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

My wife and I are both recently retired and are not sure how best to invest our retirement funds.  Friends of ours recommended we visit your website/forum and read/study some of your recommendations for investing.  While we’ve found the site very interesting, we are not savvy investors and would welcome any suggestion for investing our retirement funds.

I’m 64 and my wife is 62.  While we’ve always been good savers we have perhaps, been too conservative with our investments (fixed funds rather than equities).

Our means and lifestyle are very modest.  We have estimated our normal gross income needs at approximately $55-60k per year.  Together, our social security and small pensions will provide a gross income of ~$42k annually.  We live in a rent house rather than own a home.

Our retirement fund is ~$910k and we currently have it invested in a fixed annuity which consists of:

                1/3 of the funds in a 3-year fixed contract earning about 4.0%

                1/3   “  “         “     “  “ 4-year    “           “             “     “     4.2%

                1/3   “  “        “     “   “ 5-year    “           “             “     “     4.2%

We entered into this contact about 2 years ago and only have 1, 2, & 3 years to go, respectively.

The most frequent and obvious criticism with our very conservative investment choice is that inflation will degrade our funds.

Our initial 3-year contract will terminate in ~1 year and we would welcome any suggestion you have regarding how we might better invest these retirement funds.

Thank you.

Congratulations on what appears to be a well funded retirement plan based on your assets and planned expenses.

 I'm not Scott and I'm sure he'll pop in soon with better advice than mine.  I will make a comment that is probably blunter than he will make about your annuity contracts.  You could have done much better 3 years ago with a CD ladder.  Even now a 5 year CD is yielding in the 4.5 to 4.8% range.  If you keep individual CDs at $100K or less, you have FDIC insurance which beats the security provided by the annuity company's rating.

 You definitely need to do some reading.  Scott's columns on Couch Potato Investing are great.  They got me to move from individual stocks to index mutual funds and I'm very pleased with my results.  If you really want to dig deep, read Bernstein's Four Pillars of Investing.  It can be a bit tedious but it's probably the best book around on individual investing.

 You don't need to become too aggressive moving into equities.  It is apparent you have a low risk tolerence but you also realize that without some equities inflation can really do you damage.  One option is to consider TIPS (inflation protected US treasury bonds).  They are available in a Vanguard mutual fund amongst others.  Their base interest rate is very low right now (<1%) but they will go up with inflation so your principle is protected to some extent.  There is some tax issues with these so I recommend them for IRA or other tax sheltered accounts.  Scott may have a different opinion.

 There's a web forum I've found helpful for advice and other opinions.  It is the Early Retirement Forum.  Google it and you can't miss.  I'll try to put in a link but I don't know if it will work.

 http://www.early-retirement.org/forums/

2B

Thanks 2B for your very helpful comments and suggested literature. 

 While it does not change the point of your comments, for the sake of accuracy and clarity, the rates for my 3, 4, & 5 year fixed annuities listed in my initial post are incorrect and should be shown as 4.5%, 4.8% and 5.0%, respectively.

We've done some reading on the CD Ladder and understand the basic fundamentals of this strategy. While the CD Ladder looks reasonable and fits our conservative approach, We understand that we need to have something that can address the inflation concern.

We appreciate the generosity of your time and helpful comments.

Joey,

Let's take a look at a long ladder and what it would do for you. Your spending needs come to $60,000. Of that amount $42,000 comes from assured income sources, leaving $18,000 to come from your portfolio of financial assets.

That means you could build a 20 year ladder of CDs, Treasury obligations, Savings Bonds, etc. and it would commit no more than $360,000 of your financial assets. So you could invest the remaining money in equities.

What risk of a negative return would you face? NONE.

 According to the 2006 Ibbotson Yearbook (I haven't got the 2008 Yearbook in hand) there were 61 rolling 20 year periods between 1926 and 2005 and there were ZERO periods in which a 100 percent stock portfolio had a negative return. Indeed, the worst return in the period was 1929-1948 and it was 3.11 percent, a good bit over the 1.77 percent inflation rate for the period. The maximum return over any 20 year period was 17.89 percent from 1980 through 1999.

You could take this a step further and build a 25 year ladder. That would essentially guarantee that you'd have the purchasing power you require from your investments for about as long as the joint life expectancy of a couple. In other words, for about as long as one of you is still alive.

And you'd still have a large reserve fund to invest in stocks. You could invest in stocks, enjoy a 2 percent dividend yield, and be totally indifferent to whether they went up or down in value.

Scott

Mr. Burns:

Thank you very much for replying to my post.  Your comments have clarified a lot of our questions and concerns.  The 20-25 year cd ladder is a strategy we plan to evaluate further.  As to our concern for dealing with the inflation factor, we will need to give more thought to this strategy.

Thank you for taking the time to respond to our post.

Joey