[jIM_Ohio]

Originally Posted by Boogaloo

No, I do not feel comfortable saying that I would be able to maintain a $40k to $80k investment pace for any particular length of time. I have teenage daughters.
It took me about 4 years to accumulate the $80k, and it has been at $80K for a year now.

I need to clarify things a bit.
The $4k/mo. nut, is bare minimum. There is at least another $1500-$2000 in discretionary spending on toys and fun, and general "care free" Americanism.

If I stopped buying car parts, and crashing my race car, and we went in to buckle down mode, we could hold fast @ $4K/mo. and live well.



Ok, some basic math which I am just ok at, looks like this to me:

$80k - $24k (6 month float) = $56k
$56k - $21k (car debt) = $35k
$35k - 24k (cd ladder) = $11k
$11k - $10k (basic investment (roth?)) = $1k < DisneySteve brings up a good question with the type of investment (taxable or no?) I have no clue here.

Clarification- the CD ladder is the 6 month float.

The way a CD works is you give the bank 4k and the bank gives you a certificate of deposit. You are committing to keep money at bank for a given amount of time. If you purchase a 6 month CD, then you are guaranteeing to keep money at bank for 6 months. In return for this, the bank gives you a higher interest rate than a savings account.

Usually there is a penalty if you withdraw money before 6 months is up. Probably about 3 months interest (so if you withdraw after 3rd month, you still came out ahead).

So let me explain ladder more.

1 If you go to bank Sept 8 and open a 6 month CD with 4k, that CD "matures" in March. It pays you back your whole 4k, plus the accrued interest.
2 If you go into bank October 8 and open a 6 month CD with 4k, that CD matures in April.
3 If you go into bank Nov 8 and open a 6 month CD, that CD matures in May
4 The Dec CD matures in June
5 The Jan CD matures in July
6 The Feb CD matures in August
In March the first CD matures, then you can roll it into a new 6 month CD (this is automatic) and the March CD matures in September.

If you have an emergency, you have 4k coming available with 30 days. Most CDs have a 10 day lookback period (check with bank on specific terms). This means if you open a 180 day (6 month) CD on Sep 8, it matures on March 8 180 days later. You then roll this into a new 6 month CD March 8 (this will be done automatically unless you tell the bank otherwise). If on March 15 you decide you need the 4k (or a portion of it) you can cancel the new CD without penalty (this is the lookback). If it was March 19 (11 days after maturity/rollover) and lookback was 10 days, you pay a penalty to access money. That penalty is 3 months interest or something similar- check with bank.


In any given month once all 6 CDs are in place, you have about a 20 day window any month without access to the money. How many emergencies require immediate access to money? Even most hospitals take longer than 21 days to bill you.

CDs are GUARANTEED by the FDIC. That is the federal government. As long as the CD is less than $250,000 it is GUARANTEED. If the bank goes out of business, you still get your $250k or 4k and interest back because of this guarantee. **if you have 600k in a single CD, the bank gives you $250k back and not sure what happened to the other 350k** If you ever have that problem, let me know

Quote:

Jim, are you suggesting he do this within a Roth or in a taxable account? You didn't specify. Also, considering where he stands and his level of investment knowledge, what would you think about a target date fund for him? Boogaloo, I'll explain that one after I hear Jim's answer.

I do not suggest using target date for OP in this situation, more on this below.

I was actually suggesting a TAXABLE account with 10k. I believe 10k at T Rowe Price removes any admin fees, and the main point was for boogaloo to learn how investing works.

If he chooses T Rowe Price
and if he chooses equity income
PRFDX PRFDX: Summary for T. ROWE PRICE EQUITY INCOME FD- Yahoo! Finance

share price today was $20.04
so OP would put in 10k which buys him 499.00199 shares

The tommorrow the value of the fund changes
and the next day it changes too
and the next day...
in 3 months it pays him a dividend (paid in months of December, March, June and September) and in December it also pays him some capital gains. He can then see how various aspects of investing work and ask more questions.

If OP does this, he should make sure he chooses the option to reinvest dividends. What this does is the following...

OP would have 499.00199 shares worth $20.04 on Aug 31. On Sep 28 it will pay a dividend (this amount changes every quarter, but in 2009 the Sep dividend was $.09 per share.

This means for 499.00199 shares paying .09 per share puts $44.91 (499.00199*$.09) in his account

If the share price was $21.09 and it paid a $.09 dividend, you would get $44.91 added to account.
If the share price was $18.99 and it paid a $.09 dividend you would get $44.91 added to account.

The way dividends work (follow this math, it might get "intense") is this
in $21.09 situation, the fund pays shareholders $.09 and the new share price is $21.00
in the $18.99 situation the fund pays the shareholders $.09 and the new share price is $18.90

if you reinvest dividends, the $44.91 gets added back into your account and buys more shares. If share price is $21, $44.91/$21=2.1385799 shares are added to account. If share price is $18.90 then $44.91/$18.90=2.376199 shares are added to account. Those shares are added to the 499.00199 shares you already have.

Around December 28 that process is repeated (the fund indicated pays dividends once per quarter).

This is done to generate questions
Why does the fund pay dividends? How does the share price of the fund change? Why does it change?

The investment is NOT guaranteed. The value of the investment WILL fluctuate EVERY day. The OP might lose money if he does this.

In any diversified portfolio, large cap stocks will be a part of it, so whether this is a total market index or T Rowe Equity income, as OP builds his portfolio he will need a fund like this anyway.


OP would have 24k in a CD ladder
OP would have little debt (only a house?)
OP would have around 9-11k in equity income
OP would have about 10k in cash (still)

so his allocation would be about 66% cash and 33% equity which is not bad to learn how it works.
plus depending on how quickly he learns, he might decide to open this in a Roth, but that is not a requirement by me (a deductible IRA based on his income is a better decision IMO)


On the target fund, most target funds will be about 75-25 for a 48 yo (just a guess) and my suggestion to OP is he take less risk than that (as a guess) because he might be able to save 40k per year and retire by 68 (I think that was his stated goal)

I am 48 years old, and for reasons I do not need to continue beating myself up over, I have nothing in the way of retirement planning in place for myself.

I have been married (to the only woman I ever wanted to marry) for more than 20 years now, we have 2 teenage daughters.

I have a pension plan in place that matures when I have x number of days on the job, which is about 20 years from now at the current rate. That means that I will be 68 before it does me any good, provided it is still intact by the time I arrive, if I am fortunate enough to make it that far.

As OP guides himself thru this maze of advice, I was intending to steer him down this path with a "high" confidence rate of success.

Invest about 60k per year (5k per month) into a 40-60 portfolio of stocks and bonds. This is close to a 50% savings rate for the OP.

Even if that number drops to 3500/mo, this will still give OP reasonable chance of success.


Here are my numbers
If OP invests $3500/mo ($42k per year) in 40-60 portfolio, assuming 7% rate of return and 66k of present expenses, OP would have around $1.6 million invested by age 68, which would be enough to retire on.

Because OP stated he had a pension, I am confident this path will generate success for him- he will not need 1.6 mil to retire on. Biggest factor is controlling expenses and learning fast.

If OP invests $5000/mo ($60,000 per year) in same 40-60 portfolio, assuming 7% rate of return and 66k of present expenses, he would have just shy of $1.5 M by age 61 to retire on.

To justify one plan or another, OP needs to know his expenses better. Do budgeting and understand a few factors
1) what expenses does he have now which go away in 15 years (think any expense associated with kids or work)
2) any other large expenses coming or going (kids college, mortgage payoff)
3) Pension and social security- how much are each worth?

I believe I overestimated how much OP needs to save because I don't know how much the pension is. I can back out the math and focus on the 66k of annual expenses to suggest earlier dates for retirement or lower savings rates for retirement.