AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

Scott,

 We have $106,000 (taxable) invested in Vanguard TIPS fund and a $273,000 Margarita Vanguard portfolio (401K Rollover), as well as Roth $28,000 in Vanguard TIPS.  We have taxable savings account $43,000 (7 months pay) with USAA.  My work 401K totals $36,000 invested across seven funds and not balanced.  They are a Bond, Small & Large Cap value, S&P500, REIT, International, and company stock, My wife holds a Vanguard Margarita Roth worth $13,000 and  401K with Principal worth $45,000.  We both now invest the annual maximum into the 401K's and Roth's.  Our primary home and lake cottage are paid for and we have no monthly creditors.  Read your book and downsized.  I receive VA disability of $12,100 annually and in two years when 60 yrs. old, I will start receiving a military reserve retirement of $19,200 annually.  I want to retire in 2yrs., my wife plans to work another 4-5 years (62).  You should know that only in the last 8 months did I invest above money back into stock funds after losing 50%+ in the last bear and then sitting on the sidelines and returning as another bear has started.  I sold because I held individual stocks with most of them tech, which have still not recovered.  Only can I wish I knew of Couch Potato then!

Scott, do you have any suggestions on how I should consoildate this portfolio?  Should I just get out of stocks 100% and not risk our retirement?  None of the above investments will be needed until my wife retires and maybe not then because we will draw SS at 62 for maybe $33,000 annually plus the military and VA.

One more question, when can we order your new book?

Sincerely,

BB from Houston

BB,

 The first thing you should do is sell the $106,000 invested in Vanguard TIPS fund in a taxable account. TIPS are best owned in a tax-deferred account because they produce "phantom income"--- income that you don't receive but is taxable due to the cost of living increase in principal. Instead, the cash proceeds in that account should be invested in a tax efficient fund or portfolio of funds--- with an emphasis on equities.

Yes, I know, equities make you nervous. So I have two suggestions. First, get yourself a copy of Zvi Bodie's "Worryfree Investing." Bodie, a professor at Boston University, believes that we should plan our retirements at the lowest possibler risk level. To him, that means investing largely in TIPS and planning for them to mature when we need the actual cash. I mention this because you're already started.

Second, your most flexible account is your $273,000 401(k) rollover account. That's where your TIPS investment should go. Should it be exactly $106,000? Probably not. What it should be is a ladder of TIPS that starts to mature in the year you intend to retire and may need money from your investments as well as your other retirement sources.

What you need is an annual schedule of expected cash needs. Then invest that amount in a TIP that will mature in that year. Basically, you'll be prefunding your cash needs, year by year. The longer you do that, the greater the odds that your equity investments will produce the higher returns equities have historically produced. With $500,000 in financial assets, I'll be that a $250,000 ladder of TIPS in that rollover account would provide you with income security for a long time. Meanwhile, the taxable and other accounts could be invested in equities. That would give you a 50/50 mix and a very long time before you had to draw on your equity investments. Pretty conservative, because you'd only have to worry about equity prices 10 or 15 years from now, not next week.

I believe you can start to pre-order "Spend Til' the End" on Amazon. It is scheduled to be in the stores in early June.

Scott 

scottb:

"...Vanguard TIPS fund...

...Should it be exactly $106,000? Probably not. What it should be is a ladder of TIPS that starts to mature in the year you intend to retire and may need money from your investments as well as your other retirement sources...

Mr. Burns:

Excuse my ignorance. Are you suggesting laddering the Vanguard TIPS?  If so,  please provide the "dummies guide" to TIPS mutual fund laddering.

Thanks in advance.

FT 

 FT,

Sorry, you presented your situation quite clearly, so I assumed a lot of knowledge on your part.

You would NOT build a ladder of mutual funds. You build a ladder by direct ownership of individual securities. The ladder would consist of a sequence of notes or bonds that matured at the same time each year in different years.

A short ladder of TIPS would be held in a qualified plan brokerage account and might consist of a TIP maturing in 1, 2, and 3 years. Planning for a more distant retirement, you might start with a ladder of TIPS maturing in 5, 6, 7, 8, 9, and 10 years. When you retired in 5 years you would start to use the money in the maturing 5 year TIP to cover your expenses.

If you do this you should buy as many of the bonds at issue (when originally sold to the public) as possible to reduce the cost of acquisition.

Scott

Scott,

Thanks for your suggestions.  Moved the taxable out of TIP’s and now trying to decide if to invest Indexes, Dodge & Cox Balanced, or I Bonds and Indexes.  I do have a question about I Bonds, are they suitable for taxable accounts since you only pay taxes on the interest?  If so,  that should be a good substitute for TIP’s in a taxable Couch Potato portfolio?

As for the non-taxable funds, I am trying to decide if it’s cheaper to keep it all in TIP’s MF or purchase through a brokerage the laddered TIP’s.  I do see an advantage of the laddering as it may smooth the returns annually, plus only maturing what I calculated our cash needs to be?  But the Couch Potato is so easy and cheap.  Your answer to FT’s question puts the laddering into simple terms.

I highly regard your experience and you have opened my eyes to possible financial security.  Also read Worry-Free Investing.  Zvi documents a good case by using some history of equities that indicates the returns are not really as great vs. risk, as the financial wizards lead us to believe.  You and Zvi are clear as to the 10 -15 year equity horizon instead of 5-10 years or less.

Worry-Free investing is becoming more appealing as I value slow growth over super growth high risk.

Yes you can pre-order your new book and my order is completed.

Thanks,

BB

 Scott, I love your "Spend 'Til the End." Regarding the laddering of TIPS, could you provide the details of the calculations on pages 40 & 41 using the example of "Bill?" Case 1 (page 40) $500k invested in tips yielding 2% after inflation can provide consumable income of $20,413 in today's dollars per year (from age 60-95). Case 2 (page 41) $217,583 (32 years?) can provide consumable income of $9,469. If TIPS are laddered for 32-35 years, how can they each yield 2%? Details of the worked out examples would be very helpful. Many thanks, GVG