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My father is 56 -- obviously nearing retirement. My parents don't know too much about investing, unfortunately. My dad has a significant chunk of change in his traditional IRA ($650,000.00) that he will soon have access too when he is 59 1/2. They don't have much savings outside of that IRA and they don't have a ROTH IRA. They do have $240,000 in their $320,000 house -- an $80,000 mortage.

My dad's traditional IRA is currently being managed by a broker at Wachovia. The only fees are as follows: the broker gets a simple 1% of the entire IRA each year. The idea being that he is motivated to make it grow so he gets a bigger annual chunk of the profits every year.

Before this bearish market hit a couple years back, their IRA had reached close to one million. Unwisely, almost all of their savings were in stocks. That pile of dough dropped to $400,000 in the worst part of these past three years, but it is on the rebound, and all the cash is still in stocks ($650,000)

My questions are as follows:

1. It is obviously very risky and unwise to keep all this dough in the stocks when they are so close to retirement, but they felt forced into doing so to "gain back" all the $$ they previously had. Since things are turning around, should they continue to keep all that money in stocks and "take it out" when it gets back up to a million. $800,000? Should they split it up -- keeping some in stocks, some in bonds, some in a money market, some in a low cost mututal fund?

2. Is their current broker situation the best they can have? They have little knowledge on investing and feel they have to have someone "taking care" of it. Should they instead put it in a low cost Vanguard fund that seeks to grow and preserve their money?

3. Lastly, my father and mother make a combined $150,000 annually. Could they save money converting this traditional IRA into a Roth IRA before they retire? Or will it be the same either way. Could my dad stop working now, get into a lower tax bracket, and say thousands on converting it to a ROTH?

Please put in your two cents. Thanks.
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No. of Recommendations: 1
If your father has $650,000 in his IRA even after the last 3 years, I'd say the broker has done a pretty good job. Without doing the math I'd say that's a heck of a return on IRA contributions spread over 22 years.

If you want to shift to a less risky portfolio, meet with the broker and explain that. He'll probably be happy to work with you. I would make the change gradually over the next two years. First, we are in a rising stock market so moving slowly out of stocks shouldn't hurt you. Second, bonds are probably going to suffer over the next couple years as rates rise. You could move into short term fixed investments and then shift to longer term bonds when you feel most of the rate increase has occurred.

Check with a tax expert on the Roth conversion. Your father would have to pay tax on anything transferred to the Roth and with his current income it would be very expensive. Depending on his pension plan he may be in a lower tax bracket in retirement.

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Right now its the tech stocks that are recovering the best. So if they still own tech stocks, it is tempting to keep them. They are going up faster than anything else. Technology stocks are once again in the Business Week top performing sector funds list. The only thing better seems to be gold stocks (precious metals) at the moment.

Some diversification may be in order. I agree with the previous poster, your fathers fund manager seems to be doing a good job. He is worth what you are paying him. But let him know of the desire to diversify. Yes, yield investments can be untimely due to possible rises in interest rates, but it certainly sounds like the Fed is not going to raise interest rates any time soon. So perhaps the risk is not huge at least for a while.

Your father should be doing some overall financial planning. With a large IRA, he needs to work out when best to take distributions to avoid mandatory distributions. In other words, he will want to time his distributions to minimize income taxes if he can. It looks like their combined income prevents a Roth conversion. Besides they are not usually adviseable for large accounts. Roth conversion work best when your income tax rate is low. For a large account, that often means never--unless stocks fall and you do it when the market is down.

His assets are large enough, the assistance of a professional like a financial planner may be in order. His estate appears close to the Federal estate tax exemption. So that too could be something to think about as the details change every year under the current law. And your state's probate laws should also be considered.

Best of luck to you.
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"If your father has $650,000 in his IRA even after the last 3 years, I'd say the broker has done a pretty good job. Without doing the math I'd say that's a heck of a return on IRA contributions spread over 22 years." - billjam

I agree wholeheartedly! As the saying goes, "He who lives by the sword dies by the sword."

Your Dad got where is is today with the Wachovia broker and the stockmarket, why change just because we had a downturn? The market will come back and someday your Dad will have more than the million bucks where the account "peaked" several years ago.

Here is how I look at it. Over the long haul, the stockmarket will yield about 8 to 10% in growth plus a dividend on many of the the shares. Bonds have yielded between 2% and 16% over the past forty years. The 16% was a one-time anomaly, I pray. 2% to 7% is a far more realistic range. But, it is almost always going to be several percentgae points below the stock market yields.

Now I know that the recommendation is to have a percentage in stocks and bonds with the bond percent going up with one's age. However, I have never bought into this concept. I base my bond versus stock exposure totally on the bond yield. Today I have zero bond exposure and 80% in stocks...I live off of the 20% cash or look for more great stocks to buy.

When Treasury bond yields exceed 6%, I will tip-toe back into bonds. Above 7% I get real excited about Treasury bonds. Otherwise, I like stocks only because I trust the long-term yield to be there at 8 to 10% plus some dividends. On a market downturn, I just ride it out like your Dad has done. Unless you sell your position, you do not lose money except on paper...what you own is a stake in great companies. People pay way too much attention to the dollar value that wall street places on their stocks instead of understanding the real value of the stocks they have purchased.

But, here is the bottom line to me. The business of America hires all wage earners who pay almost all taxes which pay for the bond interest. Thus, if business falters, the government's ability to pay for the bonds will falter also. I believe on betting on the bottom line. I go where the money is. How can the government ever get any money without great businesses keeping America's industrial/commercial machine rolling? I see this as a real problem for bonds.

If your Dad does not understand how to figure the real value of what he owns...he needs to rely on that broker of his and gladly pay the 1% per year for the guidance. It sounds to me as if that broker has done a great job so far. Plus, at present bond yields, I would avoid diversifying to bonds right now. There is a huge risk there.

If your Dad gets into bonds at 3 to 4% today and rates increase to 6% over the next several years, his value will decline just like the value of his stocks did. Bonds are risky too. They just guarantee your money at maturity plus a yield. But, if you need the money before maturity, you could take a huge hit on the principle amount.

Why own bonds at 4% when you can own great stocks that have a dividend yield of 6% or more? There are many sound utilities that have yields that far exceed the yields of bonds and the shares may appreciate over time. The high yield almost guarantees the stock price since a drop in price will drive the yield even higher thus attracting more buyers. Plus, if you have some cash on the sidelines and the price does drop, you can buy even more shares at the higher yield. Conversely, if the shares double in price over time and the yield drops to 3%, your Dad can sell the shares in the IRA tax free and lock up some more cash to live on for several more years. Maybe by then Treasury bonds will be yielding 6% and your father can get into them then.

The key is to "demand" the best yield on your investment dollar. Lower stock prices are a blessing...not a curse! The lower prices give you an opportunity to buy more great stocks at even higher yields.

Back in 2000 when the Fed was raising rates at every opportunity to slow the run-away stockmarket, your Dad might have lightened up some on stocks and taken his nice gains. He could have bought some zero coupon bonds at 6-3/4% up to 7-1/4%. Then as the market retreated in 2001 and 2002, he could sell the zero coupons at a 75% to 100% profit and buy back great stocks. Maybe his advisor should have guided him in that direction, but who knew then that the NASDAQ would collapse as it did or that bond yields would not continue upward? It is all clearer in hindsight. I find the safest thing is to be in great stocks all the time. When the retreats is healthy. I live by the sword. Luckily, investors do not have to die by the sword...we just suffer some pain.

Anyway, that is what I do. So far, it is working just fine for me. I just save the 1% fee by doing it for myself. That way, I have no one but me to blame if I do the wrong thing. I like it that way. Some folks feel better if they have a broker to blame. Unfortunately, it is not his money that is at stake. We can blame the broker but, in the end, it is our money that is being invested. Who will ever care as much about our money as we do ourselves?

I hope this helps.

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Am I missing something?

Did I miss the part in your post where your parents were asking for your help?

Your parents are bringing in good incomes so I would assume that they are not complete idiots and are capable of learning what they need to know about retirement planning. Unless they are about to do something questionable and irrevocable like buying an annuity then you should probably back off and let them manage their own affairs.

What you can do it to help the start reading up on retirement planning and investing. For example you could refer them to information about how important it is to manage their costs.

As to your questions;

1) Stock mix.
Since they are still working and assuming that are saving a lot of their current income then it makes sense to have a higher than typical percentage of their portfolio in stocks. They may choose not to retire until their mid sixties or later so they may have over a decade of work before them. In the retirement planning they should probably plan on at least one of them living into their mid nineties. That is a long time to do depend on a portfolio that is light in stocks.

2) Broker.
Individual investing is not for everyone even with mutual funds. As long as there aren't hidden fees, the deal they have is surprisingly cheap if they have a good broker. If the broker is just buying mutual funds for them that have and additional expense of a couple of percent a year, or even worst, a load, then that that would be a bad deal. You mentioned several numbers but the value of the portfolio at the peak is misleading because what you really need to know is how the portfolio is doing compared to if it had been invested in an index fund instead.

3) Roth IRA conversion
The answer is simple, ask a tax accountant. There are so many factors in play that it would be worth paying for a professional opinion. At your parents level of income and assets they should being having their taxes professionally done anyway.

Bonus question
...he will soon have access too when he is 59 1/2.

If he wanted to he could get access to it now without a penalty, using the substantially equal withdrawal option.


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First, old Pop's got 650K in an IRA not too shabby considering the average is 50K

Second, he will not have to access the IRA until he is 70, actually it is more complicated than that-Is it by April 1 the year after you turn 70? Just guessing.

Third, their AGI is too high for a Roth conversion.

Fourth, they should not be 100% in stocks, however, given that their income is 150K and they only have 650k saved, retirement might need to be postponed. Just a guess

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Thanks for all your thoughts. I greatly appreciate it. Thankfully my parents are seeking my help, and do not feel threaten by my suggestions. They trust me and know I am not "taking over" there retirement money, but helping them out by giving them suggestions on areas they are not that knowlegable on. I don't know what they are going to do, but I sent them the following email. If you have any further suggestions or ideas on my suggestions and ideas to my folks, please continue to post. Thanks again!

Mom and Dad

Good to hear from you. Yeah, hope that IRA info was helpful. You seem to be doing pretty well. The only things I would for sure reexamine are the following:

1. The management fee is 1 percent annually -- but are there any other fees? Read the fine print -- get all the facts and see if the broker is taking more than 1%. Regardless of whether it is more than 1%, I would be very, very tempted to switch to a low cost index fund that only charges 0.18% and may perform just as well (compare Todd's record with the S&P over the past few years). Below is a following list of the annual charges for an IRA worth $650,000.00

3% $19,500.00
2% $13,000.00
1% $ 6,500.00
.18% $ 1,170.00

Chances are, Wachovia is charging you more than the 1 percent. Even if it was one percent, that is a signicant chunk of change that could be brought down significantly.

Another advantage of a low-cost index fund, is that you won't have to pick and choose specific stocks while having Todd call you all the time.

2. Secondly, I would compare Todd's performance in the past couple years to the S&P 500's. Is there a significant difference? If there is a significant difference -- with Todd's performance significantly outperforming the S&P over the last few years, you may just want to keep him if you like him, if you feel Wachovia's charges are not too high, and it is not too annoying or stressful to
have him calling you all the time.

3. Thirdly, don't worry about converting your IRA to a Roth till after Dad is 59 1/2. It won't make any sense. Rexamine this till after you have access to the money.

4. Lastly, if you want to keep all your money in stocks, it is up to you. The outlook for the next couple years is optimistc, although anything could happen. I would be tempted to put at least a slice of that pie (maybe 10-25%) in a low cost bond index, but that could probably wait til you ride this rise on stocks for a while.

Those are my suggestions. In sum, most importantly -- you need to fully
understand all of Wachovia's charges. Is it more than 1%? Secondly, see if Todd's performance is worth the thousands extra you are paying in comparison to a low cost index fund. If you are satisfied with his performance, don't feel they are gouging you to much with fees, and think he can continue to do better than the S&P 500 in the future, go ahead and keep him. If you are dissatisfied with any of these points, I would save the your dough from this service and move to a lower-costing index fund and/or bond fund with Vanguard or USAA.

Let me know your thoughts. Whatever happens, I think you are doing fine with your IRA. The above suggestions though, may save you a substantial chunk of change in fees.

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Just a few suggestions on the letter,

Comparing their broker's performance to the S&P 500 may not be entirely fair if they had told him to be more aggressive. There may a more appropriate in index fund to compare his performance to.

You might want to make sure that they understand how badly long term bonds will do if interest rates or inflation go up. In a lot of ways long-term bonds are set up to get clobbered in a perfect storm if everything goes wrong.

If they have more money than they need for their short term and emergency needs in a money market accounts or CD's then they might want to research better places to park their money such as savings bonds.

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I hit enter a bit too soon;

Also have them check into any tax complications before moving any money around.

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Just a comment on your message and reply to your parents.

I don't think a 40% loss of principle ($400,000) over the past 3 years, especially if I am paying someone 1% advisory fee ($24,000.) is acceptable. ( Any commission on all of those stock trades?) Additionally, you indicate that your parents have made $50,000 (8.33%)of the loss back. Again, this is far less than any of the averages (all YTD figures): (S&P 16.09%, DJ 13.93%, and NASDAQ 39.4%). If they are fully invested in stocks, I would question the performance of the account. Top quality preferred stocks are returning about the same as your parents account with far less risk.

I am not sure which type advisory account your parents have, but I would be skeptical of someone advising me to keep 100% of my investments in stocks, especially if I were approaching retirement age. I don't think there is any brokerage advisory service that is recommending this asset allocation.

I would recommend they contact a financial planner as some have suggested and go over their future plans (retirement, transfer of assets, and etc.). The cost will be minimal based on their assets and salary. They will have peace of mind knowing either that the current broker is okay, or should be dumped.
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