Your recommendations please.....

**kork13** · 08-21-2008, 08:36 PM

What sort of retirement account does he currently have? standard IRA? just from my limited perspective, if that is the case, he should look at putting a fair (if not significant) portion of that $5k into the IRA, probably into something with fairly consistent (read: lower risk) returns, perhaps such as treasuries or similar bond-type investments. clearly, however, since there is still a good bit of time, some of it should go to stocks, maybe like a good S&P index fund. I believe the max contribution to IRAs is $15.5k/yr, so if he did $1.5k/mo into that, then put the rest into a high-yield savings account (or maybe just into the MMF), that would help him out alot. He's got 10 years to contribute still, so that's a good $170k into the IRA, plus over $300k more into others that he can put aside. He's in a good position, so he should take advantage of it.

Note that I'm not experienced with the retirement mindset right now--others here may well have some better advice.

**globetraveler** · 08-21-2008, 09:02 PM

Kork13,

Thanks for the reply.

His retirement acct is a state ran DROP acct. -Deferred Retirement Option Plan-

Once he retired 8 years ago, he was not allowed to deposit any further funds into the acct. So now the ~50k will just sit and grow until he is of age to start drawing it without penalty.

The best conclusion that I have come up with, is as you stated, to start a traditional IRA and max it out yearly. But his max contribution would only be $6k a year. Standard max contribution is $5k, but he will be allowed an extra $1k being that he is over 50 and this will be his initial IRA acct.

So the IRA would only utilize 10% of the cash he wants to invest.

He doesnt really like the idea of moderate to high risk stocks. He is not a big risk taker.

The high yield savings acct is another option we have discussed, but the HY accts that I have looked into all max at $25k which would be maxed within 6-7 months. And I dont know if once it gets to 25k, if it will still draw interest or not since thats thats limit.

Globetraveler

**kork13** · 08-21-2008, 09:12 PM

The $5k limit is only on the Roth accounts, which are taxed upfront and not at all on returns. However with traditional IRAs it's tax deferred, where he'd pay no taxes now, then pay taxes on his contributions and returns when he withdraws it in retirement, presumably in a lower tax bracket (assuming he doesn't maintain a 6-digit income from pensions, retirement savings, etc.). But as i metioned in my previous note, I'm pretty sure traditional IRA's get the benefit of being able to contribute $15.5k/yr (adjusted annually for inflation) with no gradients based on income, though he may be able to take advantage of the so-called "catch-up" contributions and add to that even more... i'm not sure if traditionals have a catch-up provision or not.

As to the risk, that's why i'd say primarily secure investments like bonds and treasury notes--they're guaranteed (I know the "g-word" is taboo with investments, so correct me if i'm wrong). However, it would be good to have at least some small portion, maybe 10-15% in a stock index fund, which will help preserve his funds over a longer period of time without greatly increasing his total risk.

About high-yield accounts, i'd look first at some of the online savings accounts, which can get up to 3.5% or maybe higher right now. Also, many standard and online banks offer a high yield savings account for balances over a certain amount, and so long as they stay above that lower limit, the account can mount some impressive returns. Another option would be CD's, which typically would have an even higher return over the long-term. I don't know much about those, so someone else would need to tell you about that...

**globetraveler** · 08-21-2008, 09:39 PM

Kork,

Thanks again for the good info.

Although I did go back and read my info, and the 2008 max contri for a Traditional IRA as well as a Roth is only going to be $5k, or $6k if you qualify for the catch up plan.

He is actually looking at sticking some cash into some CD's before he heads back out to work for the next 6 months.

GlobeTravler

**mrpaseo** · 08-21-2008, 10:43 PM

Might I suggest a ladder program in CDs, if he sets up a plan he could have monthly or yearly CDs maturing well into retirement.

Here is what ING Offers right now:

Term Annual Percentage Yield Effective Since

6 Month 3.50% 08/12/08
9 Month 3.60% 08/12/08
12 Month 3.70% 08/12/08
18 Month 3.75% 08/12/08
24 Month 3.80% 08/12/08
30 Month 3.85% 08/12/08
36 Month 3.90% 08/12/08
48 Month 3.95% 08/12/08
60 Month 4.00% 06/11/08

Let's say you sink 100 dollars into each one of these CDs, initial cost would be 900 dollars. After this, you would continue to save 100 per month into a high interest saving s (Such as ING Direct), when your first CD matures in three months, you would add the 300 that you saved to this CD and buy a 60 Month CD... This process would go on every three months until all your CDs are 60 month CDs giving you the best rate. If you continue this until retirement (10 years) your CDs will end up being a few thousand each, with each one maturing every three months. The objective is to repurchase the CD every three months while in retirement and keeping the interest it earns for yourself.

The initial cost is only 900, from that point on the monthly cost would be 100 dollars. Once the first CD matures, you repurchase a 400 dollar CD, each CD would do the same (Roll over to a 400 dollar CD) then with the next cycle you would roll them over to 700 dollar CDs, then 1000 dollar CD effectively rolling them over to 2700 dollar CDs in 10 years (That is if you NEVER raised the 100 dollar investment.

If you double this and do 200 dollar monthly investments, your CDs would end up at about 5400 earning the highest rate available (4% in this example). At this point, you would earn 216 per quarter on your money, meaning you would have about 72 dollars per month to spend (If you did not continue to roll over the funds).

Just something to think about, there are probably better rates out there but the process is the same.

Good luck,
Ray

**mrpaseo** · 08-21-2008, 10:48 PM

Just realized that is every 6 months not every three months, the effects are still the same, you would save 100 every month for six months and invest the saved money and the maturing CD into a new 60 Month CD.

Of course you could buy every month and make it so you have a maturing CD monthly.

The point is the security and accesability of your funds, not to mention the monthly income.

Ray

**jIM_Ohio** · 08-22-2008, 04:15 AM

Laddering CDs is bad idea for money which is needed over a 30 or 40 year retirement. In addition the interest on 60k might push person into a higher tax bracket. Without knowing detailed tax info, I would advise against this.

$5k per month to invest?
Deductable IRA is needed. Might exceed income limits for deductions- what is the gross income, AGI, and taxable income from 2007 tax return?
I would put 3k per month into equites and 2k per month into bonds. I would probably use muni bonds because this is a taxable account. 60% equity and 40% bonds for a person 11 years from retirement is a souind allocation. Probably grows at 6% per year with less volatility than 100% equities or 100% bonds would provide.

60k per year invested
over 11 years this should supply close to enough $$ to retire on at age 65.

**globetraveler** · 08-22-2008, 02:07 PM

Thanks for the info Jim. I appreciate all the responses so far. I am hoping to get more reponses and see what the majority agree on as far as which would be best way to invest for him at this point.

So far, I can say that the first and foremost would be a Traditional IRA. (He doesnt qualify for a Roth)

This again, would be 6k a year in the IRA. (additional 1k a yr do to the late start program)

I dont think the CD laddering sounds like a good idea for him. Because it sounds like a bunch of hands on keeping up with the CDs. He works out of the country for months at a time, sometimes with no access to the outside world.

What do you guys think about one of the funds (i have forgotten the correct name) that are setup specifically for someone planning to retire in a set number of years like TRowe price offers?

I dont think he would against the 60/40 allocation in equities and bonds, but we are still noobs at this and dont quite understand the steps to get to the point to have an acct to deposit the money into monthly for this.

Does this just involve opening a investment acct with one of the major companies like TRowe or what? Again, sorry but we are in the learning stages here. If so, whom do you recommend? And what percent do they charge for handling your investments?

Thanks

globetravler

**jIM_Ohio** · 08-22-2008, 02:31 PM

A target date fund might work- biiggest considertation is taxes.

If this person is a contractor, he might want to consider a solo 401k or SEP IRA. If the account is tax advantaged (IRA/401k type) the target date fund makes sense.

If the funds are held in taxable accounts, I would consider a different strategy which simplifies taxes (uses muni bonds). Muni bonds are not held in Target date funds.

**disneysteve** · 08-22-2008, 02:34 PM

It is great that he will be putting away 5K/month for 3-4 years, but what about after that. He is 54, single, earns 134K and only has 80K in savings. I think he is way behind the curve for someone his age who wants to retire in 10 years or so. Just as a comparison, I'm 44, married with one child, earn less than him and have about 400K in savings.

The fact that he is now prepared to invest $5,000/month for the next 3-4 years will obviously help a great deal. At that rate, he will save an additional 240K over 4 years (plus earnings), so that will put him somewhere around 360K total at age 58. That money, growing at 5%, will hit about 500K at age 65 if he adds nothing to it. If, however, he continues to save that 5K/month until age 65, he would have at least $1 million at 65, and that's with only a 5% return. Increase the equity portion of the portfolio to boost the average return to 6 or 7% and that number gets even higher.

As long as he maintains that 5K/month, I think he will be in good shape.

**globetraveler** · 08-22-2008, 03:24 PM

Thanks guys! Keep it coming if you have it.

FYI.... He isnt a contractor per say, but he does work on yearly contracts for his employer. The upside is the money and insurance is great. But the downside is this company doesnt offer any type of retirement accts.

So point it, he is not considered self employed, so the SEP and personal 401k accts will not work for him at this point.

Globetravler

**jIM_Ohio** · 08-22-2008, 05:14 PM

Originally posted by globetraveler View Post

Thanks guys! Keep it coming if you have it.

FYI.... He isnt a contractor per say, but he does work on yearly contracts for his employer. The upside is the money and insurance is great. But the downside is this company doesnt offer any type of retirement accts.

So point it, he is not considered self employed, so the SEP and personal 401k accts will not work for him at this point.

Globetravler

He should look into asking if employer could switch him to contractor, or pick up a second contractor job so he can defer into into SEP or 401k. The 5k deductable IRA has two issues
1) income might to too high to deduct
2) 6k is not a high enough percentage to make this a one step plan (he would max this out in 2 months).

**globetraveler** · 08-22-2008, 07:26 PM

Jim,

1. I dont think he can deduct from a Traditional IRA, (He doenst qaulify for a Roth b/c of his high income and being single)
2. You are correct, the IRA alone will not be enough for him. Although he will be starting a Trad. IRA within the next week or so just to get something started in the short term along with some short term CD's.

*Asking his employer to convert him to a actual contracter is not an option. His employer has 10's of thousands of employee working there contracts like he does oversees, which are contracts for the US goverment.

There is no option for him to be switched to a actual "contractor".

Great thought though!!

So now, we got the Trad. IRA covered, and a few short term CD's.

What other types of investment accounts are available? Say if he did want to put the rest of his 5k a month after the IRA contri into a 60/40 setup like recommended earlier in the thread. And maybe even a MMF acct.

We just arent sure what the first step is to open/start the intial investment acct up.

He will be going to his main bank (BofA) and opening a IRA next week and also looking into some CD rates. But can his bank offer anything to do with the 60/40 investment acct for him or does he have to go through a org like TRowe Price?

Thanks All

Globetraveler

**jIM_Ohio** · 08-22-2008, 08:01 PM

My thoughts-

I don't think the traditional IRA gains him much, and if it were me, the only investments I make past age 50 are either in my 401k, Roth or taxable accounts. Traditional IRAs have too much tax liability and the time gained from compounding at age 50 is minimal, as withdraws could be within 5-15 years. I don't want no stinkin RMD to raise my tax bracket.

I would do the following- find a good muni bond (not sure how this applies to someone working overseas, so person would need to check with an accountant). Then look for the following

60-40 asset allocation
40% to cash or muni bonds. Keep cash accounts low (to avoid taxes). Interest from muni bonds could serve as secondary emergency fund (probably would generate 1-2 months expenses per year in interest).
60% to stocks
30% large cap ($1500/month)
20% foreign ($1000/month)
10% mid and small cap ($500/month)

You won't here me say this often, but look for index funds to keep tax bills small.

Large cap- this will generate 2.5% yield per year (S&P 500 index)
International- find a fund with low turnover
mid and small cap- find a wilshire 4500 fund- this should have the lowest turnover and lowest yield of any asset class.

I would look at T Rowe Price- they have each fund needed-
Use Equity Index or Equity Income for large cap
Use International stock or International Growth and Income for international fund
Use Extended Market Index for wilshire 4500- mid and small caps.
They have numerous muni bond funds, just depends on state and international tax laws as to which one to choose. In addition TRP will waive fund minimums if you commit to investing each month thru automated deposits. Most minimums should be met within 10 months anyway if automated deposits needed to stop.

All this in taxable accounts. I am serious (check my blog).

Over next 15 years this person will have a slight increase in their tax bill (because of the dividends). These currently have favored tax status (15%) for high tax brackets right now.

In 15 years when this person retires, these same dividends are taxed at 5% if in lower tax brackets- so the planning being done is to get tax bracket LOWER in retirement than it is now.

Some basic math:
$1500 into PRFDX (Equity Income) per month for 60 months is $90,000. 2.5% of this (the yield) is $2250. 15% taxes on this are $337.50- so in 5 years the tax bill might go up $400 from where it is today.
If he can contribute for more than 60 months (think 180 months=15 years).
$1500*180=$120k*2.5% yield=$3000 meaning the fund contributes 3k per year to retirement income stream.
$2000 (muni bond)*180=$360k*3.2% yield=$11520 income.
$1000 (international)*180=$180k*2% yield=$3600
$500 (mid/small cap)*180=$90k*1% yield=$900

add all the income streams up $900+$3600+$11,500+$3000=$18k in income.

This ignores any capital appreciation in the next 15 years. Best guess is for this to double twice in 15 years, so 54k in income, all being taxed at 5% (based on current tax law) or lower -muni bond income, more than half the total, is not taxed at all.

I realize tax laws will change between now and then. My comment is the tax deferral for 15 years to increase the taxes the 16th year makes little sense. 15 years to contribute, 35 years to withdraw... pay a little more tax now ($300 each year) to save considerable taxes later.

Your recommendations please.....