My previous employer has offered me the option of cashing out of their pension program. I am new to investing on my own and a trusted friend referred me to a financial advisor who told me that I could get a better return on my money by cashing out and investing in 5 different mutual funds managed by American Funds. Would it be better for me to avoid the financial advisor and invest the money in some type of index fund, or does American Fund have good products? How do I go about making this type of decision?Here are the particulars:1. My previous employer was Time Warner (now AOL Time Warner). They have a pension and a 401K program. My 401K account is still intact and I don't have any immediate plans to move it. However, I am considering their offer to cash out of the pension program.2. I am about 18-20 years away from retirement.3. In all five cases, each American Funds prospectus contains a table showing the average annual total returns for one year, five years, ten years, and the lifetime of the fund. Two of the funds had disastrous years in 2000. However, the lifetime average in all five cases ranges from 12.92% to 17.79%.4. I'm not clear on how to asses the fees, loads, and commissions. It appears to depend on which class of shares you purchase. In particular, I'm looking at the a) EuroPacific Growth Fund (77% outside the US and 33% inside the US), b) Smallcap World Fund (worldwide companies with less than $1.5 billion in outstanding shares), c) Growth Fund of America (a variety of worldwide companies), d) Fundamental Investors (companies that have a commitment to R&D, among other characteristics), and e) the Washington Mutual Investors Fund (blue chip companies).5. I'm just getting into investing but haven't much reading about it nor do I have a great deal of time to do so. I've read the introductory material at the Fool web site and understand what steps must be taken, but haven't done any of it yet. For one thing, other than investing the retirement money from Time Warner I don't have enough money saved up for emergencies before I can start investing the rest. This has always been a desire of mine, but with a family and living off one income we've never been able to save more than two months worth of income as a reserve.6. I am aware that the money coming out of the retirement account will have to go into an IRA so I don't have to pay income taxes on it now.Thanks much.
IMHO, you are only looking at 1/2 of the issue; e.g. where & how to invest the lump sum. First you should look at what your periodic benefit will be at age 65 & compare it to the lump sum offered today and compute your minimum return needed for the next 18 - 20 years to determine the relative value of the lump sum offer.As an example, if you only need to earn 3% or 4%; then the lump sum is clearly worth it; as opposed to needing to earn 10% which would be much more questionable.TheBadger
Author: TheBadger Date: 7/18/01 9:21 AM Number: 30821 IMHO, you are only looking at 1/2 of the issue; e.g. where & how to invest the lump sum. First you should look at what your periodic benefit will be at age 65 & compare it to the lump sum offered today and compute your minimum return needed for the next 18 - 20 years to determine the relative value of the lump sum offer.As an example, if you only need to earn 3% or 4%; then the lump sum is clearly worth it; as opposed to needing to earn 10% which would be much more questionable.I agree, but to make matters more complicated, the growth of the Pension Lump Sum is normally not linear. It grows faster the older you get. And, when you cross key years, like 55, it takes a step up in value.This is why it so important to consider your age and your career plans when making this analysis. You need to fully understand how your traditional pension grows.When my company went through this, they provided an analysis to help us with the decision, and it turned out that if you had 12 years or more with the company, and you planned to stay with the company for the rest of your career, the pension was the better choice assuming historical market returns. If you were planing to leave the company, then the defined contribution plan was better.Russ
Standard advice follows:be careful of any advisor. Find out how he gets paid. If he's being paid by American Funds, well, he's going to have to look to American Funds' interest before he looks to yours. And how do you know he's not duping your trusted friend?Past performance has little--if any-- relation to future performace, which is what matters.In nearly every case when you're considering a load fund, there is a comparable no-load fund of the same quality.The only way to save is to increase your income, reduce your expenses, or both. There are boards here on the Fool that can make suggestions.
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |
BATS data provided in real-time. NYSE, NASDAQ and NYSEMKT data delayed 15 minutes.
Real-Time prices provided by BATS. Market data provided by Interactive Data.
Company fundamental data provided by Morningstar. Earnings Estimates, Analyst Ra