Author Topic: How to invest after retirement?  (Read 332 times)

James!

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How to invest after retirement?
« on: December 13, 2018, 01:01:34 PM »
Hi All!

I'm asking this on behalf of my mom.

Deets:
68, F, Retired, Single (ready to mingle), No Dependents

Assets:
  • Home Equity - $200k
  • 403(b) - $100k
  • ~$12k emergency fund kept in savings

Income:
  • SS - $2400/mo
  • Pension - $6500/mo until 2029

No Debt

Monthly living expenses:
TBD exact numbers but approximately $4k


So, mom is about to begin her pension distribution 1/1/2019. She hasn't saved much during her career but fortunately has a pension coming for 10 years and it will exceed her expenses. I want to help make the best decisions possible so that the excess cash will last as long as possible. We will work on optimizing her budget but I am looking for suggestions on what she should do with the few thousand extra each month.

Please hold any judgement on her life decisions up to this point, and thanks for your help going forward!

We cannot change the pension distribution schedule. Also, she does have long term medical issues, so we want to consider that her expenses may increase as her care needs change in the future.

Cheers,
James

terran

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Re: How to invest after retirement?
« Reply #1 on: December 13, 2018, 01:07:42 PM »
Interesting. In some ways this isn't so much about investing after retirement, but how to save and invest for retirement in 10 years since she currently has more income than she needs, but will have less and will need to withdraw at that point.

I assume the 10 year pension is not inflation adjusted?

Have you looked at what happens to her social security if she delays until she's 70? That might be worth doing since she has more than she needs now, but needs increased cash flow later. 

FIRE@50

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Re: How to invest after retirement?
« Reply #2 on: December 13, 2018, 01:14:42 PM »
I would recommend putting all extra cash into an index fund. I don't think it needs to be anymore complicated than that.

robartsd

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Re: How to invest after retirement?
« Reply #3 on: December 13, 2018, 02:13:14 PM »
Using your estimated $48k annual expense (with 3% annual inflation), $28.8k SS check (with 1.5% annual inflation adjustment), $78k pension (ten years, no growth), $100,000 403(b) (earning 5% annually, RMD starting in 2020), taxable account accumulating surplus beginning in 2019 (earning 5% annually) - I project that mom doesn't go broke until age 106. (She'd have over $800k invested by the time her 10 year pension runs out.) If expenses grow by 4% annually instead, she goes broke about age 96. If she does go broke, she can sell/reverse mortgage her home to come up with at least a few more years income.

As long as her current surplus and 403(b) are invested reasonably, I don't think her retirement is in too much danger financially. Her current timeline for needing the funds is still 10 years out so the simplest solution would be to invest in a target 2030 fund (like VTHRX).

James!

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Re: How to invest after retirement?
« Reply #4 on: December 13, 2018, 04:00:01 PM »
Interesting. In some ways this isn't so much about investing after retirement, but how to save and invest for retirement in 10 years since she currently has more income than she needs, but will have less and will need to withdraw at that point.

I assume the 10 year pension is not inflation adjusted?

Have you looked at what happens to her social security if she delays until she's 70? That might be worth doing since she has more than she needs now, but needs increased cash flow later.

No inflation adjustment. She can't delay the SS as it has already begun. It actually began a few years ago due to long term disability.

Using your estimated $48k annual expense (with 3% annual inflation), $28.8k SS check (with 1.5% annual inflation adjustment), $78k pension (ten years, no growth), $100,000 403(b) (earning 5% annually, RMD starting in 2020), taxable account accumulating surplus beginning in 2019 (earning 5% annually) - I project that mom doesn't go broke until age 106. (She'd have over $800k invested by the time her 10 year pension runs out.) If expenses grow by 4% annually instead, she goes broke about age 96. If she does go broke, she can sell/reverse mortgage her home to come up with at least a few more years income.

As long as her current surplus and 403(b) are invested reasonably, I don't think her retirement is in too much danger financially. Her current timeline for needing the funds is still 10 years out so the simplest solution would be to invest in a target 2030 fund (like VTHRX).

Thank you for this! What did you use to calculate that? CFireSIM?

My biggest question is specifically how to invest that surplus. Perhaps I'm overcomplicating it. Is it just in a taxable account, and then decide on the exact product based on risk and timeline? I didn't know if there were any other strategies available. She doesn't currently have any investment accounts (beyond the 403b which she can't contribute to) so we'd be starting something new.


robartsd

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Re: How to invest after retirement?
« Reply #5 on: December 13, 2018, 04:34:38 PM »
No, I just did it as a simple spreadsheet with assumed fixed rates compounded annually. I think my assumptions for earnings are quite conservative, but she'd still be subject to a bad sequence of returns that starts in 2029 (but hopefully her portfolio would have also seen much better than projected returns while she was accumulating). I think the biggest risk is underestimating expenses. I'd check on investment choices in the 403(b) right away, then start working on a much more detailed picture of current and future expenses. With a more detailed picture of expenses, you can then use CFireSIM to do a more detailed analysis of potential scenarios.

Most tax strategies are best played out while accumulating with earned income and/or while realized income can be controlled to remain low. She might choose to do some Roth conversions before RMDs push her already ample income even higher. If she realized fairly low income for 2018, then a Roth conversion taking advantage of a lower marginal rate than she'll have in the next 10 years would be worth looking into.

James!

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Re: How to invest after retirement?
« Reply #6 on: December 13, 2018, 07:56:01 PM »
Thank you for the follow up.

Her 403(b) is already with Vanguard, I'm not sure yet how it is allocated. So perhaps we'll start a taxable account with them as well and have both in the target fund.

I agree the expenses are the key, unfortunately with it being my mom there are some family dynamics at play and she's a little resistant to a full budgetary review and analysis as she's worried about judgement of her decisions. So we've talked generally and she's making improvements and hopefully at some point we'll go more in depth.

Open to any additional thoughts but this seems like a good direction. Any thoughts on discussing with a vanguard advisor? I don't know if they are free/hourly/% based in this scenario if we just want to discuss options then set it and forget it.

Cheers,
James

Andy R

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Re: How to invest after retirement?
« Reply #7 on: Today at 12:32:35 AM »
I would model this in excel, but if she sticks to the 4k/mo and invests the other 5k/mo, I would imagine she will be doing just fine.

I would say that by 2029 when she is almost 80, she will probably want something around 40/60, and with such a short time for the money to be saved until then, compounding does not have enough time to make higher risk than that beneficial. 
In the best case it's not significantly more and won't change her life.
In the worst case, a higher equity proportion will have less safety margin in term of survival in a downturn and could ruin her last years.
Why take the extra risk and return if when it works out with a lower allocation, it doesn't matter.
It makes no sense to gamble on something that if even when you win, it does not matter. You are guaranteed to lose.

So yea I would allocate anything over the 4k/mo into a 40/60 portfolio. Preferably a fund that is auto rebalanced for you so there is nothing to do except dump it in each month. Vanguard Target Retirement 2015 looks good to me.

Seriously though, I urge people to do the numbers in excel to see how utterly useless a higher equity allocation is for this specific scenario. The results will surprise you. Actually, here I knocked one up quickly. I would never advise my mother to take a 70/30 portfolio with the massively higher risk, when the reward is so tiny.
« Last Edit: Today at 12:34:11 AM by Andy R »

robartsd

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Re: How to invest after retirement?
« Reply #8 on: Today at 01:43:29 PM »
Andy makes a good point about not needing to be overly concerned about growth. Vangaurd has several all-in-one funds that would work well (any Target Retirement from 2015 to 2030 or LifeStrategy Conservative Growth are all reasonable choices for her situation). You don't need detailed spending if she doesn't want to provide it as long as she understands the need to keep the savings rate up to prevent being broke in her eighties.