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Hi, Pixy, from a "smoky" old friend at a former employer! Yup, I've taken a walk from our former haunt and now am in desperate need of advice and opinions from you and your faithful board denizens.

I need advice on choosing where to put my money - all opinions gratefully accepted, as I'm into my research phase.

Here's the basics:

I've recently left my employer voluntarily. Recent, as in, less than a week ago. I'm taking a breather of about 2 weeks and then will begin drumming up some consulting business, and taking a look around the job market for a new employer.

I have over a year's worth of gross income saved, so cash is not a problem during a period of no cash flow.

I'm 38 years old, no dependents, a fiancee. We'll be married this July.

Approximately 75% of my payout from my former employer comes from a defined benefit plan operated by that employer. The other 25% is from a 401k sponsored by that employer.

I want to put that money to work as my retirement nest egg. I don't want to withraw it for about 20-25 years. I want some financial security for the money. Most of all, I want the investments to grow! (Doh)

What are my options for tax-deferred places to put both pots of money? Pros and cons of any options opined upon please!

As you can tell, I don't have a great deal of experience managing this kind of transaction, so your advice is deeply appreciated.

Yes, I'm reading everything I can on the Fool about retirement planning, 401k's, etc., but I'm very interested in your opinions.

Thanks!

foolishjk (hoping someday to sign my name with a capital F!)
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Hey, Foolishjk, welcome! I had heard you recently jumped ship. Hope all goes well for you. In your post, you said:

<<I want to put that money to work as my retirement nest egg. I don't want to withraw it for about 20-25 years. I want some financial security for the money. Most of all, I want the investments to grow! (Doh)

What are my options for tax-deferred places to put both pots of money? Pros and cons of any options opined upon please!>>


Both pots come from an employer's qualified retirement plan. Touch any now, and you will be taxed on the amount taken plus assessed an additional 10% on the amount taken as an early withdrawal penalty. Thus, your best bet (given the 401k I know you had) is to transfer the money to an IRA at the custodian of your choice. You have 20 years or more before you need the money, and there is no place you can put it for absolute "financial security" (something that really depends on the eyes of the beholder) and achieve maximum growth. Because you have a long time before that money is needed and because you are in the process of becoming Foolish, I suggest for the time being you consider transferring those monies to a single IRA with Vanguard in their S&P 500 or Total Index fund. After you explore Fooldom and learn more about stock investing in general, you can then move on to other options.

I wish you well. Given your innate talents, it won't take long to give yourself a capital "F" to preface the "oolish."

Regards..Pixy
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Your defined benefit plan is probably a qualified plan. Therefore, it and the 401K can be transferred to an IRA account, and possibly converted to a Roth IRA.

The location of the IRA or Roth IRA will be determined by your degree of sophistication with investments. If you are willing to go after growth stocks, then a discount broker is probably the best choice. Otherwise, mutual funds at a mutual fund company allow good returns with less effort on your part.

Take a look at Fool School from the links at the fool.com homepage. An S&P Index fund would be a good basic investment. But Foolish Four and Rule Maker stocks can also be excellent. If you are from the technology sector and have faith in the future, it could be a great time to buy in there--either technology sector funds or perhaps some of your own high performance stock picks.

Best of luck to you.
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Hi, Pixy, from a "smoky" old friend at a former employer! Yup, I've taken a walk from our former haunt and now am in desperate need of advice and opinions from you and your faithful board denizens.

I need advice on choosing where to put my money - all opinions gratefully accepted, as I'm into my research phase.

Here's the basics:

I've recently left my employer voluntarily. Recent, as in, less than a week ago. I'm taking a breather of about 2 weeks and then will begin drumming up some consulting business, and taking a look around the job market for a new employer.

I have over a year's worth of gross income saved, so cash is not a problem during a period of no cash flow.

I'm 38 years old, no dependents, a fiancee. We'll be married this July.

Approximately 75% of my payout from my former employer comes from a defined benefit plan operated by that employer. The other 25% is from a 401k sponsored by that employer.

I want to put that money to work as my retirement nest egg. I don't want to withraw it for about 20-25 years. I want some financial security for the money. Most of all, I want the investments to grow! (Doh)

What are my options for tax-deferred places to put both pots of money? Pros and cons of any options opined upon please!

As you can tell, I don't have a great deal of experience managing this kind of transaction, so your advice is deeply appreciated.

Yes, I'm reading everything I can on the Fool about retirement planning, 401k's, etc., but I'm very interested in your opinions.

Thanks!
--------------------------------------------------------------------------------------------------------------------------------------------------------------------- Since you admit that you don't have a great deal of knowledge relative to your concern (I admire your honesty), an S&P index fund will probably "fit" your investing personality best. The Vanguard Group offers the cheapest in the industry. You can contact them online at www.vanguard.com (a great website) or call them directly at 1-800-892-3335. They will send you everything you need to effect your transaction...free of charge. Good luck.
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Dear Pixy, pauleckler, and Gglass555,

Many thanks for the prompt suggestions. A few follow-up questions.

To Pixy:
Thanks for the vote of confidence!

The suggestion of an index mutual fund "for the time being" is helpful. How do you define "for the time being?" 'Til I'm more knowledgeable or for a set period of time? Or did you have something else in mind?

Also, I'm intrigued by the concept of dollar cost averaging. Is that something I should think about since I have a sizeable sum to invest? If so, are there tax consequences to dollar cost averaging in my situation (money from a qualified retirement plan and 401k)?

If I put the money in an index fund, I assume that I can diverisfy at a later date, with no tax consequences, as long as I do so without taking the money into my possession and by diversifying into another 401k. Yes? What did I miss?

To pauleckler:

Thanks for the Foolish suggestions and good wishes.

Great minds run in the same rut! I've been reading up on the RuleMaker portfolio already and will explore your other suggestions.

I definitely have faith in the future and know something about the technology sector - I'm interested both personally and professionally, so I keep up on my reading! I'm in the process of diversifying my cash holdings right now and intend to put a small amount into a few tech stocks to see how I do.

My financial planner told me that a Roth IRA is not a good suggestion for me. Would you care to take a contrarian viewpoint? If you need more information on my situation, please let me know!

To Gglass555:

Thanks for the "luck," all contributions gratefully accepted. ;-)

Well, it looks like the consensus opinion for the short term is the one you expressed (Vanguard S&P Index fund with a 401k). Thanks for replying to me.

What would you NOT do if you were in my position? (Leaving aside taking it all to Las Vegas!!) What do you think are the major missteps taken by people in my situation?

Many thanks again to all of you,

foolishjk

PS I'm interesed in any "devil's advocate" positions out there, too. Sometimes it helps me to look at questions from different angles.


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Dear Pixy, pauleckler, and Gglass555,

Many thanks for the prompt suggestions. A few follow-up questions.

Foolishjk writes in part:

<<To Pixy:

Thanks for the vote of confidence!

The suggestion of an index mutual fund "for the time being" is helpful. How do you define "for the time being?" 'Til I'm more knowledgeable or for a set period of time? Or did you have something else in mind?>>


It means there's no need to rush into something until you're comfortable with what you're doing. Thus, at least to me, that means after you gain the knowledge that gives you that confidence and comfort.

<<Also, I'm intrigued by the concept of dollar cost averaging. Is that something I should think about since I have a sizeable sum to invest? If so, are there tax consequences to dollar cost averaging in my situation (money from a qualified retirement plan and 401k)?>>

Dollar cost averaging is a sound strategy and a means of achieving your goals without risking all at once. However, it's a matter of your being able to sleep at night. More than one study has shown that investing a lump sum over time as opposed to all at once results in very little difference in results over the long term (i.e., the 20 years or so you're talking about). If you're comfortable with that strategy, by all means use it. And no, as long as the money remains in the confines of an IRA or another employer's plan, then there are no tax consequences for using that strategy or a lump sum approach.

<<If I put the money in an index fund, I assume that I can diverisfy at a later date, with no tax consequences, as long as I do so without taking the money into my possession and by diversifying into another 401k. Yes? What did I miss?>>

As long as the money remains in an IRA or an employer's qualified retirement plan, you may transfer those funds to available investment choices at will without fear of the tax man. In an employer's plan, you will be restricted to whatever is available in that plan. In an IRA, your choices are pretty much unlimited.

Regards..Pixy
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Long Post Alert -- You have been warned!

The suggestion of an index mutual fund "for the time being" is helpful. How do you define "for the time being?" 'Til I'm more knowledgeable or for a set period of time?

Vanguard S&P 500 is an excellent place to park money until you can find a better place for it. Long term, "the market" (as represented by various indexes including the S&P 500) returns an average return of around 11% which is much better than you're going to get from CDs or a money market while you plan your next move.

Index Funds, unlike most mutual funds, are also very "tax efficient" which basically means they make a limited number of trades each year and thus generate a minimum of capitol gains distributions. And the Vanguard funds have extreamly low management fees even compared to other Index Funds.

Also, I'm intrigued by the concept of dollar cost averaging. Is that something I should think about since I have a sizeable sum to invest? If so, are there tax consequences to dollar cost averaging in my situation (money from a qualified retirement plan and 401k)?

Dollar Cost Averaging works well to help smooth out the bumps short term, but the "cost" of not having your money working for you and be greater than the "cost" of buying aat a less than perfect spot in the market. (The past week not withstanding.....)If you have a good plan and stick with it for the next 20-25 years, my guess is that you're better off getting started with it and not artificially delaying starting.

Also, Dollar Cost Averaging is generally used to show people how they can get involved with small periodic investments when they don't have enough to make a more substantial initial investment. However, in your case you have that initial investment by virtual of the rollover amounts.

If I put the money in an index fund, I assume that I can diverisfy at a later date, with no tax consequences, as long as I do so without taking the money into my possession and by diversifying into another 401k. Yes? What did I miss?

Presumably you're rolling over the funds from your previous employer into an IRA with a custodian. Once you have the money there, you can diversify into any investments that custodian permits: stocks, bonds, limited partnerships, REITS, etc. As long as you don't "taint" that money by using the same account to hold your annual IRA contribution, you can roll those assetts into a future employers 401(k) plan, assuming that employer's plan accepts roll overs at all. Personally, I'm not inclined to worry about that as you usually have fairly limited choices compared to have you'd have in the IRA.

My financial planner told me that a Roth IRA is not a good suggestion for me. Would you care to take a contrarian viewpoint? If you need more information on my situation, please let me know!

For somebody several years away from retirement, a Roth IRA seems to make a lot of sense. You don't get the tax deduction now (and have to PAY the tax on any conversions), but when you pull that money out down the road, you won't have to pay ANY income taxes.

So for a $2,000 annual contribution you can get a tax deduction worth $560 (at a 28% marginal rate) and instead pay $3,767 down the road ($2,000 earning 10% for 20 years with the same 28% marginal rate). OR you can forgoe the tax deduction today, and take the money out tax free 20 years from now. There are also some advantages relating to not having to take a Required Minimum Distribution when you turn 70 and the ability to pull out contributions at any age that make Roth's even MORE attractive.

The main thing that might cause a Roth to NOT make sense in your case would be if you were contemplating using part of the 401(k) distribution to pay the taxes on converting the rest. Taxes on conversions should ONLY be paid with ordinary funds. The other thing your financial planner might have been refering to is that you can't roll the 401(k) into a Roth IRA directly. You would have to roll it to a regular IRA and then convert those funds to a Roth IRA.

What would you NOT do if you were in my position? (Leaving aside taking it all to Las Vegas!!) What do you think are the major missteps taken by people in my situation?

My guess is the two biggest mistakes you could make right now would be to "touch" the retirement funds and/or to be overly conservative with your investments. The first is rather obvious. If you use any of the retirement funds now, you'll be paying taxes & penalties on the money, stop if from working towards your retirement, and, in general, there won't be any way for you to undo the mistake.

The second is probably even more dangerous right now. With the stock market in the midst of a major correction, it's easy to think that 3% on a savings account, or 5% on a money market is a LOT better than losing 10%, 20% or more in a month, a week, or even a day! However, letting a short term fluctuation, even one this large, keep you from investing in stocks for the long term is probably the worst thing you can do for your long term prospects.

For now, roll the money to an IRA and invest in one or more indexes. Vanguard S&P 500 is the most common recomendation. And leave it there until you have a better place for it, and know WHY it's a better place including the possible risks, and then go for it. Without knowing more about your situation (married/single, kids/no kids, $ amount you have to work with, etc.) nobody could be able to offer you any better advice than to read everything you can and once you have more specific questions, come back and ask for more help.

Sacto Fool
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More than one study has shown that investing
a lump sum over time as opposed to all at once results in very little difference in results over the long term


I thought the study said you lost on average 1% for each month you weren't fully in the market -- can you provide pointers to the studies you're talking about, Pixy?
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Jrr7 asks:

<<I thought the study said you lost on average 1% for each month you weren't fully in the market -- can you provide pointers to the studies you're talking about, Pixy?>>

No, not really. They are the results of several analyses I read in various financial publications over the past five years, but I don't recall the specifics other than the differences were neglible over various 20-year periods. The approach was to take a lump sum investor going in at a year's high and the year's low as compared to a dollar-cost averager entering at the same time using 12 monthly installments. The end results weren't significantly different for either in terms of the final accumulations.

Regards..Pixy
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If I saw the same article as you, and if I remember it correctly (more of a theoretical thing based on historical data rather than an actual "study"), it was saying that the yearly % returns weren't that much different between DCA, investing at peak, investing at nadir -- about 1-2%. Unfortunately, 1-2% a year does compound a bit over time with the result that the final accumulations are quite a bit different.

I searched for the article and didn't find it.

I did find this article:
http://www.invest-faq.com/articles/strat-dol-val-avg.html

And here at the Fool:
http://search.fool.com/Fribble/1996/Fribble960826.htm
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<<If I saw the same article as you, and if I remember it correctly (more of a theoretical thing based on historical data rather than an actual "study"), it was saying that the yearly % returns weren't that much different between DCA, investing at peak, investing at nadir -- about 1-2%. >>

Nope, that's not the same at all. This was a study done by one of the universities over a number of different 20- year periods that showed the final actual dollar results were within 1% to 3% of each other, not the annual return.

Obviously, returns are time sensitive, so the start point of the period is important. The analyses I refer to used differing start points/years to see what effect that would have. The results showed the final portfolio value just wasn't that much different.

Regards..Pixy
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