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    #16
    "assuming 8% return (money doubles every 9 years)
    age 65 $1.25 M
    age 56 $625k
    age 47 $313k"

    I imagine we can't be so sure on that 8% return. THen again, itf we were everyone would invest.

    Comment


      #17
      Originally posted by Wink View Post

      It scares me to be so far behind for retirement, but it also scares me to see, and read so many stories about people who have invested and are now losing hundreds of thousands of dollars. I know I have to invest, I'm just trying to sort out how, when, and what to invest in.
      Maat's post was a good one.

      My generic advice to someone starting out is put 15% of gross pay into a retirement account and 5% of gross income into a short term savings account.

      Maat suggested you get 6 months expenses into an EF- this is the 5% I mentioned above. Once you have 6 months expenses you need to "think" about what other short term financial goals you have (kids college, debt free, something else) and put the 5% towards that.

      I suggest you want the retirement account in around 60% equities, maybe 80% as maat indicated. If 80% appears high, then 60% is acceptable. If 60% is too much for you, I would counter with the following debate:

      If you had 6 months expenses in cash, would you be comfortable with 80% equites? With 60% equity? with 40% equity? Meaning market crashes (like it just did) with a 50% loss. You can live 6 months without ever touching the retirement account. Is that 6 months enough?

      Then I would ask a similar question once I knew the answer:

      If you had 12 months expenses in cash, would you be comfortable with 80% equites? With 60% equity? with 40% equity? Meaning market crashes (like it just did) with a 50% loss. You can live 12 months without ever touching the retirement account. Is that 12 months enough?

      Once we discussed that situation, I would ask a third question:
      If you had 18-24 months expenses in cash, would you be comfortable with 80% equites? With 60% equity? with 40% equity? Meaning market crashes (like it just did) with a 50% loss. You can live 18-24 months without ever touching the retirement account. Is that 18-24 months enough?

      If you responded that one of those 3 scenarios let's you go with 70-80% equities (which should give a 9% return on average over a 20 year period), then that is the plan I would suggest you go with.

      For example if you suggested 24 months expenses in cash (2 years worth) would allow you to have 80% in equities within retirement accounts, I would suggest the following:
      15% of gross income to retirement accounts
      5% of gross income to cash reserves.
      Keep 3-6 months expenses in a money market, savings account or short term CD. Put the remaining cash in longer term CDs, municipal bond funds or something similar (maybe buy some individual bonds).

      As you learn about investing, a few things to look at-

      Most of your investment return comes from asset allocation. This is the amount of stocks, bonds and cash you invest in. In general the more stocks you have, the more risk you are taking. There are exceptions to that... which could be discussed if you had questions.
      100% equity is probably shooting for 10% gains over a 30 year period.
      80% stocks and 20% bonds is probably shooting for 8-9% gains over a 20-30 year period (if you have less than 20 years to retirement, 80% stocks is where I would start discussion).
      60% stocks and 40% bonds/cash is probably a 6-7% average return.

      Within the stock world, there are many types of stocks.
      Large companies (like Microsoft and Proctor and gamble) have less risk than small stocks.

      Large companies might return 9-10% over a 30 year period. Small companies might return 11-12% over a 30 year period.
      Foreign stocks would have a different risk profile (like 15% returns over 5 year periods and 8% returns over longer periods).

      Within the bond world, there are also many types.
      Government bonds might return about 3-5% over a 30 year period. Corporate bonds might return 4-6% over a 30 year period. There are also mortgage bonds, foreign bonds, junk bonds and similar. There are short term bonds, long term bonds, inflation bonds and even more.

      Most of your return will be decided by the high level (% stocks and % bonds) you decide to hold. This defines how much risk you are taking.

      What I know about you now is you want to take only moderate amounts of risk. You need the growth that stocks provide, so I recomend 60-40 as your allocation.

      Within the 60% stocks, make sure you have large cap stocks (25%), foreign stocks (15-25%) and small cap stocks (15-25%). 25+25+10=60, or 25+20+15=60 is what I am driving at here.
      Within bonds look for a general bond fund which holds both government and corporate bonds. Might also hold real estate bonds, US bonds and foreign bonds. I own one bond fund which includes everything.

      You also need to understand various risks involved:
      1) Market risk- this is the idea that the stock market goes up and down. The money you invest today will have a different value tommorrow. Over long periods of time the market goes upward... but in short term you could see movements of 6-8% in a day (lose 8% one day, get 6% back the next, lose 4% one day, get 7% back the next).

      2) Interest rate risk- the cash you invest (in savings accounts or similar) will be subject to interest rate changes. As rates change, the value and return of your investments will be modified. For example if the fed raises rates, the value of any bond you hold goes DOWN. So if you invest in a bond fund now and it is selling for $10/share, then the fed raises rates, the value of your bond fund will drop (might drop to $9.90/share or $9/share depending on type of bond fund)

      3) return risk- the risk that you do not get the return you expected, or the risk that another investment returned significantly better than what you invested in. You want exposure to equities because history has shown this is where the best return is. If you do not invest in some equities, this might be the biggest risk you are taking.

      4) inflation risk- the risk that the value of your investments loses value because prices rise more than the return you are getting for that investment.

      5) currency risk- if you invest in a foreign investment (foreign stock, foreign bond, another currency or similar), the value of that currency to the US dollar will fluctuate (regardless of how good or bad the investment is). For example if the US dollar is weak, foreign investments made in US dollars tend to go up. Once the US government strengthen's the dollar your return drops, even if the actual investment is doing well.

      You cannot eliminate any of these risks when you invest. You can manage them.

      For example with a 60-40 portfolio and 24 months expenses in cash you have the following risks:
      1) market risk- 60% of portfolio is in stock market and 40% is in bonds- both of these investments will fluctuate in value. Stocks will go up and down 20%, 50% or more in a given year. Bonds might fluctuate up and down 10% in a given year... with 5% fluctuations much more common. Both stocks and bonds change in value every day, so what you invest today will not be the account value you have tommorrow.
      2) interest rate risk- the 40% bond position (which is reducing your market risk) is exposed to interest rate risk. So is the 24 months of cash you are holding. To counter this, keep some of the cash in CDs with 4-6% interest rates (you might need to use a 4 year CD to get the 4% rate right now for example). You have 60% of your porfolio in equities which really does not deal with this risk directly.
      3) return risk- you have investments in stocks, bonds and foreign and domestic issues. If someone's market shoots upward, you will get a portion of those profits.
      4) inflation risk- the longer you hold stocks, the less inflation risk you have (stocks are historically the best investment which beats inflation). Make sure some of the bonds are TIPS (TIPS are indexed to inflation- so if inflation is high, so are the return of TIPs).
      5) currency risk- some of the equity and bond positions will be in foreign investments subject to this risk. This can be a good risk (over the last 3-5 years my foreign investments have done better than my domestic ones because of the weak US dollar).

      Over time you will have a 60-40 portfolio which might become 62-38 if your stocks do better than your bonds. Sell 2% of your stocks and buy bonds with that portion. In other market conditions you will have stocks do real bad. Might take the 60-40 and make it 25-75. In this case sell 35% of your bond position and buy stocks with that money. sell what is high and buy what is low.

      Remember that the retirement money is not needed for 20 years. It is OK to put this money at risk because you do not need it tommorrow. The money you need tommorrow and next year should be in cash investments outside a 401k. In 15-18 years you will change how you invest to prepare for retirement in 5-10 years... but you do not need to invest conservatively until you have less than a 15 year time horizon to access the money (and 60-40 accounts for the 15 year time horizon). As you approach retirement (within 5 years) there are many small details to start considering which have not been discussed yet.
      Last edited by jIM_Ohio; 12-18-2008, 03:48 PM.

      Comment


        #18
        Originally posted by Goldy1 View Post
        "assuming 8% return (money doubles every 9 years)
        age 65 $1.25 M
        age 56 $625k
        age 47 $313k"

        I imagine we can't be so sure on that 8% return. THen again, itf we were everyone would invest.
        If I did not think I could get 8% returns in equities, I would be investing in cash based things (like CDs) which return around 6%.

        I don't need an 8% return this year, or next year or the year after. I need an AVERAGE of 8% over s 20 or 30 year period. The best way to get the average is to be in market the year it gives the 20-30-40% returns to offset the bad year or two which preceded the good years.

        Comment


          #19
          Some decisions:

          1. Grow my income: I can pick up teaching a class each semester as an adjunct. It pays about $1700 (gross) per class (3 month semester). I can probably handle 2 classes a year in addition to my full time job at the college.

          I'll use this extra income to grow my EF, then maybe use it to pay down HELOC.

          2. I'll invest the $700 a month into a 401k. Jim, based on your comments and after looking at tax returns, I need to lower my taxable income. So, 401k instead of ROTH.

          3. Even though it scares me I will invest aggressively in stock mutual funds at a 70/30 split. I still need to investigate exactly what to choose, and will do so over the holiday break and put this in motion right after the 1st of the year.

          Jim, if I retire at age 67, I would recieve about $1796 a month from SS, according to my last statement. I will be 58 when my house is paid off, so I would have another 10 years of working after that expense is gone to save as well.

          How does this sound? Should I tweak it? Suggestions welcome.

          Thanks, this has been very helpful and motivating!

          Comment


            #20
            Originally posted by Wink View Post
            Some decisions:

            1. Grow my income: I can pick up teaching a class each semester as an adjunct. It pays about $1700 (gross) per class (3 month semester). I can probably handle 2 classes a year in addition to my full time job at the college.

            I'll use this extra income to grow my EF, then maybe use it to pay down HELOC.

            2. I'll invest the $700 a month into a 401k. Jim, based on your comments and after looking at tax returns, I need to lower my taxable income. So, 401k instead of ROTH.

            3. Even though it scares me I will invest aggressively in stock mutual funds at a 70/30 split. I still need to investigate exactly what to choose, and will do so over the holiday break and put this in motion right after the 1st of the year.

            Jim, if I retire at age 67, I would recieve about $1796 a month from SS, according to my last statement. I will be 58 when my house is paid off, so I would have another 10 years of working after that expense is gone to save as well.

            How does this sound? Should I tweak it? Suggestions welcome.

            Thanks, this has been very helpful and motivating!
            70-30 is a good choice.

            Never let anyone tell you how much risk to take. INCLUDING ME. If you are not comfortable with the risks you are taking you might bail on the plan if market drops 50%. If you invested $8000 today and market turned it into $4000 tommorrow what would you do? If that 70% appears too high, take the 6 months expenses maat advised and bump it up to 12 or 24 or 36 months (until you are comfortable with 70%). You need to be able to stay invested (and buy more stocks) when the market drops 50%. If a 70% position does not make you think you would do this, rethink the 70%. You need to be comfortable buying stocks in all market conditions.

            Make sure the 70% includes large cap, small cap and foreign. The exact percentages you pick will impact performance, but not as much as you might think.

            The "overall market" is about 70% large cap, 22% mid cap and 8% small cap. Overall market=wilshire 5000. Anything with more than 30% small and mid cap is taking on more risk than the whole market and would not be something I would recomend to you right now (disclaimer- I hold 30% of my equity position in small and mid caps- I am not taking the same advice I am giving you).

            Other notes:
            $1.25 M goal
            SS of $1796/mo=$22k per year. 22k is valued at 539k.
            You are shooting for an equity position of 715k to retire on.

            age 67 715k
            age 58 357.5k
            age 49 178.8k
            age 40 89k

            You might come close to the age 49 goal Age 58 goal is where you need to make sure you reach. It becomes easier once you get 50k or 100k invested because compounding will help the cause.

            You mentioned house is paid off at age 58. This gives you much flexibility.
            1) your expenses will be closer to what retirement looks like.
            2) you have more disposable income
            3) at this point we focus on taxes during work and retirement- for example we might be able to lower taxes in retirement by using a Roth, or by using taxable accounts because of new tax laws, raises you have received, or the house shooting up in value. The last 9 years you can really help the retirement income plan from a tax standpoint.

            Comment


              #21
              Originally posted by maat55 View Post
              I would take my EF to 6 months expenses.
              Set up a misc. fund for cars etc. Maybe 200 to 250 in a high yield account.
              Invest the rest in stock mutual funds with an 80/20 or higher equity allocation.
              Yes the misc funds are important also known as a sinking fund. You don't have to have to take out a HELOC to buy another car.

              I would build up the e fund to 6 months of expenses and then start a home repair and car fund.

              Then the rest put into a Roth IRA.

              Comment


                #22
                After re-reading all of the posts, and thinking about my choices and what I would be comfortable with, I am ready to implement the following:

                1. I need to increase my EF to 12 months (currentley at 4). If I teach 3 classes a year that will gross an additional $6000 a year. This will fund my EF. Once I am built up to 12 months I can use this money for a car fund, or miscellaneous fund.

                2. I am comfortable investing at a 70/30 split. My current retirement account is at a very conservative 50/50 split. My stocks and equities have taken a huge hit (like everyone else) and I did not panic and sell. I believe I can ride out the markets ups and downs, and I have 20 years until retirement so I have time to recover.

                One last question: Can anyone recommend any good publications I can read to continue to educate myself about the market, and investments? I am really enjoying learning what I have so far and want to continue.

                Oh, and any thoughts on Lifecycle Funds? Like them? Not?

                Thanks.

                Comment


                  #23
                  Originally posted by Wink View Post
                  After re-reading all of the posts, and thinking about my choices and what I would be comfortable with, I am ready to implement the following:

                  1. I need to increase my EF to 12 months (currentley at 4). If I teach 3 classes a year that will gross an additional $6000 a year. This will fund my EF. Once I am built up to 12 months I can use this money for a car fund, or miscellaneous fund.

                  2. I am comfortable investing at a 70/30 split. My current retirement account is at a very conservative 50/50 split. My stocks and equities have taken a huge hit (like everyone else) and I did not panic and sell. I believe I can ride out the markets ups and downs, and I have 20 years until retirement so I have time to recover.

                  One last question: Can anyone recommend any good publications I can read to continue to educate myself about the market, and investments? I am really enjoying learning what I have so far and want to continue.

                  Oh, and any thoughts on Lifecycle Funds? Like them? Not?

                  Thanks.
                  smartmoney magazine is good for learning. I have had numerous subscriptions to it over the years.

                  visit forums like this too.

                  Lifecycle funds might work- issue is you might decide to retire in 2030, and the fund might be 70-30 now, but it might be 60-40 in 3-6 years when you still want to be 70-30... if that makes sense to you, the fund meets your needs.

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