Where to begin - Advice requested

[Boogaloo]

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.

For the last few years I kept 100% of my cash in online savings accounts. I pulled all of that money out and put it into my credit union since I make about the same there as any online savings bank offers at this point.

Here is my financial picture right this minute

Income: $120,000.00/year +/- (depends on overtime).
Mortgage: $1300.00/mo.
Credit card Debt: $0
Other debt: $0
Auto loans: $650.00/mo
Monthly nut/budget: $4000.00 (including auto loans, and mortgage)
Cash in hand: $80,000.00

I am absolutely clueless when it comes to money, the only thing I have going for me, is that as I got older, I somehow stopped needing to pump my ego with expensive fancy cars designed to make me look like I had more going on that I actually did. I drive a Subaru now.

The other thing I guess makes a me marginally smarter than I was, say 5 years ago, is that I started saving money, and actually got really hooked on watching the balance grow just by adding to it every paycheck.

So now here I sit, $80,000.00 in the bank, no credit card or other debt (besides mortgage and car payments), and I find myself really uncomfortable.

I think I need a ROTH IRA, I think I need to buy another house as income property, I think I need to buy gold, I think I need to buy into energy etc.

I am losing my mind because I have no idea what to do and what is going to be best for my wife and daughters.

If you were going to suggest a plan for your 48 year old son, who had $80,000.00 in cash and was pretty well debt free, what would you suggest?

I know I need to hang on to about $10,000.00 cash in case of emergency, but that still leaves me with $70,000.00 that should be working for me somehow.

Help me out here?

Thanks.

[disneysteve]

Originally Posted by Boogaloo

Monthly nut/budget: $4000.00 (including auto loans, and mortgage)
Cash in hand: $80,000.00

If you were going to suggest a plan for your 48 year old son, who had $80,000.00 in cash and was pretty well debt free, what would you suggest?

I'd suggest a 6-month EF, so $24,000 for you. That should be at least partly in a money market account that is totally liquid. The rest could be in laddered 1-year CDs.

Does your wife work?
Do either of your employer's offer a contributory retirement plan like a 401k or 403b?
If so, is there a company match?

Regardless of the answers to those questions, I would immediately open a Roth for each of you and put in $5,000 each for 2010. If you wife is over 50, you can put $6,000 in hers.

Next, I'd probably pay off the car. It makes no sense to be sitting on 80K earning 1% while carrying a huge car loan unless that loan is at 0%. What is the balance on the car loan?

If there is a company plan, start contributing at least enough to earn the full match. Ultimately, your goal will be 15% of gross household income going to retirement through some combo of company plan (not counting the match) and Roth and other accounts if needed.

[MonkeyMama]

Originally Posted by disneysteve

Ultimately, your goal will be 15% of gross household income going to retirement through some combo of company plan (not counting the match) and Roth and other accounts if needed.

Steve has given you good advice.

However, if I am understanding everything correctly, I do not agree with this part. So, you have $0 in retirement funds? The cash is all you have as far as investments? For your situation, 15% is probably less than the bare minimum you should be saving for retirement. You have the added problem that if you save as much as you probably need to, you will need to be saving some in taxable accounts, which impacts the growth of your investments, and means you have to save even more. Kind of a vicious circle. (The advantage of retirement accounts - IRAs and 401ks - is that you don't pay tax until you take the money out. But you can only put so much in, every year).

If you are eligible for a 401k or regular IRA, I would probably choose those. You aren't going to get much benefit from a ROTH because you have such a short investing horizon (& are in a higher tax bracket, to boot). You probably can not invest in a tax-deductible IRA with the pension situation. Maybe your wife can. If you could contribute to a 401k, it could reduce your taxes considerably, which in turn could help you put away more. For example, if your tax rate is 30% (Fed/State) and you put $10k into a 401k plan, this decreases your taxes by $3k. If your wife can do a deductible IRA (within tax rules), then every $5k she could put away could save you $1250 in taxes.

Forget gold and real estate. Invest in mutual funds. I'd go with a Target Retirement fund. You don't need to take big gambles and there is no magic bullet. What you need to do is save up a ton.

[Boogaloo]

First, thank you both for the replies,
I will address each bullet point the best I can.
I need to (re) qualify that I am a lame duck when it comes to this stuff, and as such some of these abbreviated terms (6-month EF) are like trying to understand and read Mandarin.... I am lost.

Originally Posted by disneysteve

I'd suggest a 6-month EF, so $24,000 for you. That should be at least partly in a money market account that is totally liquid. The rest could be in laddered 1-year CDs.

No concept here.

Originally Posted by disneysteve

Does your wife work?

No, she has been a stay at home mom since we conceived our first daughter. We home school both girls.

Originally Posted by disneysteve

Do either of your employer's offer a contributory retirement plan like a 401k or 403b? If so, is there a company match?

Need to look more in to this, but to DisneySteve, I work (below the line) in Hollywood, and as a card carrying member of IATSE Local 695, I have whatever they offer, but I know for certain, I do not participate in a 401k or 403b. I have been totally negligent for years because my job in Hollywood has been in high demand since I got in to the business 14 years ago. I just never even considered the end game.

Originally Posted by disneysteve

Regardless of the answers to those questions, I would immediately open a Roth for each of you and put in $5,000 each for 2010. If you wife is over 50, you can put $6,000 in hers.

Who do I go with? should I stick with one of the "big 3" like Fidelity, Vanguard, or T-Rowe Price? (was able to regurgitate those names, because I have been reading as much as I can digest online with regards to ROTH's).

And what about what MonkeyMama says below? Is my investment horizon just too far gone now for this to be of any real benefit to me?

Originally Posted by disneysteve

Next, I'd probably pay off the car. It makes no sense to be sitting on 80K earning 1% while carrying a huge car loan unless that loan is at 0%. What is the balance on the car loan?

We have 2 car loans that total just over $600.00/month (A) with an $8,000.00 balance @ 6-1/4% and (B) with a 12,800.00 balance at 5-1/4%

Originally Posted by disneysteve

If there is a company plan, start contributing at least enough to earn the full match. Ultimately, your goal will be 15% of gross household income going to retirement through some combo of company plan (not counting the match) and Roth and other accounts if needed.

I really need to look into what IATSE has in place for us union members, again, I have no clue what I have or what is offered.

Originally Posted by MonkeyMama

Steve has given you good advice.

However, if I am understanding everything correctly, I do not agree with this part. So, you have $0 in retirement funds? The cash is all you have as far as investments? For your situation, 15% is probably less than the bare minimum you should be saving for retirement. You have the added problem that if you save as much as you probably need to, you will need to be saving some in taxable accounts, which impacts the growth of your investments, and means you have to save even more. Kind of a vicious circle. (The advantage of retirement accounts - IRAs and 401ks - is that you don't pay tax until you take the money out. But you can only put so much in, every year).

If you are eligible for a 401k or regular IRA, I would probably choose those. You aren't going to get much benefit from a ROTH because you have such a short investing horizon (& are in a higher tax bracket, to boot). You probably can not invest in a tax-deductible IRA with the pension situation. Maybe your wife can. If you could contribute to a 401k, it could reduce your taxes considerably, which in turn could help you put away more. For example, if your tax rate is 30% (Fed/State) and you put $10k into a 401k plan, this decreases your taxes by $3k. If your wife can do a deductible IRA (within tax rules), then every $5k she could put away could save you $1250 in taxes.

Forget gold and real estate. Invest in mutual funds. I'd go with a Target Retirement fund. You don't need to take big gambles and there is no magic bullet. What you need to do is save up a ton.

Thank you so much for the advice MonkeyMama,
I am overwhelmingly confused at this point. Not because of the differing points of view between you and Steve, but because I feel like I have really placed myself behind the curve at this point in my life.

Luckily for me, at least at this point, (even with current market values), we bought our home in a neighborhood that remains in high demand because of it's proximity to schools and the beach, and I am sitting on close to $300,000.00 in equity right now. We remodeled the house several years ago adding nearly 800 sq/ft and in this neighborhood, that increased the value of the home significantly.

So, in the big picture, I think I am probably a bit better off than I make myself out to be.
I just don't like having most of my net worth as equity, particularly this day in age.

My head is telling me that if I had the reverse of what I have now (300,000.00 cash and 80,000.00 equity) I would be far better off.


Still, I need help with figuring out how to keep my house and whatever equity may be there when I retire, so I can give the girls something to get their lives started with when I am gone.

[disneysteve]

Originally Posted by MonkeyMama

Steve has given you good advice.

However, if I am understanding everything correctly, I do not agree with this part. So, you have $0 in retirement funds? The cash is all you have as far as investments? For your situation, 15% is probably less than the bare minimum you should be saving for retirement.

Originally Posted by Boogaloo

Thank you so much for the advice MonkeyMama,
I am overwhelmingly confused at this point. Not because of the differing points of view between you and Steve

Definitely don't let the fact that different posters will have different opinions confuse you. There are some basic rules of thumb and then there is a whole lot of personal opinion and preferences and nuances to exactly how to implement your own plan.

I actually thought about saying exactly what MonkeyMama posted. I agree that 15% is most likely not adequate considering you are nearly starting from scratch at age 48. I opted to use the 15% figure anyway because I think it is a realistic goal that isn't too overwhelming. I didn't want to scare you off and say you should be putting 25% toward retirement. Once you are actually saving 15%, I'd certainly encourage to ratchet up that number as high as possible to make up for lost time. Just to give you a point of reference, my wife and I are both 46 and earn just a little bit more than you. We have one teenage daughter. So a pretty similar picture. We currently save 22% of my gross and 50% of my wife's gross which works out to about 25% of our total household income. That doesn't all go to retirement - some goes to a college savings plan. Some is prepaying the mortgage - but at least 15% is going to retirement. So it is very achievable and a good starting point.

I want to address your follow up post but today was my first day back from a 2 week vacation, I have a pile of mail on the kitchen table and my head is spinning after 11 hours in the office. Maybe a bit later this evening or tomorrow.

[jIM_Ohio]

EF=emergency fund. Keep 6 months expenses in the EF. So monthly expenses of 4k means 24k should be kept in cash. Look for CDs (certificate of deposits). You can open one 6 month CD of 4k now, and next month open a second 6 month 4k CD and after 6 months you will have 6 CDs, each 6 months in duration. This is a CD ladder. CDs **usually** pay better interest than savings accounts. USUALLY.

If you gross 120k and have 48k of expenses, does this mean you can invest up to 40-80k per year? How long did it take to accumulate the 80k savings you have now?

With investing, you have 3 variables which you control which impact your results.

1) savings rate- Steve suggested 15% and I suggest close to 40-50%. This is the percent of income you can set aside for investing. If you gross 120k and save 60k, that is a 50% savings rate. If you gross 120k and save 40k that is a 33% savings rate. The higher the rate, the better.

2) the risk you take investing. Usually expressed as a % stocks and % bonds. If you do 80% stocks and 20% bonds that is more risk than 40% stocks and 60% bonds. There are questionaires at T Rowe Price, Fidelity and Vanguard for new investors. Take the questionaires at each site (they are free) and see what they tell you in terms of % stocks and % bonds.

3) the time you give the money to grow. If you have 30 years the results will be better than if you have 20 years. You have some control over this, but you can never get younger or go back in time.


My guess is you will end up with a 60-40 portfolio and a 25-33% savings rate for 30 years, or a 40-60 portfolio and a 50% savings rate for 20-25 years. I don't have my calculators bookmarked on this PC, but if you answer the risk questionaires, they should give you a similar conclusion I think.


I would take the following steps immediately:

1) pay down all the car debt with a portion of the 80k. 21k pays off the loans, locking in an 6% return on the money.

2) open the CD ladder as described above with 24k of the 80k

3) purchase a basic investment with a small portion of the remaining 55k. Think 10k and leave the remaining in savings for another 6-12 months. This will help you learn by doing while you also ramp up your education.
If you choose T Rowe Price, try a fund like equity income
If you choose Vanguard, try a fund like 500 index or Total market index
If you choose Fidelity look for spartan index or equity income

Those funds will all fluctuate in value daily and pay dividends (the T Rowe fund pays them quarterly).

I own T Rowe Equity Income (PRFDX). Google it to learn more.

4) Ask questions. I tried to explain this for you, but I have no idea how good I did. ASK QUESTIONS.

[disneysteve]

Originally Posted by jIM_Ohio

If you gross 120k and have 48k of expenses, does this mean you can invest up to 40-80k per year? How long did it take to accumulate the 80k savings you have now?

I was wondering the same thing. Why is it that at 48 with a 120K income, you only have 80K saved? I'm 46 with a similar income and have five times that much saved plus another 175K or so in home equity. I'm wondering if your estimate of 4K in monthly expenses is really accurate. Might you actually be spending more than that?

I would take the following steps immediately:

1) pay down all the car debt with a portion of the 80k. 21k pays off the loans, locking in an 6% return on the money.

I agree 100%. Prepaying a 6% loan is the same as earning a tax-free 6% return on your money and it is guaranteed. You can't beat that.

2) open the CD ladder as described above with 24k of the 80k

I agree with this, too.

3) purchase a basic investment with a small portion of the remaining 55k. Think 10k and leave the remaining in savings for another 6-12 months. This will help you learn by doing while you also ramp up your education.
If you choose T Rowe Price, try a fund like equity income
If you choose Vanguard, try a fund like 500 index or Total market index
If you choose Fidelity look for spartan index or equity income

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.

4) Ask questions. I tried to explain this for you, but I have no idea how good I did. ASK QUESTIONS.

ABSOLUTELY!! As you can see already, this board is filled with helpful and knowledgeable people. There are no stupid questions. If you don't know something, ask. If you don't understand the answer given, ask again. We don't bite.

[disneysteve]

member of IATSE Local 695, I have whatever they offer, but I know for certain, I do not participate in a 401k or 403b.

I checked your union's website but at least in the public access section, I saw no mention of any retirement plan except for the pension. On the member-only section of the site, they probably give more details. Check it out or speak to your HR person or union rep.

Who do I go with? should I stick with one of the "big 3" like Fidelity, Vanguard, or T-Rowe Price? (was able to regurgitate those names, because I have been reading as much as I can digest online with regards to ROTH's).

And what about what MonkeyMama says below? Is my investment horizon just too far gone now for this to be of any real benefit to me?

The "big 3" are the "big 3" for a reason. Great customer service, low expenses and a wide variety of investment choices. You could do far worse. I think any one of these 3 companies would be a great choice. Personally, I'm with Vanguard but I have absolutely nothing negative to say about the other two.

We have 2 car loans that total just over $600.00/month (A) with an $8,000.00 balance @ 6-1/4% and (B) with a 12,800.00 balance at 5-1/4%

As already stated, pay these off. It makes no sense at all to keep them. Your cash is earning next to nothing and these loans are costing you a fortune. Get rid of them. Call the lenders and get the pay off amounts and then write a check to each and be done with them.

Still, I need help with figuring out how to keep my house and whatever equity may be there when I retire, so I can give the girls something to get their lives started with when I am gone.

The best thing you can do for your kids is to make sure you are able to support yourself and your wife for the rest of your lives so that the girls don't need to do it for you. The other best thing you can do is educate yourself on proper money management so that you can then teach them the same so that 30 years from now, they don't find themselves in the same situation that you are currently in.

[Boogaloo]

Some fantastic info flowing in these responses, thank you so much for the thought and effort that has gone into them.

Originally Posted by jIM_Ohio

EF=emergency fund. Keep 6 months expenses in the EF. So monthly expenses of 4k means 24k should be kept in cash. Look for CDs (certificate of deposits). You can open one 6 month CD of 4k now, and next month open a second 6 month 4k CD and after 6 months you will have 6 CDs, each 6 months in duration. This is a CD ladder. CDs **usually** pay better interest than savings accounts. USUALLY.

Ok, in regards to order of importance and available cash, using this figure, I would start down this road of responsible money management with $56k in hand.

Originally Posted by jIM_Ohio

If you gross 120k and have 48k of expenses, does this mean you can invest up to 40-80k per year? How long did it take to accumulate the 80k savings you have now?

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.

Originally Posted by jIM_Ohio

I would take the following steps immediately:

1) pay down all the car debt with a portion of the 80k. 21k pays off the loans, locking in an 6% return on the money.

2) open the CD ladder as described above with 24k of the 80k

3) purchase a basic investment with a small portion of the remaining 55k. Think 10k and leave the remaining in savings for another 6-12 months.

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.

None the less, that is something solid to look at, and I do like the tip about taking the questionnaire at each of the 3 sites.

Thank you for the generous reply, thank you.

Originally Posted by disneysteve

I was wondering the same thing. Why is it that at 48 with a 120K income, you only have 80K saved? I'm 46 with a similar income and have five times that much saved plus another 175K or so in home equity. I'm wondering if your estimate of 4K in monthly expenses is really accurate. Might you actually be spending more than that?

I appreciate that Steve, so please do not take this the wrong way.
My post count, and the caveat I placed in the op, I had hoped would be sufficient to ward off any pee pee measuring contests, or statements which would normally cause me to fold up my kit and head yonder.

It is hard enough to show up and lay it out here like this, even with the (perceived) anonymity of these forums.

Basically I thought I was bulletproof when I was younger, I never finished high school, I have zero college and my parents divorced when I was 2. I never received the guidance when I was younger that I so desperately seek now.

Alas, I am a high school drop out, who has somehow managed to learn how to make over 100K/year, with no formal training or the basic skill set necessary to make that money work for him or his family.

Plus, I did not start growing up until I was about 40..... I'm "that" guy.

Anyway, congrats on all of your accumulated wealth, thank you for the advice, and if my retort seems a bit emotional.. Please forgive me.

P.S. I would have about $60k more than that in cash right now if I had not gone out of pocket for some MAJOR home improvement projects.

My rationale there was the economy sucks, labor was dirt cheap, and materials were at prices not seen in years.
I thought "strike while the iron is hot" and I had the cash, so we added 2 bedrooms.

One more thing I forgot to add to the equation.
I work from July to May every season. We have a "hiatus" in my world that is the better part of 3 months.
Every year for the past 10 years, I have been unemployed for those 3 months during hiatus.
My hourly rate increases 3%/year and that's it, I am capped out.

So, we have to save $12k minimum to cover those 3 months (unemployment covers my mortgage and one car payment) and we usually time it out perfectly so that we do not have to dip in to the regular savings fund each year.

So, as you can see, I am in a really weird position, somehow I need a plan that will account for that.
I am sorry for not throwing that out there earlier, I am overwhelmed.

[Seeker]

Boogaloo (like your nickname here ),

Don't feel bad. You are not alone. It's never too late to start saving. Be glad that you are in a position to do so -- unlike many other Americans, who have yet "to get it."

You're 48 so, so you have some 18 years or slightly more to still save if you want to work until full legal retirement age (assuming that SS is still around). Don't plan on SS, if it is available, than fine, but don't plan on it and save all you can.

The only advice I can offer here is yes, you really do want to concentrate on the "big 3" -- they have the least costing management fees of anyone else out there.

And the only second bit of advice is to stay away from annuities and insurance firms (for investments) -- in most cases they are not worth it. Read everything you get, never trust what anyone says about an investment; read the contract, prospectus, anything you can get your hands on.

Buying and renting housing to other people here in California may be an option if you are a handy-man and wish to remain in this state after retirement. And if you have the patience for dealing with people not always under the best of circumstances (ie collecting rent, fixing, evicting -- in some cases -- etc.). Neither me nor my DH would be able to do that.

[disneysteve]

My post count, and the caveat I placed in the op, I had hoped would be sufficient to ward off any pee pee measuring contests, or statements which would normally cause me to fold up my kit and head yonder.

My apologies, Boogaloo. My point in posting my own numbers wasn't to boast or compare. What I was trying to get at was to question if the 4K monthly expense figure you gave was truly accurate because if you earn 10K/month and only spend 4K/month, you should have more than 80K saved so something was missing from the story. You answered that question here:

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.

That makes more sense now since it takes the 48K in spending up to 72K (or possibly more). If 30% of the 120K goes to taxes, your take home is about 84K. If you are spending at least 72K, that leaves 12K for saving which is 10% of gross.

One common rule of thumb that you will often read here is the 50-30-20 plan. That is 50% of income for needs, 30% for wants and 20% for savings. From that savings portion, 15% to retirement and 5% to other needs. As alluded to earlier, in your case getting a later start in the saving game, it would be great if you could tweak that to put more than 20% to savings.

[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.

[jIM_Ohio]

Boogaloo-

""Thank you for that lovely tune. That funky music will drive us 'til the dawn. Let's go. Let's boogaloo 'til we puke.""

Had to share that line with you- its from one of the top 5 movies EVER...

Planning financially is tough. So many things are related and depend on other things which are also related.

You are doing well if you set aside 80k cash in 3-4 years. That is 20k/year. IMO you will need to dig a little deeper to make retirement before age 68 work, how much deeper depends on many factors.

Focus first on PAYING YOURSELF FIRST. This means when you make 10k in a month, pay yourself something. Try $2000/mo for starters... if you can get this up to $3k per mo that is better. Because of taxes, if you find a 401k which you can use, the first $1300 per month should go to the 401k, that will NOT take $1300 out of pocket though because 401k money is pre-tax, so once social security (6.2%) is taken out (and medicare 1.45%) the 401k money goes in before Federal and State taxes are taken out (25% federal taxes and not sure what state taxes are for you).

Focus second on spending. If you could get away with spending only $48k in retirement each year, the $20k you saved the last 4 years might be enough to sustain a good plan. The 60k-72k you admit to spending each year is probably close to your desired retirement (play with cars etc...) so define what retirement IS to YOU. Put a number on it (how much do you need to spend to do what you want).

Once you know what you think you will spend, I can point you to some places online which will give you more numbers and analysis.

Focus third on predicting where life changes- things like kids moving out, expenses decreasing, paying off mortgage, expenses decreasing (again) and similar behavior. I believe that even though we cannot predict how life will change, we can predict our own behavior regardless of the changes thrown our way (for example I know I will always like being around people and making everyone laugh). You could take away all my material toys and if I was around people which liked my sense of humor (its not for everyone) life is good. But everyone's behavior to various financial stimulus or life problems will be different. Focus on knowing what makes you happy (and wife happy) and build from there.

**edit to add** fourth, consider budget and cash flow- for example you are saving $1600/mo now (20k per year??!!??) already. GREAT work. If your cars are paid off, does this increase to $2200/mo or more? How tough would it be to find another $1300/mo to invest. If you invest $3500/mo I am confident of success with your current expense level of 65-72k per year ($6000/mo), especially if you have a mortgage which will be paid off eventually. $3500.mo will probably allow you to retire before age 68, and with the pension and SS kicking in around age 68, you will be set. Even if contribution to retirement accounts is about $2500/mo I think its workable.

[disneysteve]

Originally Posted by jIM_Ohio

If you have an emergency, you have 4k coming available with 30 days.

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.

I'd personally be uncomfortable having all of my cash tied up in CDs although I wouldn't have a problem because I could charge an unexpected bill on a credit card and a CD would mature by the time the bill was due. I wouldn't recommend that system for everyone, though.

I would rather see someone like the OP keep a portion of the EF in a liquid account (checking or money market). So in this example, maybe $3,000 in a money market and $3,500 in each CD rather than $4,000 in each CD and nothing at all liquid.

[jIM_Ohio]

Originally Posted by disneysteve

I'd personally be uncomfortable having all of my cash tied up in CDs although I wouldn't have a problem because I could charge an unexpected bill on a credit card and a CD would mature by the time the bill was due. I wouldn't recommend that system for everyone, though.

I would rather see someone like the OP keep a portion of the EF in a liquid account (checking or money market). So in this example, maybe $3,000 in a money market and $3,500 in each CD rather than $4,000 in each CD and nothing at all liquid.

Still has 10k cash available even if every aspect of my plan was followed to this point.

Agree do not tie up all money (savings) in CDs and leave checking account empty.

If bare bones expenses are $4000 and each CD is only $3500, there will be a problem. Keep CD value at one months expenses, and then make sure checking account always has $3000 in it too...


Consider OP has HIGH free cash flow- probably close to $1600/mo already and our suggestions are for him to invest anywhere from $2000-$5000 per month, keeping 3k in the checking account will not be an issue.

If I need to detail this, it would look like this


If $3500/mo were invested
earn money previous month, keep $1750 in cash (skip first investment cycle)
on the 1st of the month invest $1750 in investment X
on the 15th of the month invest $1750 in invesment X or Y

(don't send all $3500 at same time and by skipping first cycle there is a $1750 buffer even if all of 80k of current savings is tied up or used to pay down debt.

--or--

earn money Sept 1 paycheck
earn money Sep 15 paycheck
Invest money Sep 20 $3500
CD matures Oct 1 (10 days later)
earn money Oct 1 paycheck
earn money Oct 15 paycheck
Invest money Oct 20 $3500
CD matures Nov 1

Meaning when the CDs are not in lookback period, just keep cash on hand, and within 10 days of CDs maturing is when the big monthly investment is made.


There are lots of solutions here because OP already has show a great skill for accumulating savings (20k per year, more than $1600/mo), so the goal is to channel this effort in a constructive manner which pays himself first and lowers his risk profile out.

[disneysteve]

I agree, Jim. I keep posting to this thread when I have a spare moment and I'm not looking at the big picture. Sorry about that Boogaloo. I'm usually more focused than that. As I said, I just got back from vacation so I'm in catch-up mode doing a dozen things at once.

[Boogaloo]

You guys are amazing, truly amazing!
I will reply in detail when I can get to my computer, we are out on location today so this is being sent from my phone.
This place is amazing, you guys are awesome!

[jpg7n16]

I'm surprised no one has brought this up yet: what type of pension do you have??

Defined benefit and defined contribution plans have maximum vesting schedules of 7 and 5 years respectively.

Consumer Information on Retirement Plans

What You Should Know About Your Retirement Plan

Chapter 2 ...

In a defined benefit plan, an employer can require that employees have 5 years of service in order to become 100 percent vested in the employer funded benefits (called cliff vesting). Employers also can choose a graduated vesting schedule, which requires an employee to work 7 years in order to be 100 percent vested, but provides at least 20 percent vesting after 3 years, 40 percent after 4 years, 60 percent after 5 years, and 80 percent after 6 years of service. The permitted vesting schedules for current defined benefit plans are shown in Table 3 below. Plans may provide a different schedule as long as it is more generous than these vesting schedules. (Unlike most defined benefit plans, in a cash balance plan, employees vest in employer contributions after 3 years.)

Now - you may not get the full benefit you would like until 20 years of service, but there should likely be something unless you are in a rare non-qualified pension plan of some kind.

It was suggested above, and I'd 2nd the recommendation that you speak with someone in your HR department to get specifics of just what your options are, and what exactly the 20 year requirement is.



Other than that, I'd agree with most of what's listed above

Immediate steps:
-Keep 15k-20k in cash for EF
-Pay off cars today if you can
-Fund Roth IRAs for both you and spouse to the max (use any broker ex. Fidelity, Vanguard, etc.)
-Speak to HR about your retirement options

Subsequent steps:
-Start putting restraints on the "fun" spending
-Start saving more than you have before

You can't change the past, but you can change where you go from here.

[Boogaloo]

Im going to put much more thought into this before I do a full blown reply, but after speaking with my wife today I had an idea so I wanted to post the question before I eat dinner and spend a few quality moments with my family.

When we pay off the cars (tomorrow), I suggested that we keep paying our savings account the total amount of the car payments as if those bills still exist in our minds.

Seems like an easy way to recoup that $21k in cash in fairly short order.
Certainly use it to up the buy in on future CD's if the yearly IRA contribution is maxed out already?

Anyway, there is $600/mo in debt reduction unaccounted for right there...
What do we do with that?

[maynard]

This is a very good thread with a ton of good info