge a lot less.
You have not said how much income your mother needs as a percentage of total investments. There have been many posts regarding research that shows that if you want your investments to last during retirement (25+ years), you should not cash in more than 5%/year. However, in your mothers case, assuming she doesn't care to leave an inheritance, that percentage can be pushed higher. Check out http://www.financialengines.com/ for calculations that will tell you how much.
Regarding the IRA questions you have, go to the IRS site: http://www.irs.gov/forms_pubs/index.html, and get their publications.
Is there a mix of equity and income which makes sense for her situation. Please look at my message #13041 for an alternate way to provide income for your mother. You can adjust the bonds portion to be as conservative as you want.
Zev

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zgriner wrote,
You have not said how much income your mother needs as a percentage of total investments. There have been many posts regarding research that shows that if you want your investments to last during retirement (25+ years), you should not cash in more than 5%/year. However, in your mothers case, assuming she doesn't care to leave an inheritance, that percentage can be pushed higher. Check out http://www.financialengines.com/ for calculations that will tell you how much.
If you use the FinancialEngines software, make sure you understand that thier retirement income estimates assumes you liquidate your portfolio and buy an annuity on the day you retirement.
It's a strategy few Fools would recommend.
intercst

Recommendations: 0
"You have not said how much income your mother needs as a percentage of total investments. There have been many posts regarding research that shows that if you want your investments to last during retirement (25+ years), you should not cash in more than 5%/year. However, in your mothers case, assuming she doesn't care to leave an inheritance, that percentage can be pushed higher."
I have seen these suggestions and the fact is that they are guidelines that probably should be explained so others understand what the 5% cashout implies.
5% or any set percent works at keeping capital intact ONLY if the withdrawal percentage is less than the actual return of the investment.
5% will not work if the realized returns actually received comes to 4.9% over the time period of the withdrawals.
If one expects and feels comfortable that their investments will match the S&P over a 15 year period and the S&P does for example 11% (history repeats) then a withdrawal rate of 10.9% over that period will leave the investment value a bit above it's starting point.
The rub comes when the estimated return for the investment is 11% over the long haul, the withdrawals made are 10.9% and the actual return for the period is 8%. In this case, the capital will be eroded.
I liked the concept put forth of setting up funds for immediate needs, short term needs, and long term returns. By setting a more reasonable long term expected return with a heavily weighted equity position and a conservative withdrawal rate, one can cashout equity to meet the withdrawal rate needed yet have a cushion for those years when the withdrawal rate exceeds the actual return.
If the historic expected value of 11% is reduced to 9% and a withdrawal rate of 8% is used, the capital investment should grow over a period of 10 to 12 years. This is true as long as the long term realized rate of return meets or exceeds the conservative estimate of 9%. Capital will be preserved if the realized returns meets or exceeds the 8% withdrawal rate over the withdrawal period.
I have not done the calculations but I believe that inflation can be factored into this process and the capital can still grow.
I'll play with some historic data and see what I can come up with....
" Check out http://www.financialengines.com/ for calculations that will tell you how much."
I have done so but the system assumes a conservative CD fixed rate of return after retirement. I believe that is unrealistic and too conservative for my blood  and lifestyle...
BGP

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"If you use the FinancialEngines software, make sure you understand that thier retirement income estimates assumes you liquidate your portfolio and buy an annuity on the day you retirement."
I realized it was using some sort of low fixed rate of return.
"It's a strategy few Fools would recommend."
It's one I do not feel has been beneficial for my mother. Will be doing more research.
BGP

Recommendations: 0
BGPenhollo Date: 9/1/99 2:58 PM Number: 13584 If one expects and feels comfortable that their investments will match the S&P over a 15 year period and the S&P does for example 11% (history repeats) then a withdrawal rate of 10.9% over that period will leave the investment value a bit above it's starting point.
This is true, but I think it's misleading. It could be a wild ride. If the 15 years of "history repeats" includes repeating 1974, you will see a year where your 10.9% is a LOT fewer dollars than the year before. If 10.9% of today represents the lifestyle you intend to support, there is a very strong possibility that you will not be able to afford it in many years. Most plans include some mechanism to smooth out this ride.

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"If she's 73 and if the annuity is inside an IRA, then she has already begun mandatory minimum required distributions from that IRA in the form of a term certain or life annuity. You would need to check with the issuer to see what payout method they are using. If it can be surrendered for remaining cash value, then that's the payout method you will have to continue using in the new IRA."
Thank you for your reply. I am still not sure I fully understand the above.
Assuming that she can surrender the annuity for remaining cash value, then whatever method  Term Certain or Life Annuity  she is now receiving as a distribution will be the method needed for continued distributions. Am I understanding this correctly?
Do you know where I can learn how to make these distribution calculations?
BGP

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"If she's 73 and if the annuity is inside an IRA, then she has already begun mandatory minimum required distributions from that IRA in the form of a term certain or life annuity. You would need to check with the issuer to see what payout method they are using. If it can be surrendered for remaining cash value, then that's the payout method you will have to continue using in the new IRA."
Thank you for your reply. I am still not sure I fully understand the above.
Assuming that she can surrender the annuity for remaining cash value, then whatever method  Term Certain or Life Annuity  she is now receiving as a distribution will be the method needed for continued distributions. Am I understanding this correctly?
Do you know where I can learn how to make these distribution calculations?
BGP

Recommendations: 0
"This is true, but I think it's misleading. It could
be a wild ride. If the 15 years of "history repeats"
includes repeating 1974, you will see a year where
your 10.9% is a LOT fewer dollars than the year
before. If 10.9% of today represents the lifestyle
you intend to support, there is a very strong
possibility that you will not be able to afford it in
many years. Most plans include some mechanism to
smooth out this ride. "
I think you missed the point I was attempting to make
about using a 5% for the cashout rule of thumb.
I did a bit more investigating to see what various
cashout % and inflation rates would do using different
rates of returns based on historic values.
Your comment about 1974 piqued my curiosity.
I went back to one of my old investment textbook
and I found S&P yearly returns from 1926 through
1993.
Using $100 as a starting value at the beginng of 1926,
I extrapolated this based on each years return to get
a new value for the initial $100 investment.
The table below takes the last value of the Start year
and uses the value for the end year. My table can be checked
for rate of return calculation using any financial calculator.
Subtract the Start Year from the End Year and enter this
as the number of years. Negate the start value and enter it
as the present value. Enter the end value as teh FV and compute
the yearly interest. it should match the rate of return
in the table.
Start End Start End
31Dec 31Dec Value Value Return
1954 1974 $1,670.12 $6,252.75 6.82%
1964 1974 $5,528.13 $6,252.75 1.24%
1963 1973 $4,745.99 $8,503.68 6.01%
1964 1984 $5,528.13 $24,771.12 7.79%
1974 1984 $6,252.75 $24,771.12 14.76%
1973 1993 $8,503.68 $93,842.82 12.76%
1969 1979 $7,044.02 $12,445.73 5.86%
1981 1989 $15,671.44 $62,685.39 18.92%
1959 1989 $3,352.89 $62,685.39 10.25%
1930 1945 $179.45 $469.35 6.62%
1940 1955 $214.46 $2,197.21 16.78%
1950 1965 $752.88 $6,216.38 15.11%
1960 1975 $3,337.13 $8,578.78 6.50%
1970 1985 $7,326.49 $32,737.51 10.50%
1980 1993 $16,480.64 $93,842.82 14.32%
1926 1993 $111.62 $93,842.82 10.57%
As indicated, 1974 impacted the rate of return.
Notice that the 10 year from 1964 to 1974 had a rate of return
of 1.24% which is drastically less than 5%. Notice also the 20
year span from 1973  1993 and the 10 year span from 1974  1984
has returns of 12.76% and 14.76% respectively.
My original point was that 5% cashout as a rule of thunb may
not always work. So I took the returns from the various
spans and developed a table showing what various cashout
and inflation rates do. I figure someone somewhere has developed
a formula for this but I used a spreadsheet.
One thing I did determine was that if the cashout rate and the
inflation rate was less than the return rate, the investment
only grows. The yearly withdrawal never exceeds the investment
returns and the portfolio continues to grow. This tells me that
the secret to capital preservation is keep the withdrawal + inflation
below a conservative estimated rate of return.
From the Table below notice that the closer the rate of return is
to the added cashout and inflation, the longer it takes to
reach the point when the amount being withdrawn exceeds the amount
the investment produces.
Also anytime the withdrawal rate is more than the expected rate of
return, obviously the withdrawal begin greater than the amount
generate by the investment so the years to match and years to
original value is 0.
Start End Cash Yrs to Yrs to Yrs to
31Dec 31Dec Return Inf out match St Val Neg
1954 1974 6.8% 3.0% 5.0% 14 23 36
1964 1974 1.2% 3.0% 5.0% 0 0 16
1963 1973 6.0% 3.0% 5.0% 7 11 29
1964 1984 7.8% 4.0% 6.0% 7 13 25
1973 1993 12.8% 5.0% 8.0% 23 32 35
1969 1979 5.9% 3.0% 5.0% 5 9 29
1959 1989 10.3% 4.0% 8.0% 8 13 22
1930 1945 6.6% 3.0% 6.0% 2 4 25
1960 1975 6.5% 3.0% 5.5% 5 10 28
1970 1985 10.5% 3.0% 8.0% 16 25 34
1926 1993 10.6% 3.0% 8.5% 10 17 28
It is interesting to note that a 5% cashout with 3% inflation
for 1954  1974 has an almost identical lifespan as using
an 8% cashout with 5% inflation for the return rate generated
from 1973 through 1993. Also note that the lifespan of
a portfolio with a 5% cashout and 3% inflation for the return
between 1964  1974 is the shortest at 16 years.
Of course, my calculations assume a constant return and constant
inflation. I am working on a more complex model which uses
year to year return and the CPI for inflation. I don't
expect the 5% withdrawal rule of thumb to be any more valid but
the numbers may be more convincing.
BGP

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BGPenhollo wrote,
I am working on a more complex model which uses year to year return and the CPI for inflation. I don't expect the 5% withdrawal rule of thumb to be any more valid but the numbers may be more convincing.
I may be able to save you the trouble.
Try downloading the Retire Early Safe Withdrawal Calculator at the following link:
http://www.geocities.com/WallStreet/8257/restud1.html
intercst

Recommendations: 0
...My original point was that 5% cashout as a rule of thunb may not always work... Not if you are avoiding dipping into last year's principal. However, that concept has a fallacy in that last year's principal may have increased beyond your draw. So, in effect, you are not dipping into last year's principal, but actually into last year's gains, or perhaps the year's before.
I am working on a more complex model which uses year to year return and the CPI for inflation. Don't forget to include S&P dividends in the returns. This is the only model that has any validity in determining what a valid cashout % is. This work has already been done and posted on this board in the last year. The cashout % will differ whether you use the S&P or DOW or Foolish Four portfolios, since each has differing returns and volatility from yeartoyear.
If you are looking to provide a steady, inflationadjusted draw for retirement, please consider the 'total return' portfolio I mention in message #13041. Once you determine a draw amount based on a percentage of your initial investment, the amount is changed yearly only to account for inflation. By cashing in CDs during down markets, you avoid dipping into stocks when they are most vulnerable.
Zev

Recommendations: 0
BGP asks:
<<Assuming that she can surrender the annuity for remaining cash value, then whatever method  Term Certain or Life Annuity  she is now receiving as a distribution will be the method needed for continued distributions. Am I understanding this correctly?>>
Yep. The company can tell you what method it used for the withdrawal calculation.
<<Do you know where I can learn how to make these distribution calculations?>>
You will find the procedures in IRS Publications 590 (Individual Retirement Arrangements) and 939 (General Rule for Pensions and Annuities). Both can be downloaded from http://www.irs.ustreas.gov/prod/forms_pubs/index.html.
Regards..Pixy

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I don't think anyone answered your bond fund questions
<From a very cursory exam of her income, I know her tax rate is more than the minimum 15% but less than the 28% rate. She has money invested in fed tax exempt govt securities mutual funds  two to be precise. I believe she'd be better off moving that investment into the short term bond fund she already owns  Morningstar ranks her short term bond fund as five star. Does this appear to be a better direction or is there some other issue I should look at. My mother's mutual funds are not held within an IRA.>
With interest rates trending upward, it is not a particularly good time to own bond funds. However, do not dismiss tax free bond funds out of hand. Some are now paying 6.6%. At many tax rates you would need to buy junk bonds to match that in taxable bonds. But do the calculation against her short term bond fund to be sure.
Cd's and Money Markets are a better fixed income investment for most at the moment unless you own the bonds themselves and plan to hold them to maturity. A short term bond fund may be the best of the bond funds at the moment.
There's a Bond and Fixed Incomes board in the Investors Roundtable folder where some of these issues are discussed. Feel free to join us there.


