Took my balance in my 401K program out of all stocks, bonds

[turbo]

Is anyone following this thread already using this strategy ? Are there any pitfalls not covered in the quoted text or the article ?

Rhody...

There are pitfalls in part because everybody's financial needs in retirement are different, so one can't get too simplistic.

For instance, except for energy costs (electricity, gas and oil) it is not very expensive to live here. BUT, women in my wife's family tend to be very long-lived, so that has to be factored in. Actuarial data isn't always helpful for outliers.

I would suggest that you "pay yourself first". For instance, don't take out a loan on a house (and especially not on for something that depreciates quickly, like vehicles). Buy those with cash. Savings accounts, money-market accounts, etc are essentially paying 0% interest thanks to Fed's policy of shoveling free short-term money at Wall Street. It's nuts (IMO) to park large amounts of money in such savings accounts at no interest, and take out loans on big-ticket items that charge significant interest. Pay with cash, avoid paying any interest, and you have pocketed the difference. That's not just a good strategy for tough times - my wife and I have been doing this for decades. Can't afford it? Don't buy it.

Our savings account and money market account are essentially stagnant, as is the "interest-paying" checking account, since banks aren't paying any interest (beyond nominal amounts that don't even approach inflation). My IRA (built of rolled-over 401ks) and my wife's 401K are doing better, plus we have smaller defined-benefit retirement plans from previous jobs.

I wouldn't stay as liquid as we are, except I'm always keeping my eye out for large tracts of nice timberland that I could buy when the owner is retiring or otherwise wants to cash out fast. Not having to ask a bank for a loan means not having to pay for foresters to cruise the property and evaluate the timber. Just review the tax records, hire a lawyer to review the title, and set up a closing.

It goes without saying that you have to be very conservative and live within your means for many years to be able to save and pull this off. Both our parents came up during the Depression, so such lessons were drilled into us from a young age.

Caveat: I have no training as a financial adviser - but these strategies have worked well for us.

 

[John Creighto]

I'm not too savvy either, Don, but I smell a bubble.

Maybe but if you look at the graph between 1988 and now, the price of gold has trippled. The same thing has happened to the money supply in this time period (M3). see graph bellow:

http://www.paulvaneeden.com/Sites/paulvaneedencom/Root/Web/Images/page_35/200807041.gif
http://www.paulvaneeden.com/The.Actual.Money.Supply

 

[lisab]

Maybe but if you look at the graph between 1988 and now, the price of gold has trippled. The same thing has happened to the money supply in this time period (M3). see graph bellow:

http://www.paulvaneeden.com/Sites/paulvaneedencom/Root/Web/Images/page_35/200807041.gif
http://www.paulvaneeden.com/The.Actual.Money.Supply

Interesting...in 23 years gold has tripled. In January 1988, the Dow Jones was 1,988, http://finance.yahoo.com/echarts?s=%5Edji+interactive#symbol=%5Edji;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;. Right now, it's 12,100. Looks like buying gold in 1988 and holding it until now would not have been a great idea.

 

[Ivan Seeking]

I'm not too savvy either, Don, but I smell a bubble.

You're not the only one.

 

[turbo]

You're not the only one.

Lots of bubbles going on simultaneously. You have to know when to bail out if you are in an overvalued asset. If not, your "paper profits" can be gone overnight. If your paper profits are being supported by fiat currency being shoved out by the Fed, eventually there has to be a correction, and that might not be nice.

 

[jtbell]

WSJ: How to Make Your Nest Egg Last Longer

Is anyone following this thread already using this strategy ? Are there any pitfalls not covered in the quoted text or the article ?

There are two parts to this: postponing taking Social Security benefits, and converting some of your tax-deferred IRA / 401(k) / 403(b) to a Roth account.

As far as I can tell, postponing SS benefits is pretty much a no-brainer, provided you have other sources of money to live on in the meantime: working longer and/or drawing down your savings. For each year you wait to start collecting SS after your full retirement age (66 in my case), your benefits increase by 8%, up to age 70 (32% total). And they increase more or less with inflation after that.

I'll probably stop working at 63, but I'll have enough saved up that I can wait until 70 to start collecting SS, unless the world economy falls apart completely in the meantime.

You have to live long enough so you "break even", so if you think you're going to be dead by 75, you might as well take SS at the normal time, or even early. I've projected my own situation using a spreadsheet for each way, and I break even somewhere between 75 and 80. My father lived to 81 (lung cancer from smoking), and my mother lived to 94, so I expect to come out ahead by postponing.

As far as I can tell, the Roth conversion trick doesn't yield anywhere near as much money in itself, but I'm going to consider it in a couple of years when I can start taking money out of my 403(b) retirement plan without penalty (apart from having to pay taxes on it). It depends on how much I can take out without bumping my wife and me from the 15% tax bracket (where we're likely to be at that point) to 25%.

Of course, if we get a complete tax and/or SS reform by then, it may reduce the "need" to play games like this. Or it may not...

 

[turbo]

Of course, if we get a complete tax and/or SS reform by then, it may reduce the "need" to play games like this. Or it may not...

Don't hold your breath on this account. There are vested interests that are determined to maintain the status quo.

 

[rhody]

NYT article: Laid Off, With Retirement Almost in Sight

If you are out of work, you can also take an early, penalty-free distribution from your company plan, like a 401(k) or I.R.A., to pay your health insurance premiums. To qualify, you need to have received, or be receiving, state or federal unemployment benefits for 12 consecutive weeks

and

paying for health insurance before you are eligible for Medicare is probably one of the biggest challenges of joblessness.

TAP YOUR ROTH I.R.A. You can pull out all of your Roth contributions — but not the earnings — at any time and for any reason, free of tax and penalty. (If you converted a traditional I.R.A. to a Roth, that money could be pulled out, too, as long as it had been in the account for at least five years; each batch of money converted starts a new five-year period.)

The shortfalls in this article, basically in a tough economy that punish older laid off workers because of the tangled mess of intertwined tax legislation deserves serious attention from our congress and senate. With their track record and approval rating, around 9% I am not holding my breath.

Rhody...

 

[rhody]

Here is some more info to chew on:

Today's Retirement Myth: A Million Dollars Is Enough

Highlights: Retirement Calculators

You can look up your expected Social Security benefits at the Social Security website. As an example, the average monthly benefit for a retiree was recently $1,229, amounting to $14,748 per year. You're likely to collect more or less than that, of course -- and you can increase your benefit by about 8% for every year that you delay taking it, beyond your normal retirement age. Also, make sure to add in income from any pensions or annuities you may have, along with dividend income and withdrawals from retirement accounts such as 401(k)s and IRAs.

and...

The $375,000 Difference

Here's some easy but important math related to your withdrawals: If you expect to have a nest egg of, say, $1 million, multiply it by 0.04 -- which is 4% -- to see what your initial withdrawal will be. In this case, it's $40,000. If you manage to amass $300,000 by retirement, a 4% withdrawal will net you $12,000 in your first year.

You can flip those numbers around, too. If your calculations show that you'll need an annual income of about $50,000 in retirement, multiply that by 25 to see how big a nest egg you'll need to generate $50,000 via a 4% withdrawal rate: $1.25 million.

Of course, your other income sources can reduce that. If you're expecting $15,000 in Social Security income and $10,000 in pension income, then your savings and investments will only need to generate $25,000 in your first year. Multiply that by 25, and you'll arrive at a nest egg of $625,000.

That's a great illustration of why you may not need to accumulate $1 million for your retirement.

Interesting and sobering, isn't it.

Rhody...

 

[jtbell]

And don't forget to take taxes into account when figuring your withdrawal rate, especially if your funds are in tax-deferred accounts (IRA, 401k, etc.).

Caution: Objects in Your Retirement Portfolio May Be Smaller Than They Appear (morningstar.com)

My retirement-projection spreadsheet does try to take this into account. Tax-deferred accounts are easy because all withdrawals are taxed as ordinary income. Taxable accounts are trickier because of capital gains versus dividends. I (over?)simplify that by calculating the tax on the entire annual gain each year, as if they were ordinary income. I figure that's conservative because unrealized capital gains compound tax-free until you sell the stock in question.

I do try to project the shifting-upwards of tax brackets with inflation, which reduces the future tax bite.

 

[turbo]

Saving for retirement can be "interesting". I have lots of pre-tax funds rolled over into an IRA, but I can't continue contributing to that IRA. I have to start another IRA with taxed money. Instead, I opted to build a substantial money-market account that the Fed has scuttled by shoveling free short-term money at Wall Street, so my interest rate is almost zero, and is far outpaced by inflation. Our government is bought and paid for, and they are driving wealth to the wealthy at a staggering rate.

My wife and I get weekly (at least) come-ons from big banks wanting us to take on credit-cards. The same banks pay less than 1/2% interest on your deposits, and will gladly dun you for 20-30% or more interest on CC balances.

"A man with a briefcase can steal more money than any man with a gun" - Don Henley