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Author: kfclabo Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75878  
Subject: decisions, decisions. Date: 2/18/2002 5:43 PM
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I will be retiring in a couple of months. Age 62. My pension can be $1200/month 10 year certain and life or $182,000 lumpSum. My wife is much younger than I am and earns $60,000/yr. Relatively debt free. The market is terrible, wouldn't want ind. stocks.I have approx. $30,000 in blue chip stocks. I was thinking about $90,000 vanguard S&P 500 index fund and $90,000 tax deferred municipal bonds.Will be receiving approx. $2,000 soc. Sec. monthly benefit. (We have a 15 yr old mentally challenged child.)WE would like to supplement our income with $500/month from the $182,000. We will still be in a high tax bracket that is why I was considering the Tax free municipal bonds.I am in good health and feel altho I am retiring, I can handle a little risk than all fixed income. I would appreciate any suggestions or advise. T.I.A.
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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33833 of 75878
Subject: Re: decisions, decisions. Date: 2/18/2002 7:57 PM
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Author: kfclabo Date: 2/18/02 5:43 PM Number: 33832
I will be retiring in a couple of months. Age 62. My pension can be $1200/month 10 year certain and life or $182,000 lumpSum. My wife is much younger than I am and earns $60,000/yr. Relatively debt free. The market is terrible, wouldn't want ind. stocks.I have approx. $30,000 in blue chip stocks. I was thinking about $90,000 vanguard S&P 500 index fund and $90,000 tax deferred municipal bonds.Will be receiving approx. $2,000 soc. Sec. monthly benefit. (We have a 15 yr old mentally challenged child.)WE would like to supplement our income with $500/month from the $182,000. We will still be in a high tax bracket that is why I was considering the Tax free municipal bonds.I am in good health and feel altho I am retiring, I can handle a little risk than all fixed income. I would appreciate any suggestions or advise.

At age 62, you could easily live another 30 years, and you need to invest with that in mind.

The fact that the market is, indeed, terrible, suggests that now may be the time to invest in it. The fact that you will be in a high tax bracket after retirement indicates that you won't have any money worries, so that means you can be more agressive.

$1200 a month is statistically equal to $182,000 based on mortality tables. Said another way, if you invest the $182,000 in fixed income instruments, and withdraw interest plus a small part of principle each month for the rest of your life, you'll be just out of money when you die. However, if you take the $182,000 lump sum and invest it more agressively, you'll likely be able to beat the annuitized approach. However, to do that, you'll need to draw only about 4% per year from the $182,000, or only about $607 per month at the start, and then increase that by inflation each year.

If it were me, I think I'd take the $182,000 and invest it 75% in VTSMX (Vanguard Total Market Index), and 25% in VGSIX (Vanguard REIT Index). I like Vanguard because they have some of the lowest costs in the industry and a great website, www.vanguard.com .

The dividends from the VGSIX will give you about $230 per month, and the dividends from VTSMX will generate about $171 per month. The rest of the 4% can be taken from selling long-term shares of VTSMX. You'll pay marginal income tax rates for the dividend income and long term capital gains rates on the sale of the shares. That should keep your taxes under control.

I don't think the municiple bonds are a good idea, because they won't grow in value, and you'll lose to inflation in the long run.

RK

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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33836 of 75878
Subject: Re: decisions, decisions. Date: 2/18/2002 10:56 PM
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I will be retiring in a couple of months. Age 62. My pension can be $1200/month 10 year certain and life or $182,000 lumpSum. My wife is much younger than I am and earns $60,000/yr. Relatively debt free. The market is terrible, wouldn't want ind. stocks.I have approx. $30,000 in blue chip stocks. I was thinking about $90,000 vanguard S&P 500 index fund and $90,000 tax deferred municipal bonds.Will be receiving approx. $2,000 soc. Sec. monthly benefit. (We have a 15 yr old mentally challenged child.)WE would like to supplement our income with $500/month from the $182,000. We will still be in a high tax bracket that is why I was considering the Tax free municipal bonds.I am in good health and feel altho I am retiring, I can handle a little risk than all fixed income. I would appreciate any suggestions or advise. T.I.A.

I don't think it can be right to take the $182,000 lump sum, pay 36% federal and 10% state taxes, and then reinvest the money. Reinvesting in an IRA deferring tax over 23 plus years must be better. In a tax deferred account investment grade corpoarates do better than municipals as you do not have the benefit of tax exempt interest--all of the income from an IRA is fully taxable.

As you are in good health it would be a good idea to defer taking Social Security until you are 65. Your benefit is actuarily reduced for each month you take it before 65. With the substantial income from your wife's salary, you would likely be taxed now on 85% of social security now. When she retires you will be taxed at 50% of SS income on a larger benefit.

As for investments for the IRA i prefer 3 asset classes VanguardTotal Stock Market Fund, VTSMX; Vanguard Real Estate Index, VSIGX; and Vanguard Inflation Protected Securities, VIPSX. VIPSX holds TIPS, treasuries with inflation protection, top credit rating and guaranteed to yield 3.25% required payout rate and maintain the buying power of the principal.

Best wishes for a long prosperous and healthy retirement!



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Author: TheAnswer3 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33838 of 75878
Subject: Re: decisions, decisions. Date: 2/19/2002 9:17 AM
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rkmacdonald posted:

$1200 a month is statistically equal to $182,000 based on mortality tables. Said another way, if you invest the $182,000 in fixed income instruments, and withdraw interest plus a small part of principle each month for the rest of your life, you'll be just out of money when you die.

This is not correct. It's a trap, actually. The mortality basis is only valid over a large group. Meaning that on average, $182,000 will provide $1,200/month for the average lifetime of all of the company's 62 year old males. For all kfclabo knows, he may outlive that life expectancy (I'm guessing 81 or 82 - I'm an actuary) by 10 or 20 years. Then he will be in big trouble if he took the lump sum.

On the other hand, kcflabo could die (heaven forbid, but you should be used to this on this board) within weeks of getting his retirement benefit. In this case, at least the annuity offered os 10 years certain and life, but the amount paales in comparison to the lump sum.

You really need to try and estimate how long you will live, and how much longevity risk you are willing to take, and how much investment risk you are willing to take.

Taking the annuity absolves you of all of those risks. Taking the lump sum puts it all on your shoulders.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33841 of 75878
Subject: Re: decisions, decisions. Date: 2/19/2002 10:41 AM
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There's great advise in the answers above. Personally the fact that you must collect for 15 years to regain the lump sum weighs strongly in favor of taking lump sum and rolling over to an IRA. But the choice does depend on life expectancy experience in your family, your health and your tolerance for risk. Letting the insurance company worry about it is a close second.

If you take the lump sum and roll it over, you will need to work out a distribution schedule that minimizes your income and gets it out of there before mandatory distribution. Your future expectations for income, your wife's planned date of retirement, and other income sources that will impact your income tax rate should all be factored into the decision.

When you get the opportunity, as in a low tax year, rolling IRA distributions over into LTBH taxable investments usually works well for estate planning and income tax advantages.

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Author: DaveLee One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33842 of 75878
Subject: Re: decisions, decisions. Date: 2/19/2002 11:14 AM
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I will be retiring in a couple of months. Age 62. My pension can be $1200/month 10 year certain and life or $182,000 lumpSum. My wife is much younger than I am and earns $60,000/yr. Relatively debt free. The market is terrible, wouldn't want ind. stocks.I have approx. $30,000 in blue chip stocks. I was thinking about $90,000 vanguard S&P 500 index fund and $90,000 tax deferred municipal bonds.Will be receiving approx. $2,000 soc. Sec. monthly benefit. (We have a 15 yr old mentally challenged child.)WE would like to supplement our income with $500/month from the $182,000. We will still be in a high tax bracket that is why I was considering the Tax free municipal bonds.I am in good health and feel altho I am retiring, I can handle a little risk than all fixed income. I would appreciate any suggestions or advise. T.I.A.

If you are familiar with the studies of Jaye Jarrett, The Trinity Study, or the Retire Early Home Page spreadsheet then you might find my website, http://members.tripod.com/DaveLeeMn/ useful (links to these studies are at the website). One of the main motivations that I had for doing this work was to analyze the case of a large fixed annuity being a major element of retirement withdrawal requirements, using the same methodology as Jaye Jarrett and Coogan, et. al. at Trinity University. OTOH, if none of this makes sense then you probably will not find it helpful to you.

Based on the analysis that I have done the annuitized yield (a tad under 8%) is at or a little better than "break even" (in favor of the annuity) based on historical market data. Given what you have said I would certainly be factoring in what would replace this income stream when you are gone.

dave

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Author: saml72933 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33843 of 75878
Subject: Re: decisions, decisions. Date: 2/19/2002 11:17 AM
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<good idea to defer taking Social Security until you are 65.>

I would have to take issue with this suggestion.

If you defer SS until age 65, you will leave 72K on the table, so to speak. It would seem that your financial situation would allow you to take early SS (at the lower rate) and invest those monies. Then at age 65 the income produced by the 72K plus your 62 retirement benefit would probably be equal to what you would receive at age 65, with the added benefit being, you would still have the 72K working for you (forever).

Incidentally, this is exactly what I did and it worked like a charm for me.

Just my thoughts, good fortune to you.

Sam



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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33848 of 75878
Subject: Re: decisions, decisions. Date: 2/19/2002 8:17 PM
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When you get the opportunity, as in a low tax year, rolling IRA distributions over into LTBH taxable investments usually works well for estate planning and income tax advantages.

As a low tax year would undoubtably have less than $100,000 AGI, rolling over the same portion into a Roth provides for better estate planning and income tax advantages.

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33849 of 75878
Subject: Re: decisions, decisions. Date: 2/19/2002 9:37 PM
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Author: WPatch Date: 2/18/02 10:56 PM Number: 33836
I don't think it can be right to take the $182,000 lump sum, pay 36% federal and 10% state taxes, and then reinvest the money. Reinvesting in an IRA deferring tax over 23 plus years must be better.

When I suggested that the poster "take the lump sum", I meant to roll it over into a self-directed IRA rather than taking the annuity.

RK

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33850 of 75878
Subject: Re: decisions, decisions. Date: 2/19/2002 10:43 PM
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"As a low tax year would undoubtably have less than $100,000 AGI, rolling over the same portion into a Roth provides for better estate planning and income tax advantages."

WPatch, good point. Roth should also be considered. You have to have earned income to qualify for conversion, so you cannot do that in full retirement. And of course you would take the full income tax hit for whatever you convert.

Highly appreciated assets (from LTBH investing) still have some advantages in estate planning. Depending on how you think estate tax laws will change when the current one expires, stepped up basis saves income taxes for the heirs. Also various charitable giving and trust arrangements make them versatile. They help with estate planning.

Its a complex subject. So plan carefully before you decide and perhaps go looking for some expert assistance to help out.

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33853 of 75878
Subject: Re: decisions, decisions. Date: 2/20/2002 11:04 AM
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You have to have earned income to qualify for conversion, so you cannot do that in full retirement.

???

Any Traditional IRA monies that you have, no matter how acquired (via 401(k) rollover or via contributions), can be converted to a Roth, as long as you have less than the limit for your filing status.

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