Retirement investment strategy for 52-year-old late to the game
April 13, 2022 10:26 AM Subscribe
My friend, a 52-year-old married male with no children, needs some advice and feedback on investment strategy. Special snowflakes inside. YANMFA...
My friend was very late to invest for retirement. He has:
* $80,000 in cash, just sitting in the bank
* $6,000 in a Roth IRA, which he plans to max out every year
* $25,000 in an annuity, which returns between 4-7% per year, and will "come due" in another few years.
His yearly income is very low, and his outlook for future earnings is unclear. He is very concerned about capital preservation, but also generating some returns from his savings.
His main question is what to do with the $80,000 cash. My first instinct was to suggest Vanguard Target Retirement 2040 - this is where his Roth IRA is invested.
I have explained that, over time, index funds are usually the best bet. However, since the market can have down year, or a couple of years, there is a concern that this will impact his ability to draw on the investment as he nears retirement.
MeFites - what am I missing here, are there other considerations?
My friend was very late to invest for retirement. He has:
* $80,000 in cash, just sitting in the bank
* $6,000 in a Roth IRA, which he plans to max out every year
* $25,000 in an annuity, which returns between 4-7% per year, and will "come due" in another few years.
His yearly income is very low, and his outlook for future earnings is unclear. He is very concerned about capital preservation, but also generating some returns from his savings.
His main question is what to do with the $80,000 cash. My first instinct was to suggest Vanguard Target Retirement 2040 - this is where his Roth IRA is invested.
I have explained that, over time, index funds are usually the best bet. However, since the market can have down year, or a couple of years, there is a concern that this will impact his ability to draw on the investment as he nears retirement.
MeFites - what am I missing here, are there other considerations?
If you plan to buy a target-date retirement fund in a non-tax-advantaged account, be aware that it distributes dividends and capital gains every year, which you have to pay taxes on. The impact of this can range from mildly annoying to very bad. (In an IRA this doesn't matter because you don't pay taxes while your assets are in there.)
posted by dfan at 10:56 AM on April 13, 2022 [2 favorites]
posted by dfan at 10:56 AM on April 13, 2022 [2 favorites]
Best answer: Assuming he's still ~15 years out from planned retirement, this sounds reasonable. Target retirement date funds will rebalance to have more in bonds closer to the target date at some reasonable rate. He may want to look at moving the $80K into a traditional IRA invested in that target fund over the course of a few years (because of contribution limits), not sure if the transaction costs of selling and rebuying would outweigh tax benefits. If he contributes for himself and his spouse this year and last year, that might allow him to put it all in a trad IRA at once, if the details work out (hurry to contribute for 2021 before tax deadline!). Spouse's financial picture is notably absent, they should be planning together.
It's also a good idea to check expected Social Security income if eligible and make sure earnings are reflected accurately in his record (ditto for spouse). That's likely to be an important component of his retirement income.
posted by momus_window at 10:57 AM on April 13, 2022 [1 favorite]
It's also a good idea to check expected Social Security income if eligible and make sure earnings are reflected accurately in his record (ditto for spouse). That's likely to be an important component of his retirement income.
posted by momus_window at 10:57 AM on April 13, 2022 [1 favorite]
I know he doesn’t have a windfall, but it might be helpful to poke around at some things on windfall investing, when you want to invest a large sum at once and thus can’t dollar cost average.
posted by bluedaisy at 11:32 AM on April 13, 2022 [1 favorite]
posted by bluedaisy at 11:32 AM on April 13, 2022 [1 favorite]
If you plan to buy a target-date retirement fund in a non-tax-advantaged account, be aware that it distributes dividends and capital gains every year, which you have to pay taxes on. The impact of this can range from mildly annoying to very bad. (In an IRA this doesn't matter because you don't pay taxes while your assets are in there.)
This is a fair point in theory, but I don't think it's important enough to outweigh the benefits of a target-date fund for someone who isn't a financial expert -- even in a taxable account. There are a few reasons why I think the tax issues for someone in OP's situation aren't as big a deal as that article makes them sound:
posted by teraflop at 11:36 AM on April 13, 2022 [5 favorites]
This is a fair point in theory, but I don't think it's important enough to outweigh the benefits of a target-date fund for someone who isn't a financial expert -- even in a taxable account. There are a few reasons why I think the tax issues for someone in OP's situation aren't as big a deal as that article makes them sound:
- That article talks about the "hefty" and unexpected tax bills, but dances around the fact that, as you said, the tax is only paid on gains that are distributed. As long as you pay attention to how much is being paid out, and set aside enough of it for tax day, then you can keep this firmly on the "mildly annoying" end of the spectrum.
- Given that OP's friend has a very low income, the distributions in a given year would likely fall into the 0% long-term gains tax bracket (which is currently $80,800/year for a married couple), making the tax issues moot.
- Typically, the capital gains and dividend distributions paid out by a passively-managed mutual fund are almost exactly what you would pay anyway, if you were making the same investments yourself. In the less common case where a fund pays out unexpectedly high capital gains, you're not exactly paying more tax than you would otherwise; you're just paying the tax earlier, and decreasing the amount of growth you'll be taxed on later. Paying tax earlier than necessary isn't ideal, and does slightly hurt your long-term growth, but it's nowhere near as bad as the up-front dollar value might make you think.
posted by teraflop at 11:36 AM on April 13, 2022 [5 favorites]
Best answer: 47 here, started late in the game but spent the last two years researching the basics of the common sense of personal finance. The following steps really helped me keep it simple and safe (without falling down and having to get up again).
1 Pay off all consumer debt if he has any, because that will free up cash from then on to invest. Including cars, those are very costly (high interest) loans.
2 Have an emergency fund of 3-6 months of household expenses, to guard against emergencies of the serious kind (probably anywhere between 6-24k). Don't invest this, because it's a form of self-insurance, where you need to be able to have it ready (regular or moneymarket account) so that you will not be forced to use creditcards or debts to finance het costs of emergencies.
3 Look at your insurance situation, is there something missing? The basics here will also guard against large risks
4 Save 15% of annual gross salary each year for retirement (Match beats Roth beats Traditional IRA)
5 This is all taken from Dave Ramsey's babysteps, so the next step would then be to pay off your house (if you are not renting)
And from then on just save and invest whatever you can
(Save, give, spend).
If you don't like Dave Ramsey's voice, attitude, politics, conservative christian style, just refer to the bare basics: the 7 babysteps. He has been coaching American working and middle class for decades on radio. Or just take this list from me, I've actively working this last two years and it has give me the calm of having a plan that is feasible (I only have a traditional IRA equivalent available in my country so that's what I put my 15% in and chose the funds according to advice from a free advisor who has a financial blog in my country). The simplicity has helped me so much, and I never really had debt, and have a high education but just never knew anything about finance.
posted by Mariemma at 11:42 AM on April 13, 2022 [6 favorites]
1 Pay off all consumer debt if he has any, because that will free up cash from then on to invest. Including cars, those are very costly (high interest) loans.
2 Have an emergency fund of 3-6 months of household expenses, to guard against emergencies of the serious kind (probably anywhere between 6-24k). Don't invest this, because it's a form of self-insurance, where you need to be able to have it ready (regular or moneymarket account) so that you will not be forced to use creditcards or debts to finance het costs of emergencies.
3 Look at your insurance situation, is there something missing? The basics here will also guard against large risks
4 Save 15% of annual gross salary each year for retirement (Match beats Roth beats Traditional IRA)
5 This is all taken from Dave Ramsey's babysteps, so the next step would then be to pay off your house (if you are not renting)
And from then on just save and invest whatever you can
(Save, give, spend).
If you don't like Dave Ramsey's voice, attitude, politics, conservative christian style, just refer to the bare basics: the 7 babysteps. He has been coaching American working and middle class for decades on radio. Or just take this list from me, I've actively working this last two years and it has give me the calm of having a plan that is feasible (I only have a traditional IRA equivalent available in my country so that's what I put my 15% in and chose the funds according to advice from a free advisor who has a financial blog in my country). The simplicity has helped me so much, and I never really had debt, and have a high education but just never knew anything about finance.
posted by Mariemma at 11:42 AM on April 13, 2022 [6 favorites]
Sorry, I forgot to include a link to his advice on annuities.
Btw I never paid for any Dave Ramsey product (as I don't live in the US) but I find the best of his basic information is all free online.
posted by Mariemma at 11:50 AM on April 13, 2022 [1 favorite]
Btw I never paid for any Dave Ramsey product (as I don't live in the US) but I find the best of his basic information is all free online.
posted by Mariemma at 11:50 AM on April 13, 2022 [1 favorite]
Best answer: You might already be aware, but the personal finance subreddit has some great resources available, particularly the Retirement Predicaments page. The How to Handle Money page (and flowchart) is invaluable.
After age 50, you're eligible to make catch-up contributions to the IRA. I would definitely max that out.
I think your instincts are good. The Vanguard target date fund is a fine choice.
It's easy to make things more complicated in an effort to improve tax efficiency and minimize fees and maximize risk-adjusted returns, but I think in this case, simplicity is key. The important thing here is to get as much money invested as quickly as possible, and do it in such a way that you won't overthink it or get spooked and change strategies or pull your money out.
And yeah, maybe look at getting out of that annuity.
posted by sportbucket at 11:53 AM on April 13, 2022 [6 favorites]
After age 50, you're eligible to make catch-up contributions to the IRA. I would definitely max that out.
I think your instincts are good. The Vanguard target date fund is a fine choice.
It's easy to make things more complicated in an effort to improve tax efficiency and minimize fees and maximize risk-adjusted returns, but I think in this case, simplicity is key. The important thing here is to get as much money invested as quickly as possible, and do it in such a way that you won't overthink it or get spooked and change strategies or pull your money out.
And yeah, maybe look at getting out of that annuity.
posted by sportbucket at 11:53 AM on April 13, 2022 [6 favorites]
Best answer: Does he have enough money to meet with a fee-only financial advisor to get him on the right path to retirement? I started stressing about this in my early 50s and meeting with an advisor, although expensive, made me much more confident in how to get from here to retirement.
posted by matildaben at 1:22 PM on April 13, 2022 [1 favorite]
posted by matildaben at 1:22 PM on April 13, 2022 [1 favorite]
Everyone else has offered good advice, but 2040 is only 17 years away, which is not a long time.
Rule of 72 tells how long his accounts will take to double; a 7%, that's 10 years. So he should invest it all ASAP. Assuming everything goes very well, a 4% withdrawl rate on $320k is only about $15k a year! So he needs other income sources (social security, etc) and to invest as much as he can as quickly as he can.
Depending on his current income, he can also switch his ROTH IRA to a traditional IRA, which he will have to pay taxes on in the future, but will lower his current tax rate. That would be a question he should ask a professional financial advisor. He doesn't seem to have lots of income now, nor will he in the future unless he gets really lucky or has assets not mentioned here (like a pension) so less tax now could be advantageous.
posted by The_Vegetables at 2:54 PM on April 13, 2022
Rule of 72 tells how long his accounts will take to double; a 7%, that's 10 years. So he should invest it all ASAP. Assuming everything goes very well, a 4% withdrawl rate on $320k is only about $15k a year! So he needs other income sources (social security, etc) and to invest as much as he can as quickly as he can.
Depending on his current income, he can also switch his ROTH IRA to a traditional IRA, which he will have to pay taxes on in the future, but will lower his current tax rate. That would be a question he should ask a professional financial advisor. He doesn't seem to have lots of income now, nor will he in the future unless he gets really lucky or has assets not mentioned here (like a pension) so less tax now could be advantageous.
posted by The_Vegetables at 2:54 PM on April 13, 2022
For what to invest in I generally follow the strategy of a three fund portfolio which is described very nicely here:
https://www.bogleheads.org/wiki/Three-fund_portfolio
The Vanguard Target Date fund you linked does a wonderful job of being a single purchase that does basically what the three fund portfolio is looking to accomplish: Creating a mix of index funds that track the US, international, and bond markets. The fees on these funds also just dropped to an even lower rate of 0.08%. Highly recommend going this route.
For which account types to place the funds in my preference is as follows:
1. 401k if available up to the match if available (sounds like this might not be the case for your friend)
2. ROTH IRA. 6k per year limit (7k for people over 50).
3. 401k
4. HSA Accounts that allow investment
5. Post tax investment account
Additionally, for a low risk investment that aims to keep up with inflation, Treasury I series bonds are great. They adjust their payout based on a nominal rate and the current inflationary rate. That said there are limits to these bonds:
1. Must be kept for at least one year
2. If sold prior to 5 years you forfeit 3 months of interest.
3. Limited to 10k per year + 5k from federal tax refund
4. Can only be purchased through https://treasurydirect.gov/
I have ~30% of my emergency fund in I bonds at this point and stagger my purchase dates to limit the amount that are locked up in the 1 year waiting period.
Past that I whole heartedly agree with the advice above to pay for a visit to a fee based financial planner to review the investment plan.
posted by Quack at 3:33 PM on April 13, 2022 [1 favorite]
https://www.bogleheads.org/wiki/Three-fund_portfolio
The Vanguard Target Date fund you linked does a wonderful job of being a single purchase that does basically what the three fund portfolio is looking to accomplish: Creating a mix of index funds that track the US, international, and bond markets. The fees on these funds also just dropped to an even lower rate of 0.08%. Highly recommend going this route.
For which account types to place the funds in my preference is as follows:
1. 401k if available up to the match if available (sounds like this might not be the case for your friend)
2. ROTH IRA. 6k per year limit (7k for people over 50).
3. 401k
4. HSA Accounts that allow investment
5. Post tax investment account
Additionally, for a low risk investment that aims to keep up with inflation, Treasury I series bonds are great. They adjust their payout based on a nominal rate and the current inflationary rate. That said there are limits to these bonds:
1. Must be kept for at least one year
2. If sold prior to 5 years you forfeit 3 months of interest.
3. Limited to 10k per year + 5k from federal tax refund
4. Can only be purchased through https://treasurydirect.gov/
I have ~30% of my emergency fund in I bonds at this point and stagger my purchase dates to limit the amount that are locked up in the 1 year waiting period.
Past that I whole heartedly agree with the advice above to pay for a visit to a fee based financial planner to review the investment plan.
posted by Quack at 3:33 PM on April 13, 2022 [1 favorite]
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The biggest priority is to get it invested -- cash is eroding pretty darn quickly these days.
posted by Dashy at 10:56 AM on April 13, 2022