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I had a terrible epiphany the other night--if I won $4 million in the lottery tomorrow, I'd have to keep working. After taxes, that $4 million would become $2 million...and if I were to put all of it in an interest bearing account at today's measly rates (let's just say 2% for the sake of round numbers), that would get me $40,000 per year--not enough to support my partner and me now, let alone in 25 years post-inflation.

I've never had a high-paying job but have always been very careful with my money, and I always thought that the cushion I've built up would ensure security later. But jeez, if $4 million doesn't even cut the mustard (and believe me, I don't have $4 million saved), how the heck does anyone ever retire??
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"I had a terrible epiphany the other night--if I won $4 million in the lottery tomorrow, I'd have to keep working. After taxes, that $4 million would become $2 million...and if I were to put all of it in an interest bearing account at today's measly rates (let's just say 2% for the sake of round numbers), that would get me $40,000 per year--not enough to support my partner and me now, let alone in 25 years post-inflation."

- - -

Well, if you remember your Bernstein, or your asset allocation guidelines, cash seldom returns more than 2.3% inflation adjusted. So leaving your money in cash is never a good idea.

Second, the taxes on 4 million, depending upon where you live, would hit the 35% tax bracket, which I think is the biggest. I don't know if you would pay Medicare tax on it or not. Not 'earned income' so probably not. You might have to pay state income tax. or not. depending upon where you live.

So let us say you do wind up with 2.5%.

At a 4% SWR rate, that will give you 100K a year inflation adjusted, if you believe the future will be no worse than the past. You'd have to be at least 50% in equities - index funds.

That 4% should be good for a 30 year retirement.

- - -

"But jeez, if $4 million doesn't even cut the mustard (and believe me, I don't have $4 million saved), how the heck does anyone ever retire??"

By investing in equities.

Second, if you have 25 years or more in SS, you and wife will get decent amount of SS, assuming it is still there when you hit 62 or 66 or whenever you elect to get it. That will be on top of your SWR.

The other thing you failed to consider is that you would gradually deplete your 2 million. At the end of 30 years, worse case, you would have zero bucks left. Likely you'd have much of it left, and maybe even more depending upon the economy and your investments.

My SS kicked in. It provides about half of what I really need in a worst case situation - which would be staying in my house, eating fine, all utilities maintained, heat and cool the house, maintain a car, etc. I also get 4.5K in a pension from a former employer a year. That helps even more. I don't have to take 4% out.

Most people might have some pension or SS to count for income

Heck, some married couples get more than 25K/yr in SS depending upon their earnings history.

Did you consider that?

That 2.5mil invested should get you way north of 50K a year additional income.

t.
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I had a terrible epiphany the other night--if I won $4 million in the lottery tomorrow, I'd have to keep working. After taxes, that $4 million would become $2 million...

Well, I think you're overestimating taxes a bit. The highest Federal tax rate is 35%. State income taxes would probably be from 0% to 10%, depending on where you live - so you could end up with anywhere from $2.2 million (at 10% state income tax) to $2.6 million (at 0% state income tax).

and if I were to put all of it in an interest bearing account at today's measly rates (let's just say 2% for the sake of round numbers), that would get me $40,000 per year--not enough to support my partner and me now, let alone in 25 years post-inflation.

Well, if inflation kicks in, it is likely that those measly rates will go up. However, if you are only putting your money into 'safe' bank accounts (where you get those measly rates), you will generally lose to inflation, as bank rates don't usually pay enough to offset inflation. That's the 'risk' with 'safe' investments.

Investing your money in stocks and bonds, even though it's 'riskier' than guaranteed bank accounts, should provide you with higher rates of return. A 60/40 stock/bond mix will generally provide enough returns that you can take out 4% a year (considered to be a 'safe withdrawal rate'), and adjust for inflation, without running out of money, for at least 30 years. Starting with a 3% withdrawal should make the money last even longer. There are a lot of assumptions behind this process, so googling 'safe withdrawal rate' to get the details is recommended.

If you're really concerned about investing for yourself and you have a lump sum, like from a lottery win, you can buy a single premium fixed annuity with an inflation adjustment. Of course, there, you run the risk that the insurance company you invest with will still be there as long as you will.

There are always risks - you just need to determine which risk you want to take - inflation, stock/bond market, or reliance on some other entity to manage your money.

I've never had a high-paying job but have always been very careful with my money, and I always thought that the cushion I've built up would ensure security later. But jeez, if $4 million doesn't even cut the mustard (and believe me, I don't have $4 million saved), how the heck does anyone ever retire??

Getting higher returns than CD rates and cutting expenses, often by downsizing or having a paid off house.

AJ
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I had a terrible epiphany the other night--if I won $4 million in the lottery tomorrow, I'd have to keep working. After taxes, that $4 million would become $2 million...and if I were to put all of it in an interest bearing account at today's measly rates (let's just say 2% for the sake of round numbers), that would get me $40,000 per year--not enough to support my partner and me now, let alone in 25 years post-inflation.

Many lotteries have the option of taking the payouts as an annunity. CA has the payments structured to increase over time. $4 million in winnings would likely be more than enough to replace your income. You could then retire.

Social security and pensions make a difference.
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As long as you are dreaming, why not dream about winning $100 million instead of a paltry $4 million?



Seattle Pioneer
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"I had a terrible epiphany the other night--if I won $4 million in the lottery tomorrow, I'd have to keep working. After taxes, that $4 million would become $2 million...and if I were to put all of it in an interest bearing account at today's measly rates (let's just say 2% for the sake of round numbers), that would get me $40,000 per year--not enough to support my partner and me now, let alone in 25 years post-inflation. "

Most lottery winning amounts are based upon a 20 year payout. You get even less if you take a 'lump sum'.

t.
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telegraph,

You wrote, Most lottery winning amounts are based upon a 20 year payout. You get even less if you take a 'lump sum'.

If you couldn't retire after 20 years earning $200K/year, I think you must be doing something wrong...

I've already worked 27 years of what I hope will be no more than a 40 year career. During that time I've probably earned less than $2M gross. Even with inflation, I expect to earn probably less than $3M in total. Despite raising a family and dealing with a spendthrift spouse for nearly 20 years, I think I should be able to retire in reasonable comfort with only a portion of that my income saved - mostly in my latter years.

I make pretty good money here, especially since they pay overtime; but if I won the lottery tomorrow (not going to happen since I don't play), I would probably give notice by the end of the week.

- Joel
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XMFBuySellBelle,

You wrote, I had a terrible epiphany the other night--if I won $4 million in the lottery tomorrow, I'd have to keep working. After taxes, that $4 million would become $2 million...and if I were to put all of it in an interest bearing account at today's measly rates (let's just say 2% for the sake of round numbers), that would get me $40,000 per year--not enough to support my partner and me now, let alone in 25 years post-inflation.

If I had $2M or $3M, I doubt I'd stick it all in a savings account - or even in CDs. Even given the recent run (back) up of the bond market, you can still buy corporate bonds or other investment grade fixed income investments that are returning 6% to 8%.

I have a brokerage account that holds only fixed income investments. According to my February 2010 statement, my average current yield was 8.3%. Of course some of the debt might be riskier than what you're willing to buy, but there are still some fair deals available. Also you're risking your principal by buying debt, especially long-dated debt; but if you're sitting on millions, I assume you're prepared to put some of it to use and don't plan to just sit on it all in some bank account.

- Joel
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>> I had a terrible epiphany the other night--if I won $4 million in the lottery tomorrow, I'd have to keep working. After taxes, that $4 million would become $2 million...and if I were to put all of it in an interest bearing account at today's measly rates (let's just say 2% for the sake of round numbers), that would get me $40,000 per year--not enough to support my partner and me now, let alone in 25 years post-inflation.

I've never had a high-paying job but have always been very careful with my money, and I always thought that the cushion I've built up would ensure security later. But jeez, if $4 million doesn't even cut the mustard (and believe me, I don't have $4 million saved), how the heck does anyone ever retire??
<<

Most of these jackpots have options to either receive $X over 20-30 years (annuitized) or as a lump sum for about half of $X. So if you won a $4 million lump sum, you might also have an option of receiving about $8 million over 30 years ($267,000 a year for 30 years). Seems very doable to me. Spend half of that (after tax) and invest the other half for inflation and for when the payments stop.

If you worry about taking it all and getting 1% on savings, you could choose the annuitized payouts (knowing that they will eventually end and are not adjusted for inflation, which you'd have to account for by spending considerably less than your annual payout) or take the lump sum and purchase a single premium immediate annuity (SPIA) to provide income for life (subject to concerns about insurer solvency and stability).

Historically one has pretty much always been able to pull out 4% a year, inflation adjusted, in a diversified portfolio with about 50-60% stocks. After taxes you'd have about $2 million to $2.6 million depending on state income tax. Let's split the difference and say you had $2.3 million in a portfolio after tax. That allows for $92,000 a year, inflation adjusted, for life. Some people are getting more cautious about their outlook for the future and don't feel comfortable with 4%. Even down to a 3% withdrawal rate, your starting payout would be $69,000 a year. (This does require some ability to maintain a prudent, diversified portfolio which has its asset allocation managed.)

The bottom line is that if you're relying only on savings account interest to provide retirement income, you're probably going about it the wrong way.

As for your final question, except for a few prodigious savers and investors in the 401K-based retirement world, "middle class retirement" is largely defined by who has a good pension. And that's all but dead in the private sector and can't be sustained in the public sector for much longer. So maybe the concept of "middle class retirement" was an economic anomaly caused by a post-WW2 economic prosperity bubble which we've desperately (and increasingly unsuccessfully) tried to keep inflated with increased debt and government spending. Not a pleasant thought, but one I personally think has at least a 50/50 chance of being true.

#29
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how the heck does anyone ever retire?

Multiple income streams help. In our first full year of hubby's retirement (I'm already retired), we expect to live on:

50% Social Security
40% investment income
10% pension income from 2 tiny pensions

Hubby might also teach one or two classes for one semester per year for an additional income stream.

My grandparents lived in NYC on a tiny SS check (and a little help from my parents). My parents--now just my mother, lives on equal parts Social Security and Mom's pension taken as a lump sum and invested.

It helps to live low on the hog, perhaps in a small house with a paid-off mortgage, with cheap hobbies and so on. With low expenses, you don't need $4MM, or even $1MM.
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"With low expenses, you don't need $4MM, or even $1MM."

When I retired 10 years ago, I would have said the same thing.

But I did not anticipate the massive increases in health insurance costs in those ten years. This problem has to be solved.

Also the dot com crash took quite a toll, but I made it back in the real estate boom.

Thank goodness for some wiggle room. It helps to have reserves to cover the unexpected.
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My grandparents never owned a home. Just rented. They lived on SS. He had been in business his whole life. Might have had a CD.

HE got bored and worked in a theater as a ticket taker. Got him out of the house and socializing. The theater had a regular clientelle of weekday goers so he got to most of them ......and they said hi and exchanged a few words.

He had a car but didn't drive that much - lived in NY City most of his life, but moved just outside to be able to have the car.

definitely 'low on the hog' for him, but then again, they didn't need much or want much. THey didn't travel, and a big trip was visiting the kids for a 10 mile trip. When he got up near 80, he sold the car, and we went and visited.

HOwever, in his younger days, he was successful business man and had cars in the 1930s......my mom had a piano which was an expensive toy at the time. I don't think he accumulated a lot of savings because you could live on SS back in the 1950s and 1960s.

There also wasn't as much stuff to buy! About the only appliance in the apartment, other than a stove and refrigerator, was a black and white TV set!

They went to a laundromat to do the clothes, or washed them in the sink.

All I remember in their apartment was some furniture..China cabinet, dining room/kitchen table (small) and that was about it. They probably had a record player/radio combination. No cable. No internet. No list of appliances like dryers and microwaves and HDTV sets and other things. I don't think they ever bought a color TV set.



t.
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I did not anticipate the massive increases in health insurance costs in those ten years.

Everyone's in a slightly different situation.

I'm anticipating $1,000/month for insurance and $500 for other health expenses (deductibles, co-pays, medicine/medical devices, vision & dental care, OTC stuff, nutritional supplements like fish oil and calcium). This is more than 3x what we're paying for these things now. Health care will be by far our biggest retirement expense.

We're lucky that we can stay in DH's group plan after he retires (because of his age and length of service), but unfortunate in that he won't have worked there nearly long enough to get any premium subsidy and so must pay full freight, kinda like COBRA (he'd have to work to age 68 to even get a partial subsidy...ain't happening). Also, being in South Carolina and having a kinda cheesy policy, full freight is only $752 for a retired couple this year. Given that I'm likely uninsurable, I think this is a fabulous deal.
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"I'm anticipating $1,000/month for insurance and $500 for other health expenses (deductibles, co-pays, medicine/medical devices, vision & dental care, OTC stuff, nutritional supplements like fish oil and calcium). This is more than 3x what we're paying for these things now."

I'm paying 15x what I was 10 years ago.

When you reach age 60, your health insurance costs jump. Then cost increase go on top of that.

Plus my employer capped their payment in my behalf at $3K per year. So now I pay full increase each year. And this year they reduced coverage to 90%, 10% copay.
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Ziggy, I really appreciate your candor in pointing out the slow extinction of the pension. Barring anyone who works for a union, I personally don't have any close friends under the age of 50 whose employer offers one--once they leave the job--even if it's after 30 years--that's it. They get nothing. I have some friends who are teachers and worked very hard throughout their careers, retired, and now get a very comfortable supplemental retirement income from their jobs. Unfortunately, they are not in the majority.
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this year they reduced coverage to 90%, 10% copay.

You are fortunate.

To keep our premiums pretty level, we lose some benefit every year. COuple years ago we lost any subsidy for physicals for those over 12. And we went from 100:0 to 90:10 to 80:20. We may fall below some minimum required benefits at some point. Even insured folks could use a national option.
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Loons.

Howie52
The above was not intended as a poltical statement involving
the content of your post.
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had a terrible epiphany the other night--if I won $4 million in the lottery tomorrow, I'd have to keep working.

To me, realizing that you would still need to work is not a bad thing. You would be ahead of most lottery winners. Most of them really don't know how to handle instant "wealth" and so they blow it.
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Interesting related article from The Street today:

http://finance.yahoo.com/focus-retirement/article/109077/1-m...
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You have had a lot of good ideas, already, but, assuming you won that lottery, any halfway decent money manager (assuming you find one you can trust, or learn to do it yourself), should be able to earn you FAR more than what you say each year!

Hell, I'd be happy if I had even $500,000 or even $200,000 to play with! We have far less than that, and have done just fine for ten years now, when we add in Social Security payments (started at age 62, so reduced).

First you have to win that lottery -- then worry about it.

Vermonter
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Thank you for your post, Vermonter--you give me hope that it might be possible! However, I just can't comprehend how you're able to survive on less than $200,000 in the bank with no additional income rolling in besides interest/stock income--are you both still working part-time? I hope that's not too personal a question; I'm just genuinely very interested and can't fathom how it can be done. I get a statement from SS that tells me how much I can expect to receive in Social Security payments when I reach the appropriate age--the amount they list wouldn't pay for my expenses *now*, let alone 20 years from now, when inflation has taken its course--and I'm very careful with money. With the cost of gasoline, car repairs, property taxes, home repairs, food, medicine, etc. (just the basics, not accounting for anything recreational), a person's monthly expenses are staggering without a paycheck (or military benefits, or a pension check, etc.) coming in every month. How are you able to swing it? (The only possible scenario I can think of is that you're both skilled enough to do all of your own home/car repairs, which would make a big difference financially.) Please tell me your secret so that I can sleep better at night when I think about the future. :-)
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TMFBuySellBelle:

Wow - an old post answered!

I can't see my original post now, so I don't know what I said about collecting SS. However, we both get SS (started lower, at age 62), and that is most of our income. No real pensions except a tiny one I get from an old employer I left in my 40's. We DO have a lot less than $200,000 in the bank, too. My IRA is only maybe $40K or so, after the 2008 mess, but I work at trying to make sure I have a collection of stocks that pay dividends and/or increase in value. I set it up so I can have a hundred or two transferred to my checking account when I need it for extra.

Can you live on lower income? Depends on debts, lifestyle, and so on. We live frugally, no smoking, no bars, rarely go to shows or movies, no costly sports like skiing or golf, etc. But we do still have a small mortgage. My wife is a good shopper, uses coupons and watches for specials, too. But we eat lunch out most days, at local, inexpensive restaurants. One car, no payments. We pay home taxes, car insurance, HO insurance, and Medigap insurance to supplement Medicare.

TBH, you probably live pretty high right now. College loans? Other higher expenses or loans?

Post again for more info. We've been retired for 10 years now, and we do okay. You can probably, too.

GL.

Vermonter
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Thank you so much for your informative post. What's weird is that I don't live high on the hog. I haven't owned a car in 21 years (I walk everywhere or take public transportation = $107/month), I've never been in debt (I worked my way through college both times and have never bought anything I couldn't afford), I buy my clothes at a wholesale discount store called DII (total usually comes to about $35/year, if that), I never go to bars, I don't smoke, I have no children or pets, I cut my own hair, and I don't believe in "impulse purchases." I buy most of my necessities (toothbrushes, soap etc.) online using credit card rewards so that I don't have to pay out of pocket for them. Fortunately, my biggest hobby is taking pictures--and because I already own the camera, it doesn't cost anything to snap/share photos with others (it's digital). I do spend significant sums on food (I have a $25/day food budget, which includes bfast/lunch/dinner/snacks/desserts/beverages per day). Altogether, the amount I have saved (in relationship to what my salary has been, anyway), is decent. But say, for example, one retires with $200k in the bank. Assume also that they collect $1000/month in SS. That's $12,000/year in SS (and in some cases, SS income is taxable so that the actual total is even lower). The interest one would earn on $200k in a *completely safe* investment vehicle (insured interest-bearing account) is nothing--even 3-year CDs barely return more than 1% right now; some aren't even earning 1%. On $200k, that's $2000 in interest annually--*before* taxes kick in--and that's assuming that you haven't had to touch any of the original $200k. So, if you leave the $200k alone and live on only the SS, it means you're living on around $12K/year. Particularly with the price of gas/insurance being what it is and the cost of home repair (a friend recently had leaking window issues in his house and had to pay $20,000 to get them replaced--this was in a cheap, modest house in PA), I still don't see how it's feasible. It seems like it would be feasible as long as nothing ever broke or went wrong. Fortunately, it sounds like you guys have been very lucky--which is great, because it sounds like you deserve it. The pension would also make a difference, albeit small. (Every bit helps!) I guess it's the lack of income beyond SS that scares me--one big unexpected expense, and... boom! (But then again, I suppose the same could be true even if you had saved millions and suddenly contracted a major illness that maxed out your insurance.) Am I worrying too much? Haha.
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I think another factor that might be helping in your situation is that you have 2 SS checks coming in, so you can share expenses (only 1 car, 1 home, etc.). Maybe I just need to move into a commune.
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t:

Anyone who wins $2 million and puts it all in such a low interest account DESERVES to be poor! Ye gods!

Look into diversification in things like GE, AT&T and such, which pay 4 or 5% annually, for example!

Vermonter
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TMFBuySellBelle

This place is driving me nuts! I just replied at length to this post, tried to correct some typos, and The Fool eliminated the hole damned message! Second time it has happened in 2 days!

Let me try again.

But say, for example, one retires with $200k in the bank. Assume also that they collect $1000/month in SS. That's $12,000/year in SS (and in some cases, SS income is taxable so that the actual total is even lower). The interest one would earn on $200k in a *completely safe* investment vehicle (insured interest-bearing account) is nothing--even 3-year CDs barely return more than 1% right now; some aren't even earning 1%.

First observation:

WHY put it all in CD's? Why not invest in various pretty darned safe stocks? Look at returns from things like GE, AT&T (symbol T) or B&G Foods (BGS) for a few. How doe 3.5 to 5% or better sound? ANd there are many others.

By the way, the "rule of 73" can help you figure out how fast your money can double if you let the dividends or interest compound. For example, 5% dividends, allowed to compound, would double your investment in 14.6 years. So $100,000, for example, would be $200,000 in 14.6 years, assuming these companies keep going!

Whatever you do, learn how to invest, be careful never to put everything in one place, and start doing better.

Remember, too, that whatever you earn in an IRA is tax-free until you withdraw it, once you are 59-1/2 or older.

We make about $40,000 altogether and have paid zero state or federal income taxes in the last 3 years, all with standard deductions. We ARE over 65, which helps.

IOW, look at alternatives, learn some things, and be careful.

Vermonter
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With all due respect, people who bought GE shares a few years ago wouldn't exactly agree with that statement.
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I have no idea how GE was years ago, but it's doing okay by me now (as part of a diversified account).

I buy stocks in my IRA and keep them as long as they reward me with growth and/or good dividends. When that changes for the worse, I sell them off in there and look for something else. My Fidelity IRA only charges me $9.95 per trade, so it's no big deal, unless I go nuts with a lot of trades!

Do your homework, consider your goals, and act accordingly!

Vermonter
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TMFBuySellBelle:

I just checked your "Info" and see that you probably know more than I do, in terms of education, about finances. CFA?

I have to admit that having 2 SS checks coming in DOES help, perhaps, but remember that we also have to feed, clothe, and insure two people, too.

When we started SS (at 62), we accepted the lower amount. We also later had her sign up as my spouse vs starting her SS on her own hook, because that way she got a lot more than she would have gotten on her own. (She had been a teacher and an aide and had not earned as much, etc.) As my spouse, she got (and still gets) about half as much as I do, which, added to mine, makes a decent amount, even at the lower amount (which we started nearly 10 years ago). If I die first, she will be eligible for MY higher SS income, of course, but she will then lose hers. I think she'd do okay that way, even with the drop in income.

Medical costs also were killing us until we got to 65 and started Medicare! My Blue Cross went from $325/month to $700 in 4 years!

Now, we have about $95/month deducted from each SS check apiece each month for Part B Medicare, but we also pay AARP/United Health Care another $340/month combined for our Medigap coverage. But that Medigap is well worth it because it covers hospital deductibles and (fingers crossed) has so far meant almost no payments to doctors or hospitals, including for two surgeries for me in the last 3 years.

Again, I think more people could do a lot better with their investments (within and outside their IRA's) if they'd just spend some time getting better educated about managing their own money, and by being willing to get on line and adjust their investments as often as they need to to keep pace! Far too many people sit and stare at their TV's (we do, too, actually), but pay little or no attention to their money!

Vermonter
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