No. of Recommendations: 0
Hello all...

First off I didn't mean to rub my age in anyone's face (you old farts! haha) but I do believe that it is the focal point of my post.

Background: I recently graduated from college (UD, May '04), I am working as a waitor for the summer and also as a substitute teacher come September. I will be relocating to St Thomas, USVI (from NJ) this coming October. As everyone always asks, "what will you be doing down there?"... I don't know yet and because of that I am not factoring that into any plans as of yet (ie. future income, benefits, etc...). I WILL be generating income, and hopefully be provided with a benefits package. I just haven't decided if I want to "work" as a charter boat captain and sail around the islands (read: low cost of living and much enjoyment) or stay on land and work in my field of criminal justice. It is very difficult to obtain employment (and housing) unless you are "on island" which is why this is still unplanned. I'm well aware that this will affect the early stages of my retirement planning, but that is where I am at and will have to work around it.

Issue: I want to start saving for retirement. I will "retire" early, it is a major goal of mine. I have begun taking 10% out of my pay and putting it aside (in cash) in order to be used for my first investment. Now the question is where to first invest?

Since I am new to investing and also on the young side I am taking the advice of many and allocating most, if not all, of my savings into the stock market, probably via a Vanguard Index of some sort. (While I may have the time to do the research on individual stocks I do not yet feel comfortable with my level of knowledge about the market.)

Now should I open that as an IRA/Roth, or just as a plain equity account? What are the pros and cons of each?

Secondly, is there any other type of investment I should be looking at given my age and circumstances? If my future employer offers a 401K it goes without saying that I will be contributing, however as stated above I don't yet know if that will be the case.

Finally (I think), I am not afraid to take risks. I am young, I like volatility (makes things interesting), and I know what I have to lose/gain. However, I AM just recently increasing my level of education in the world of investment and personal finance, so I question everything. Also the only debt I have is a student loan of $17K with a fixed rate of 1.8% and the first year's worth of payments are already stored away in an account.

If you have any advice, opinions, or anecdotes please feel free to share.


Kyle
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Kyle,

You're young and perhaps a bit immature, and that's fine at 21. What is UD, and what does field of criminal justice mean? I assume at 21 you are not a law school graduate. Taking a job as a charter boat captain may be fun, but it seems unlikley to lead to early retirement in the usual sense. I'd recommend taking a year or so to play, and if you have any spare change put it in an ING Direct account until you accumulate the minimum to open an account with Vanguard where you could buy their Total Stock Market Index Fund (VTSMX). Of course, the year of play is unlikely to serve you well in your later job search unless you could make the case you spent the year doing something productive, educational, or noble. I think you may have the cart before the horse -- you first need to earn money, then you can worry about investing it.

db
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No. of Recommendations: 2
An island hopper eh? A buddy of mine did that and had a blast so best of luck. He did say there were some times when the cash outlay was a bit low but he enjoyed it nonetheless.

I have begun taking 10% out of my pay and putting it aside (in cash) in order to be used for my first investment. Now the question is where to first invest?

Awesome! You're already off to an excellent start.

Now should I open that as an IRA/Roth, or just as a plain equity account? What are the pros and cons of each?

Kind of depends on the benefits package and if it provides for some type of 401k, SEP-IRA, 403b, etc. Typically you'll want to start there.

If you don't have that option then I would go for the Roth. Con: Use after-tax dollars, HUGE PRO: You can withdraw money tax-free!

You can use the IRA and donate up to the same $3000. The difference is it is almost exactly opposite the Roth in that initial dollars are deducted from your taxes and when you withdraw the money you'll be taxed at your ordinary income. Since most people don't really have any idea what they'll be taxed later on, the Roth gets the nod in my opinion.

Here's a good publication and very readable for more info: http://www.irs.gov/pub/irs-pdf/p590.pdf

Secondly, is there any other type of investment I should be looking at given my age and circumstances? If my future employer offers a 401K it goes without saying that I will be contributing, however as stated above I don't yet know if that will be the case.

If you have a 401k then here's the typical scenario:

1) Put money into your 401k up to the match.
2) Then start donating to your Roth and max it out if possible ($3000, but changes year to year.)
3) Still have more? Then go back and max out your 401k.

If there is no match then I would recommend the #1 and #2 get switched.

However, I AM just recently increasing my level of education in the world of investment and personal finance, so I question everything. Also the only debt I have is a student loan of $17K with a fixed rate of 1.8% and the first year's worth of payments are already stored away in an account

The good (actually outstanding!) news is your young. The market will have some serious ups and downs. This is completely normal and with 30+ years to invest you have plenty of time to take a bit of risk. Risk and return are intertwined such that the more risk you take typically the more return and vice versa.

Your student loan is at a great rate and you get a tax benefit for interest paid on a student loan so there's another plus. Obviously you want to pay off that loan, take the benefit and get money put away for your retirement.

Diversification will be another consistent theme you'll find here at the Fool. What this means is to choose multiple types of investments categories. For example Large Value and Large Growth funds, Small Growth and Value funds, International Large and Small funds, etc. There's a ton of information about this on the Fool and here are a couple of books to get you going as well.

William Bernstein "Four Pillars of Investing"
Burton Malkiel "The Random Walk Guide to Investing"

The latter is a quick read and will give you the idea. B. Malkiel has another book "A Random Walk Down Wall Street" which is a classic and has lasted over 30 years since it was first published, currently on its 8th edition.

Hope this helps and enjoy the journey you're taking. It'll be a fun ride! Happy Sailing!!! (If that's what you decide...)

Jesse
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If your employer has a retirement plan, such as a 401K or 403B (the latter is for non-profits) you should certainly participate, unless the investment choices offered are terrible. Then you should also have an IRA with some brokerage company like Brown or Scottrade. If/when you change employers, roll over the retirement plan to your IRA, where you have more flexibility.

You are beginning to invest at a good time. You have the option of many different electronic tools, courtesy of the net. Take a look and see which are best for you. I use Fasttrack for nightly downloads of mutual funds and stocks. There is also TC2000. For developing trading systems, I use FastBreak. These things give you tools for technical analysis, which is the study of price action of stocks, etc. There are people who claim that technical analysis does not work, but I have a lot more money because I have used it. After all, you buy or sell a stock or fund because you expect the price to move one way or the other, so it makes sense to study price action.

At this point, with the use of the personal computer, and electronic trading, you have huge advantages over what was available to me at 22, essentially before the computer was invented. People used to have to chart things by hand, and watch the tape, if they could.

In order to trade successfully, you need two things: timing and selection. The timing component tells you when to be in the market, when to be out, and when to be short. People tell you that you cannot time the market, but that is simply not true. Nothing times the market perfectly, but there are intermediate-term trend following systems that trade 2-3 times a year and do very well.

This year, the market has so far gone nowhere, so unless you made some excellent stock picks, there has not been much opportunity for significant profit either on the long or the short side. That may change. Some timing systems recently went long, but the results have not been terribly profitable, although still a little money has been made in some of the indices.

For selection, you can do quite well if you just time the indices, either using ETFs or Rydex, Potomac, or ProFunds. And you do not have to trade often: 2 - 3 times per year.

On the other hand, CNBC and Zacks publish lists of stocks with excellent fundamentals, and you can select from those lists (usually around 200 stocks). Value line also has a list published weekly. CNBC is free, Value Line is generally available at the public library (last I looked), and Zacks requires a subscription for all of the features.

Above all, avoid just buying and holding an index fund. People like to quote the record of a fund like VFINX. It has an average compount rate of return of 11% over the last 10 years. Sounds great until you realize that the max draw-down is abut 40%, and that for the lase 5 years you would have been better off in a money market - the result is about -2.48% average annual. I would have to be taking some really good drugs to remain happy with those results. Any decent timing system would have kept you out during the bad periods, and you would have made much more.

Another thing to avoid is dollar cost averaging. While you may want to contribute to your IRA, etc. on a monthly basis, there is no reason just to blindly put the money in the same thing every month. That is what timing is all about.

http://www.fasttrack.net/
http://www.edge-ware.com/
http://www.ftmonitor.com/index.html
http://www.stocktiming.com/pages/9/index.htm
http://www.timingcube.com/app/html?page=home

The above are subscription sites - do not just blindly buy stuff, but give them a look. It is important to have the right tools, and the cost is minimal compared to losing 2.48%/year on average for the last 5 years because somebody told just to buy an index fund.

http://www.frontlinethoughts.com/gateway.htm

Mauldin's site is free, and you can subscribe to his excellent newsletter.

http://www.actwin.com/kalostrader/

My own site is free, and I have recently started posting a trading journal. You can see my good and bad trades.





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Joel,

Welcome back! It's been a while since you spammed this board with your active trading ads. We missed you.

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Yeah, Joel, seems like great advice for a kid who doesn't have a job, and whose idea of a job is charter boat captain in the Virgin islands. Of course he should open an account at one of the brokers and start actively trading with any spare change he comes across. As I've noted before, a homeless guy who panhandles might be thought of as an early retiree, and might view himself as such even though he's likely to verbalize it as who wants to be tied down to a 9 to 5 job.

db
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I do not think trading 2-3 times a year is active. It sounds downright sedentary to me, but then maybe your reading comprehension is a bit weak.

Also, it is excellent advice on what to do with the money he is saving, which is what he asked for. I just answered the question as best I could. The stuff I do requires a bit more work than just dumping money into an index fund, but not much more, and it is much more profitable, as anybody can see.

I don't see anything wrong with being a charter boat captain in the Virgin Islands, or why that is relevant. I imagine that he can make some pretty good money, but I really do not know. That was not an issue.
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No. of Recommendations: 3
This is a crude lifetime financial plan--modify it according to your priorities and needs, but it may serve as a starting point for discussion:

1. Fund a "mini emergency fund" of about a month of living expenses. Keep it someplace reasonably safe and reasonably liquid (typically a savings account at a credit union or bank).

2. Pay off high-interest debt. For example, 18% credit card debt will eat in one's earnings far faster than one can typically earn back from long-term investments. Carrying high-interest credit card debt is very detramental to one's net worth and thus very destructive to one's future plans. Generally, it is good to avoid debt except for what one can reasonably handle for education (which improves one's ability to earn income, which is one's most important financial asset) and for a mortgage that one can easily afford. (I don't want this to go into a big discussion about borrowing to start up a business. But for personal items, I think minimizing debt obligations is generally good--usually it is better and cheaper in the long run to save up for personal purchases than it is to borrow and pay interest--that interest is esentailly a I want it now "tax".)

3. Build up a fully-funded emergency fund. This is typically the equivalent of 3 to 6 months of living expenses. (My preference is 6 months.) This should be reasonably safe and reasonably liquid, but when it gets larger (4 to 6 months of living expenses), it may make sense to move part of it off to better returns in exchange for reduced liquidity or slightly higher risks (e.g., savings bonds, which are illiquid until 1 year after purchase; CDs, which have "substantial penalty for early withdrawal"; short-term bond funds, which have some volatility in what is called "interest rate risk").

4. I might suggest doing this at the same time as #3. Contribute to the employer's plan (401(k), 403(b), or the like) up to the amount matched by the employer. Contributing less than the matched amount is like telling your employer that you don't want all of your compensation. If there is no employer match, go to #5.

5. If you have more money to invest for retirement, contribute to a Roth IRA if you can. Even though the contributions to a Roth IRA are after-tax, if one follows the rules the withdrawals from a Roth IRA are potentially tax free. This is probably the only way you can get decent growth and also have it tax free. (Municiple bonds from one's state are also tax free, but generally pay a low interest rate.) Also, you can open a Roth IRA with just about any financial establishment so you can pick your investments and then pick the most appropriate custodian for that. For example, if you wish to invest in the Vanguard Total Stock Market Fund or the Vanguard Target Retirement 2045 Fund, once you have $1,000 to invest, you could open a Roth IRA at Vanguard and use that $1,000 to invest in one of these two funds.

6. If you have more money to invest for retirement, and if the investment choices in the employer plan are reasonable, the expenses are low, or if your occupation tends to attract lawsuits, contribute to the employer plan up to your legal limit. Even though withdrawals in retirement will be taxed at ordinary income tax rates, the ability to contribute to them before taxes give them a big advantage that personal (taxable) investments don't have.

7. If one still has money to invest for retirement, consider whether to invest in personal (taxable) accounts or pay off the lower interest debt (such as a mortgage or the 1.8% student loan--that 1.8% sounds really low!).

Even though steps 4 and 6 put money in accounts that one normally cannot access until one is 59.5 years old (or one can withdraw from the most recent employer's 401(k) or 403(b) if one has turned at least 55 years old before retiring), one can still make use of that money in early retirement by, after one has retired, roll the money over to a "Rollover IRA" and then, since the Rollover IRA follows the rules of a Traditional IRA (with the added advantage of being able to be rolled into a new employer's plan), one can make use of the rules of a Traditional IRA. One beneficial approach of a "Rollover IRA" for early retirement is to make use of SEPP (Substantially Equal Periodic Payments, one of the clauses of 72T) to make penalty-free withdrawals of funds for living on. SEPP must last the minimum of at least 5 years or until one is 59.5 years old, whichever is longer, the amount withdrawn depends on the balance of the IRA(s) one is using for this purpose and one's life expectancy. But when making use of SEPP, one pays just income taxes, not any penalties. So, by using SEPP, one can benefit from a 401(k) or 403(b) by being able to make pre-tax contributions while working, yet after rolling over to a Rollover IRA and setting up SEPP, one can withdraw funds before one is 59.5 without the 10% penalty.
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Joel...

I think that everyone has to decide for themselves which method of accumulating funds works for them. Whether it is investing or trading or just a savings account is certainly a personal choice and one that obviously has a great deal of impact on ones future wealth.

I also think that a young person, who is inexperienced in how to accumulate wealth for his future years, requires a certain degree of special handling when it comes to advice. In other words...he needs to learn how to walk before he learns how to run.

In my opinion, starting with a broad-based, low-fee, no-load Index Fund from a reputable company, placed in a Roth IRA, would be an excellent way to begin accumulating wealth without unduly risking principle.

On the other hand, going with individual stocks, trying to time the market, short selling on margin, charting, and the rest of the rather sophisticated, time consuming, complex, and (IMHO) questionable methods utilized by traders...needs to come much later in a young person's life - if at all.

I don't claim to be a financial expert - my opinions are my own based upon personal experience and information from the books I have read on finance and investing. I can't say, with any authority, that your methods are ineffective. What I can say is that I certainly don't buy into them. Accumulating wealth, for most of us, is a matter of time not timing. And...it's a matter of education. I vote to give this young man both.

Regards,
Bill
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Well, the contention that building wealth, for most of us, is more a matter of time than of timing is interesting.

Let us consider the facts:

Using Timing Cube, and trading only ETFs, we have, as annualized results, since the first "live" signal on 6/18/2001:

Nasdaq 100 long only: 21.35%
Nasdaq 100 long and short: 48.42%
Nasdaq 100 buy and hold: -6.35%

S&P 500 long only: 12.02%
S&P 500 long and short: 23.48%
S&P 500 buy and hold: -2.86%

Russell 2000 long only: 21.21%
Russell 2000 long and short: 44.63%
Russell 2000 buy and hold: 3.46%

In order to achieve these results, all you have to do is check the website daily. In fact, you do not even have to do that - if the market is going your way you will not get a new signal.

There have been 11 trades since 6/18/2001. There are also some backtested results that they did before they went live. It is hard to imagine anything more simple.

You do not need any knowledge of technical analysis either, although it helps to understand what is going on.

But there is nothing special about Timing Cube. The timing systems on my site, where I publish the source code, do as well. They are more targeted to small caps, however. You could easily convert the code to run in Excel and use Yahoo for the data source.

Anyway, I leave it as an exercise for the reader as to whether or not is is more a matter of time or timing. And I am content to make money, rather than to do what "most of us" do, whatever that is.
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You have a system that has been in effect since 2001 and you think it's a moneymaker? Sir, 11 trades do not a system make. Good luck to you, though.
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First off I thank all of you for your replies and I'm hoping to recieve even more.

iamb: What is UD, and what does field of criminal justice mean? I assume at 21 you are not a law school graduate. Taking a job as a charter boat captain may be fun, but it seems unlikley to lead to early retirement in the usual sense. I think you may have the cart before the horse -- you first need to earn money, then you can worry about investing it.

UD stands for the University of Delaware, which is where I attended and graduated from this past May. My degree is in Criminal Justice, which encompasses everything from pre-law, to corrections, to social work, to general liberal arts. However I do not plan to spend my life working in this field, this is merely what I enjoyed learning about after testing the waters of many other majors. I don't plan on living my life "in the usual sense" so yes I agree a charter boat captain does not seem to be the best choice for someone who may have lived a "usual life" (I am not incinuating that you have). My decision to spend some time in the islands is just that, mine, and I see no reason why I can't accomplish my goals and dreams there as opposed to here on the mainland. I have 90% of the benefits of being on the mainland (the USVI is a US territory) plus I will be in a place which I enjoy immensly. I have spent countless hours trying to explain this to people to no avail, and I don't plan on continuing to try here. Besides, I'm willing to retire a year or two later than I would like if I get to spend a year or two now in "paradise". Moving on...

...seems like great advice for a kid who doesn't have a job, and whose idea of a job is charter boat captain in the Virgin islands"

Not to pick on you but... I never said I didn't have a job, did I? In fact i've been a part of the workforce for 10 years now (and boy do I miss that paper route). Furthermore, I don't think that being a charter boat captain is my idea of a Job, because when I typically hear the word job I tend to correlate that with something one does in order to generate income yet is something that one usually does not enjoy. Im quite sure I enjoy sailing in the Caribbean and meeting people from all across the globe. Maybe I took your comments too harshly, maybe not. Anyhow the record is set straight, and as always im greatful for the reply and opinions.

jesserivera67: Thank you for the excellent reply and the links to the resources and books. If you know where I could find more information on the tax benefits of interest paid on my student loan I'd love to know about it.

joelxwil: Seems that you're a pretty popular poster around here. While much of your advice went over my head I'm always open to new methods of doing things. While time trading is not something I can see myself embarking upon right now, I may in the future (or may not) and have bookmarked your site. Thanks.

MarkOYoung: Also a great reply with solid advice that I could follow, and the informative tax information. Thanks.
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First off I didn't mean to rub my age in anyone's face (you old farts! haha) but I do believe that it is the focal point of my post

I almost forgot... the "old farts" comment was purely in jest. All of my experiences with the Fool so far have had a bit of humor involved in them and I myself joke frequently, so combine the two and you get a remark that may be taken the wrong way. If this was the case I apologize, now lighten up! (<--- another joke! Go ahead, laugh, see its ok).
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"I almost forgot... the "old farts" comment was purely in jest.

Hi IF,

Well, from this OF to a young twerp, no offense taken ;-) Hope you live to be my age and well beyond it!!! I enjoyed my work for the most part, just not the office politics, meetings... all that stuff that had nothing to do with engineering.. The past 7 years I've been working part time and it's great !! Hope you do well as a charter boat captain, nothing wrong with living your dream... many will leave this life without ever being able to do it :-( Don't recall who said it first but no one on their death bed wishes they'd spent more time at the office.

I can't buy back a single hour of all the ones given to my job. I don't have lots of money but I have lots of free time, I dance 2-3 nights a week, ride my motorcycle, Honda Magna, off into the hills when I feel like it, take off to Oregon a couple times a year... I'm enjoying life and feel very fortunate to be able to do so... I wish you all the best on your adventure... worked with an engineer back in the '70's who quit so he could fly charter planes around the islands ;-)

Your situation fits perfectly with The quote I sign off with, 'cause you know, we're all dyin', we just don't know if it will be tonight or tomorrow... but it will be some tomorrow ;-)

Regards, Ken ("As Tim McGraw sings, 'Live like you were dying.'")

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Actually, the TimingCube people did a backtest during the time that they were working on the system. The backtest goes back to 3/9/1999. They started publishing their work on the date I mentioned as the first live signal. Also, it is not the number of trades but the quality of the trades that counts. More trades would not, most likely, have been profitable.

If you look at the code for Microc2x on my site you can see that it generates good signals for small caps and goes back to 9/1/1988. I can currently only access the last 10 years, but just going long on the buy signals over that period, you get a cumulative 678% on the Russell 2000 and 1043% on the Nasdaq index. Needless to say, this beats buy and hold by a wide margin.

I mention TimingCube because it is simple, cheap, and accessible.
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The backtest goes back to 3/9/1999.

Wow! You mean that backtest goes back a whole five years? I'm whelmed -- whelmed I say! That's certainly proof that timing works invincibly in the marketplace. I can hardly wait. Where can I get some of this good stuff?

Regards...Pixy
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I have just retired on disability. I am 51, and have worked for XOM or affiliates for 25 years. My savings are in the XOM thrift fund and all in Exxon stock. I know people preach being diversified, but IMHO, if XOM goes to pot, nothing else will be worth anything either.
My question is, do I have to switch my thrift to a rollover IRA to use SEPP? I will need to start making withdrawls as I will be on half pay for quite awhile, and will need more to cover cost of living expenses. As long as I'm on long term disability, I don't need to start drawing on my pension, so it will continue to grow in the meantime. Any thoughts (besides diversify)?
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Backtests are absolutely worthless. Someone posted recently about some timing strategy that backtested perfectly. However, when they started actually using it on current data, the signals whipsawed them mercilessly. But, hey, it's your money.

Hedge
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Before you sink your dreams on being a charter capt. better check into getting a "six pac, near coastal waters" license with a sail endorsement first. It isn't cheap or easy and does have a requirement for specific amounts of sea time.
Best of luck and Go For It!
Jim
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So I guess if I don't want to diversify, nobody wants to talk??
Let me ask this question. Given my age, 51, and my wife's of 46, when I take my retirement is it best to take a lump sum and invest it in some of the mutual funds you have been talking about, or take the annuity. I don't believe XOM will cut their pension plan benefits, but a lump sum would give me money up front in case that happened. It's a defined benefit plan, and my options are to let it ride, take the lump sum, take it in my name where my wife would get the same amount after I die, or take it jointly where we would each get 50% for life. I've been leaning towards the lump sum, but have seen several posts that don't reccomend that. Any thoughts? Hal
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Hi Hal,

I'm 52 and I just started on this retirement learning quest a few months ago. The one thing that I noticed right off the bat is that there are a lot of folks out there to help you invest your money, but very few who will help you spend it. The most committment I have seen is on the order of "take out no more than 4% of your investment funds annually in order to ensure you retain your capital for later years". That's pretty much it. Billions of lines on how to invest, and one single line on how to spend during your retirement. It's !@#%! depressing.

Back to the subject:
It's likely to be very hard for anyone here to recommend that you continue to keep all your retirement in the stocks of one single company. XOM may not be the next Enron, but, can you be absolutely sure? Things happen. CEOs get greedy, technology changes. Hell, governments change, rise, fall, go to war, etc. So, given that, I think most of us are going to very strongly recommend diversification --- or say nothing so that your feelings aren't hurt and we don't have a fight. I believe that defined benefit plans are one of the few places where an annuity can be the right thing. It would depend on how much money you have in your pension fund and how it pays out.

As to investing after retirement; my take is that you need to plan this very carefully. My personal feeling is that you need to look at it as two separate issues. First, you need to have a *safe* retirement that will allow you to live the way you want to until you either die or have to move to assisted living. (By you, I mean both you and your wife.) (Second,) any funds you have in excess of that could be invested in higher risk allocations; say the stock market in the form of ETFs or index funds. Remember, the point of being in the market is to fund your retirement, not simply to be in the market.

The reason for these two separate retirement "accounts" is the fluctuations in the market. You want to make sure that you are not living hand to mouth in the bear years. The bull years will take care of themselves. Most years are bull years (this is no guarantee, though LOL).

I'd like to finish this by saying that I am not a retirement professional. In fact, I have absolutely no investment credentials at all.

good luck to us all,

Hedgehog
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dofitch1...

So I guess if I don't want to diversify, nobody wants to talk??
Let me ask this question. Given my age, 51, and my wife's of 46, when I take my retirement is it best to take a lump sum and invest it in some of the mutual funds you have been talking about, or take the annuity. I don't believe XOM will cut their pension plan benefits, but a lump sum would give me money up front in case that happened. It's a defined benefit plan, and my options are to let it ride, take the lump sum, take it in my name where my wife would get the same amount after I die, or take it jointly where we would each get 50% for life. I've been leaning towards the lump sum, but have seen several posts that don't reccomend that. Any thoughts? Hal

--------------

I think that maybe you might be able to get some good suggestions/discussions from people who have already "Been there...Done that". I'm talking about the "Retired Fools" Board:

http://boards.fool.com/Message.asp?mid=21242274

Good luck,
Bill


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