Author Topic: Slow Start to My Questions - Change Distribution of 457K?  (Read 5968 times)

Rollin

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Slow Start to My Questions - Change Distribution of 457K?
« on: November 06, 2013, 01:07:19 PM »
Not sure how much information you need to help with this question, but I'll provide what I think will help.  First, the question though - should I revise my distributions for my 457K?

Stable Value/Cash Management  $89,773.44   39.2%   
Bond                                         $871.76     0.4%   
Balanced/Asset Allocation       $55,110.61   24.1%   
U.S. Stock                      $63,140.91   27.6%
International/Global Stock       $19,927.44     8.7%

___________________________
Here is where that all lands:

"Stable Value/Cash Management"
VT Cash Management

"Bond" 
Vantagepoint Core Bond Index

"Balanced/Asset Allocation"
VT Vantagepoint MP Cons Growth 

"U.S. Stock"
VT Vantagepoint 500 Stk Idx 
VT Vantagepoint Brd Mkt Idx 
VT Vantagepoint Md/Sm Co Idx 

"International/Global Stock"
VT Vantagepnt Ovrseas Eq Idx 

____________________________
I am 52 and planning on ER at 57.
Have about $230,000 in this 457K and contribute $17,500/year
Have a pretty good amount in employer retirement, but will loose 25% due to retiring 5 years "early"
Have SS too of course
The DW has about $15K in an IRA, contribute $5K/year
We owe $195K on our home at 3% with 14 years remaining
We own two other homes outright, with renters in each (approx. $10,000 after taxes, insurance etc./year)
Income approx. $135K/year (have a gauranteed income of $16,300 tax free for life (life insurance annuity))

I went what I would say is "conservative" on this 457K not long ago, but am concerned that I am not invested properly.  I didn't want any bonds, but have a smidge left.  Put most in a lower interest savings to avoid loosing it to stocks.  Each of these funds are some of the lowest cost funds available to me.

Rather than me blather on, I'd appreciate some assistance and questions that might help you make a better suggestion.
« Last Edit: November 07, 2013, 05:18:31 AM by Rollin »

Rollin

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #1 on: November 08, 2013, 08:48:35 AM »
Have I missed posted this?  Can any of you suggest a better way for me to phrase this so I can get a few responses?

fiveoh

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #2 on: November 08, 2013, 09:31:24 AM »
40% of your money in "Stable Value/Cash management" seems too high.  This is the fund I found from googling:

http://www.icmarc.org/prebuilt/static/funds/profile/02569900.html

which basically says all their money is invested in this:

http://www.icmarc.org/prebuilt/apps/downloadDoc.asp

It has returned 0% for the last 3 years, doesn't pay a dividend, and has a .61% expense ratio.

If it was me I would take all that money out of there and invest it in your 3 "U.S. Stock" funds.   Otherwise you will be losing whatever % inflation is for the next 5 years until you retire. 

fiveoh

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #3 on: November 08, 2013, 09:33:33 AM »
What is your planned budget for retirement?

Rollin

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #4 on: November 08, 2013, 07:37:22 PM »
40% of your money in "Stable Value/Cash management" seems too high.  This is the fund I found from googling:

http://www.icmarc.org/prebuilt/static/funds/profile/02569900.html

which basically says all their money is invested in this:

http://www.icmarc.org/prebuilt/apps/downloadDoc.asp

It has returned 0% for the last 3 years, doesn't pay a dividend, and has a .61% expense ratio.

If it was me I would take all that money out of there and invest it in your 3 "U.S. Stock" funds.   Otherwise you will be losing whatever % inflation is for the next 5 years until you retire.

Within that fund its VT Plus at 2.08% YTD and expense ratio is .81.  Now that I type that I see even how whimpy that is!  The other fund you saw in there is the 0% (I have nothing in that).

So, you wouldn't be concerned about the risk in the 3 US Stock funds?

Rollin

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #5 on: November 08, 2013, 07:44:26 PM »
What is your planned budget for retirement?

I don't have a specific budget, but was expecting to have a similar income to what I have now.  I've been trying to pin down what our current costs are, but I'm not there yet.  We just moved to a new home and its been an odd year.  And what I mean by similar income is the money that I have after taxes, after paying into my 457K, and my wife's IRA.  I just try and keep our costs down.  We may consider downsizing after the kids are gone too.

This is not a very good answer and needs a much better response, sorry.  Is there a specific answer that would help get to where you are trying to go with the question?

fiveoh

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #6 on: November 08, 2013, 08:37:00 PM »
40% of your money in "Stable Value/Cash management" seems too high.  This is the fund I found from googling:

http://www.icmarc.org/prebuilt/static/funds/profile/02569900.html

which basically says all their money is invested in this:

http://www.icmarc.org/prebuilt/apps/downloadDoc.asp

It has returned 0% for the last 3 years, doesn't pay a dividend, and has a .61% expense ratio.

If it was me I would take all that money out of there and invest it in your 3 "U.S. Stock" funds.   Otherwise you will be losing whatever % inflation is for the next 5 years until you retire.

Within that fund its VT Plus at 2.08% YTD and expense ratio is .81.  Now that I type that I see even how whimpy that is!  The other fund you saw in there is the 0% (I have nothing in that).

So, you wouldn't be concerned about the risk in the 3 US Stock funds?

Personally I'd be more concerned with inflation than the equity risk at this point. Inflation has historically been 3-4% per year.  So you are making 1.27% per year in your fund(return - expense ratio), you are actually losing ~2% per year(from inflation).  Compound that by 20 years(or longer depending on how long you live)... AND add a 4% withdrawal rate on top of that.  You will be surprised how fast you burn through that money. 

The reason I asked about your budget.... I was trying to figure out how much income you will need from your portfolio to cover your expenses.  You are already making 16,300(annuity) + 20,000 from rentals so 36,300.   What is the income level you are trying to achieve for retirement?

If you only need a small amount of income from your portfolio I could see you being in some less risky assets than the us stock funds but I still would NEVER except a return below inflation for a long term investment.  You are just losing money. 
« Last Edit: November 08, 2013, 08:39:56 PM by fiveoh »

fiveoh

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #7 on: November 08, 2013, 09:12:41 PM »
A little math... lets take your 230,000 and multiply * .40, for your roughly 40% you have in this fund.  That's 92,000, also your adding 17,500 per year times .40 again for 40%, or 7,000 per year in this same fund.  Plugging into a compound interest calculator a starting value of 92,000 with a 7,000 annual addition and 0% interest rate(even though you are getting a negative inflation adjusted rate).  That gives you 127,000 in 5 years.  Now change that to a 7% interest rate(market average after inflation) and now you have 172,000.  45,000 you are potentially missing out on.  Now if you push those figures out over a longer term(i.e. your retirement) the difference becomes way larger. 

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

is the calculator I used.  Play with the numbers if you want. 

Rollin

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #8 on: November 09, 2013, 12:30:01 PM »
Fiveoh - thanks for the suggestions and information.  I know I can do better than a -2% return!

Also, for 2013 I did not contribute to the 457K until April of this year, but when I did I took out the amount each two weeks to still get me to $17,500 (that was $1,050 per pay period).  Now, starting in January and spread out over the year that equates to $635 per pay period.  So, I thought I'd take advantage of the $5,000 over 50 catch up provision and go to $22,500 for the year.  That's $865.  So, going from $1150 to $865 won't be felt!  Now I'm up to $22,500 per year!!

As to my budget (i.e., expected income : ) I was too tired to respond better last night and should have waited.  My haste and sorry to waste your time.  Here is a better idea of what I expect ay ER of 57:

Yearly Income (not including wife's IRA as yet in the calculations, but that will have about $75,000 in it by age 57):
$17,000 SWR from 457k ($390,000 in the 457K at 57 factored for now to 92 years old - but I'm going to 105 and still be alive! - also a modest 3% growth rate and maybe better if I follow your suggestions)
$39,000 from work's retirement plan (57 on)
$24,000 for DW's income (57 until 62)
$16,300 life insurance annuity (goes on until I die)
$25,800 from rent (two homes/not assuming and increase for these calcs., but could)
$4,000 for leave bank payout (from 57 to 62)
$22,000 from DW's and my SS (at age 62 on)

So from 57 to 62 income of approx. $126,000
and from 62 on income of approximately $122,000

We spend between about $50,000-$75,000/year right now (a guess at this moment).  That includes everything (like taking care of the rentals, food, etc.).  I need to put more detail into that, but it gives you a rough idea.  We can do better, but for now that is where we are.  Again, our only debt is the house and HELOC.  No TV, I ride my bike to work 2-3 times per week and most errands, eat out modest, etc.).
 
« Last Edit: November 13, 2013, 06:10:49 PM by Rollin »

fiveoh

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #9 on: November 09, 2013, 09:07:58 PM »
You've got a great plan and more than enough income to cover your expenses it sounds like.  I'm just curious, why don't you retire earlier?  If your expenses are only 50-75k, you don't need income of 126k.  Sorry, I'm not trying to drag personal details out of you, just trying to help. 

Since you don't really "need" the money from the 457, I would DEFINATELY switch it to an index fund.  You can afford to take on the risk.  Otherwise your 457 might not even make that 3% growth rate you are looking for.  If you are really risk adverse, you could always just move half of it(leave 20% in the cash management fund). 


Rollin

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #10 on: November 10, 2013, 07:36:15 AM »
fiveoh - by the way I used to live on the North Shore of Oahu and the wave shown at the beginning of Hawaii Five-0 was Pipeline, a short walk from my house - if that is where fiveoh comes from for you.

To answer your question (and no I don't think you are prying - rather I do appreciate the questions) I am a "turtle" and do everything slow and sure.  I'm fairly new to MMM and it is just dawning on me that I might be able to retire before 57.  In fact, I set the goal of 57 when I remarried and then started sorting out if I could do it.  When I met with my tax guy he gave me the good news for my 57 goal.  I was delighted.  However, what he and others in the real world (notice lower case "r" as opposed to the Real World) are saying, "but if you go to 62 you can get so much more."  They are all interested in more, but I don't think they really don't know what that means.  They just say it because if you have "X" then more is always better.  Right?!

It's not a battle to deal with his "more" when I talk with my tax guy or others, but my DW is a different story.  She comes from a place a lack, that is, even though she has everything she has asked for she feels its not enough (and will never be, therefore always lacking).  So, I plan and build and adjust for our financial future as I think it best protects the whole family.  If I catered to everyone's whims I would be stressed out, sick inside (too much excess bothers me for many reasons), and surely way in debt.

As it is I become debt free June of 2001 (yee haa)!  Before I remarried I planned on retiring at 50, but then with the new family I said I'd work until 57.  Now I have the house and HELOC as debt (with the wife's van at 180,000 miles I may need to get a new (used actually) vehicle and am set against borrowing).

As to your question.  Are you saying switch it to an index fund within the 457K list of options (there are many) or go outside of it?  I don't qualify for an IRA (or so I thought) so not sure about that.  If it inside the 457K I'll start looking for something like that today.  If I find something there before you (or others who might like to chime in) read this I'll edit and add.  Off I go to research!  Here is their site http://www.icmarc.org/investments/vantagepoint-funds.html , but I cannot login at the moment (their site is experiencing issues).

Also, I hope this doesn't dismiss your suggestion to go index, but what about something like this http://www.icmarc.org/prebuilt/static/funds/profile/02529700.html ?  Or even this instead http://www.icmarc.org/prebuilt/static/funds/profile/02599700.html ?


And - thank you.
« Last Edit: November 10, 2013, 09:08:01 AM by Rollin »

fiveoh

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #11 on: November 10, 2013, 12:30:06 PM »
Actually fiveoh is because of my car a 5.0 mustang... I belong to a lot of car forums and spent a lot of money on it(until I decided I wanted to retire early).  I've always used fiveoh on those forums, so I just used it here as well.  I've only been to Hawaii once and loved it.  Beautiful place.  I even told my wife I would like to retire there, but she doesn't want to move away from family.

Nothing wrong with slow and steady.  You've done a great job of planning and I'm sure you will have a great retirement. 

I meant switch it to an index fund within the 457k.  You already own one.  VT Vantagepoint 500 Stk Idx.  That mirrors the S&P 500 and has a low expense fee.  I wouldn't invest in those other 2 funds you mentioned, only because they trail their returns trail the market.  I.e.  you will see better returns by investing in an index fund and it has lower fees.  You should compare 10 year or longer returns since you are looking to hold for the long term.

VT Vantagepoint 500 Stk Idx = 7.34% annualized 10 year return and a .21 expense fee

Vantagepoint Model Portfolio Conservative Growth Fund1(the 1st one you linked) = 5.43% 10 year return and .85% expense fee

Vantagepoint Milestone 2020 Fund1,2(the 2nd one you linked) = it doesn't look like it has been around for 10 years, but if we go to 5 years its 7.65% vs 9.82% on the index fund, with a fee of .84%.

So you can see the market average(SP500 index fund or VT Vantagepoint 500 Stk Idx) has beat both those funds and has a lower expense fee.  Seems like a no brainer to me.  :) 

Rollin

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #12 on: November 10, 2013, 04:17:38 PM »
Actually fiveoh is because of my car a 5.0 mustang... I belong to a lot of car forums and spent a lot of money on it(until I decided I wanted to retire early).  I've always used fiveoh on those forums, so I just used it here as well.  I've only been to Hawaii once and loved it.  Beautiful place.  I even told my wife I would like to retire there, but she doesn't want to move away from family.

Nothing wrong with slow and steady.  You've done a great job of planning and I'm sure you will have a great retirement. 

I meant switch it to an index fund within the 457k.  You already own one.  VT Vantagepoint 500 Stk Idx.  That mirrors the S&P 500 and has a low expense fee.  I wouldn't invest in those other 2 funds you mentioned, only because they trail their returns trail the market.  I.e.  you will see better returns by investing in an index fund and it has lower fees.  You should compare 10 year or longer returns since you are looking to hold for the long term.

VT Vantagepoint 500 Stk Idx = 7.34% annualized 10 year return and a .21 expense fee

Vantagepoint Model Portfolio Conservative Growth Fund1(the 1st one you linked) = 5.43% 10 year return and .85% expense fee

Vantagepoint Milestone 2020 Fund1,2(the 2nd one you linked) = it doesn't look like it has been around for 10 years, but if we go to 5 years its 7.65% vs 9.82% on the index fund, with a fee of .84%.

So you can see the market average(SP500 index fund or VT Vantagepoint 500 Stk Idx) has beat both those funds and has a lower expense fee.  Seems like a no brainer to me.  :)

Cool on the 5.0. I had a 1965 Vette Convertable for 22 years (and a Mini and a Jeep) until I decided to stop that and get out of jail - I mean debt!

Thanks for doing the math and yes, it does look like a no-brainer going with the lower fee index.  It makes sense that the fee is low compared to the other fund.  Also, the other fund has too high of a bond mix for me right now.

You have been very helpful in pointing out some of the complex (and obvious, but not to me :) pathways and I appreciate your input and effort.

Rollin

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Re: Slow Start to My Questions - Change Distribution of 457K?
« Reply #13 on: November 10, 2013, 07:10:31 PM »
I do like those funds now that you pointed some facts out.  I also looked at what I had in the VP Broad Market Index and saw higher fees and lower returns.  It also looked like it duplicated much the same as 500 Index and Mid/Small Company Index.

I decided to move out of the Broad Mkt. and put more into the 500, Mid/Small, and the Overseas Eq. Index.  Much of that Stable fund is gone to those today.  I didn't feel quite right moving it all, but will give that a few day more thought.

Edit - not much "safe" stuff for me to choose from.  That's why I went with the cash fund in the first place.  Do you see anything I don't (to balance my risk)?
« Last Edit: November 11, 2013, 06:30:18 AM by Rollin »