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

I am 62 and recently retired.  My wife who is 60 is also retired.  Our monthly income is $3788 net with an increase when my wife becomes eligible for SS.  We have $835,000 in a rollover IRA.  In addition, $50,000 in CD's and Money Markets.  We have no debt and our house is worth $200,000.  We have met with several financial advisors and are still confused with the best options for us.  We will need to draw about $20,000 per year from the savings to pay taxes and insurance.  We are conservative and would like 50% of the funds in laddered CD's and 50% in a balanced fund.  In the future, we would like to move into a patio home which will require the proceeds from our home and an additional $200,000.  Is this a workable plan?

Although a lot depends on actual figures--- such as how the operating costs on your patio home compare to the operating costs on your current home--- what you hope to do may be workable. I say this in spite of generally encouraging down-sizing for retirees rather than upsizing.

With $885,000 in financial assets and a need to draw only $20,000 to cover taxes and insurance, you withdrawal need is only about 2.3 percent of your portfolio a year. That amount will be reduced still further when your wife starts collecting Social Security.

Now let's factor in the larger home purchase. You'll need to take about $240,000 out of your IRA over some period of time to have the extra $200,000, perhaps more. In addition, the operating expenses of the house are likely to be about $8,000 a year greater than your current house. As a consequence, you'll be drawing $28,000 a year from about $650,000 of financial assets, or about 4.3 percent of your portfolio. (Less the future Social Security benefits.)

That doesn't leave a lot of margin for you but if owning a nice house is a major pleasure for you, it's a reasonable thing to do.

You and your wife might also benefit by delaying your Social Security benefits and drawing down your financial assets because you'll get more increased income from Social Security than you'll get from your investments. I've covered this in a number of columns, all in the "Social Security" category on the website.

Scott

Dear Scott,

Thank you for replying to my post.  I thought you were vacationing in Maine.  Maybe you still are but love helping others with investing.

The $20,000 I mentioned needing is for taxes on our house (4.500), homeowner's insurance (2,100), car insurance (2,000) and hospitalization, dental & vision insurance (4,000).  My former employer provides $111,000 life insurance at no cost.  The money left would be set aside for repairs, saving for next car purchase and/or travel.

What are your thoughts on investing the remaining funds in a CD ladder and a balanced fund?

Should this be 50% in CD's and 50% in a balanced index fund? 

Thank you again for your assistance.

Doug

Doug,

I would like to recommend a ladder of individual TIPS instead of CDs.  The interest rate on CDs is so low right now that the slightly lower rate on TIPS won't hurt too much, and the inflation adjustment will probably put you ahead.  Since you would be doing this inside your IRA, you wouldn't have to worry about the phantom income of the inflation adjustment.  Although you can submit a non-competetive bid for the TIPS on your own, most people prefer to have the broker at their IRA handle the matter.  I don't know if your IRA custodian is set up to handle this, or how much they would charge, but many places that offer self directed IRAs, including Schwab and USAA that I know of, are happy to do so at reasonable cost.

You mentioned putting 50% in a balanced fund.  In general, a balanced fund keeps about 50% of its assets in fixed income investments.  However, since you are already planning to put 50% of your money in fixed income outside of the balanced fund, this would give you a total of 75% fixed income.  At your age this sounds like far too much fixed income.

Bryan