Confused! What should I do with my portfolio?

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Confused! What should I do with my portfolio?

Postby jmzf1958 » Sun May 02, 2010 8:34 am

HI. I'm new to this board. I've heard great things about Vanguard and would like some advice on restructuring my portfolio. I have been very confused about what to do these last few years and I'd like to be in mutual funds or ETF's with passive management long term. I have been talking to an advisor who is recommending the following funds, 70% equity and 30% bonds:

AMERICAN FUNDS WASHINGTON MUTUAL - 23%
AMERICAN FUNDS CAPITAL WORLD GROWTH AND INCOME - 20%
AMERICAN FUNDS CAPITAL INCOME BUILDER - 18%
FRANKLIN RISING DIVIDENDS - 9%
MANNING & NAPIER PRO-BLEND MODERATE TERM - 9%
FRANKLIN SMALL CAP GROWTH - 4%
PIMCO TOTAL RETURN - 4%
THORNBURG INTERMEDIATE MUNICIPAL - 13%

These are load funds and the load depends on how much I invest. I'm figuring the average load will be 4%. And I need to pay the ongoing expenses. My advisor is telling me my returns will be much better and I'll come out farther ahead with the above funds instead of going with index funds as my friend recommended. His recommendations are as follows:
SPY - 55%
MDY - 9%
IWM - 8%
LQD - 7%
HYG - 7%
EEM - 7%
EFA - 7%.

Of course, the index funds have very low expenses.

My question to you is this: What do you think of these two options? And
What Vanguard funds can do the same thing for me? I'd like to switch to Vanguard either mutual funds or ETF's, like I said, something I don't have to worry about too much, or go with the index funds if the returns are the same. I've read that expenses can take a huge chunk out of your returns.

This is my situation: I'm 52, divorced and retired on a disability pension. I have two children, 24 and 20 who are almost on their own - another couple of years.

My income is:
$18,600 tax free to age 65 (no cola) (private disability policy)
$20,700 tax free for life (no cola) (worker's comp)
$34,176 New York State disability pension for life (1 to 3% cola up to the first $18,000
$27,672 social security for life (with cola).
THE TOTAL IS $101,148 gross. I am in the ten percent tax bracket.
I also have $6000 per year in rental income for a total of $107,148.

I have an emergency fund.
My outstanding debt is $100,000 mortgage, 15 years bi-weekly at 4.375%, payment of $380 every two weeks. Mortgage was taken out in April, 2010.
Car loan of $21,000 at 3.74%, 2 years 7 months remaining with a payment of $735.

INVESTMENTS NOW:
$200,000 - IRA
$160,000 - TAXABLE ACCOUNT

I also have land for sale that I should come out with $75,000. I wasn't sure whether to invest this money or pay down my mortgage.

As an aside, my financial advisor did some retirement planning for me at a cost of $2500! It included advice on changes in my will ($500 - probably took her about an hour), $300 - opinions on what to invest in, then referred me to a stockbroker who works with her company. Also did a annual after tax spending graph based on my income and investments to age 65 - $1800. She said that takes a long time, but it looks to me you could key this into a computer program and have it done in a short time. It's really not that helpful. Do you think I got ripped off? I feel that I can't really trust anyone!

Any opinions would be helpful! Thanks. Judy
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Postby livesoft » Sun May 02, 2010 8:55 am

Welcome to the forum.

What are the goals for your investments? What are your annual expenses? If your expenses are low enough, then when your private disability stops paying at age 65, then that will have no effect on your lifestyle. Perhaps you are adding $20,000 a year to your investments already?

Typically the sustained withdrawal rate from a portfolio is between 3% and 4%. So your $360K portfolio can create another $11K to $14K in money that you can spend annually.

You will want your investment locations to be tax-efficient. That means try to put the fixed income in your IRA. In your current low tax bracket, you should consider converting some of the IRA each year into a Roth IRA.

Your taxable account could have only tax-efficient index funds. On this forum, we typically recommend Vanguard FTSE-all-world-ex-US international fund (VFWIX or VEU) and Vanguard Total Stock Market index fund (VTSMX or VTI) to start with. There are other possibilities.
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Re: Confused! What should I do with my portfolio?

Postby YDNAL » Sun May 02, 2010 9:07 am

jmzf1958 wrote:This is my situation: I'm 52, divorced and retired on a disability pension. I have two children, 24 and 20 who are almost on their own - another couple of years.

My income is:
$18,600 tax free to age 65 (no cola) (private disability policy)
$20,700 tax free for life (no cola) (worker's comp)
$34,176 New York State disability pension for life (1 to 3% cola up to the first $18,000
$27,672 social security for life (with cola).
THE TOTAL IS $101,148 gross. I am in the ten percent tax bracket.
I also have $6000 per year in rental income for a total of $107,148.

I have an emergency fund.
My outstanding debt is $100,000 mortgage, 15 years bi-weekly at 4.375%, payment of $380 every two weeks. Mortgage was taken out in April, 2010.
Car loan of $21,000 at 3.74%, 2 years 7 months remaining with a payment of $735.

INVESTMENTS NOW:
$200,000 - IRA
$160,000 - TAXABLE ACCOUNT

I also have land for sale that I should come out with $75,000. I wasn't sure whether to invest this money or pay down my mortgage.

Judy, welcome to the Forum.

Here's the beauty: you don't need an advisor, or load funds, or stock broker, or....

First, some reading.
Reading List (link)

Then, the asset allocation (stock/bond split). You are disabled and 52 years old - a 70/30 AA is aggressive for someone like you because you may not need to take this level of Equity risk. The AA is personal in nature and should be based on ability and need for risk.

Finally, you will be best served with Broad index funds that cover the entire markets. With these funds, you don't need to pick the right manager of a fund, or the right segment of the market, or anything else. You own the entire market.

I just saw that livesoft has questions to start. You should *edit* the original post to add other information and to conform with these guidelines.
Asking Portfolio Questions (link)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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CONFUSED! WHAT SHOULD I DO WITH MY PORTFOLIO?

Postby jmzf1958 » Sun May 02, 2010 9:19 am

Thanks for the replies. My annual expenses are $85,000 which will be reduced to $72,000 in three years after car is paid and kids are on their own. I also invest $14,000/year, plus I put $6,000 in an emergency fund and $6,000/year in a savings account. I also save $4,800 a year for vacatioons.

My goal at age 65 is to live off of my social security, pension and workers comp. I could supplement that with money from my investments if needed.
I would like to leave money to my children.
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Postby livesoft » Sun May 02, 2010 9:45 am

Since you can live off your income and want to leave your money to your children, I think that's why your asset allocation came in at 70% equities and 30% fixed income. I might still suggest that you go with 60:40 or 50:50.

You should be converting your IRA to a Roth over the next few years.

You may be able to pay even lower taxes than you do now with tax efficient investing. It may end up being more complicated than you want though.

A simple portfolio can consist of just 4 funds:
VFWIX, VTSMX, (these were already mentioned)
VBMFX Vanguard Total Bond Market index fund
VIPSX Vanguard inflation-protected securities fund.

There are many ways to split them up. For example, suppose you want 40% fixed income, so that would be about 40% * $360K = $144K. You could have $100K in Vanguard Total Bond Index Admiral Class and $44K in Vanguard Inflation-protected securities fund. Both of these would be held in your IRA.

The other 60% could be the equities funds split very roughly 2/3 US and 1/3 foreign. That would be $60K VFWIX in your taxable account, $100K of VTSAX (Vanguard Total Stock Market Index fund admiral share class) in your taxable. The rest of your IRA ($56K) could be VTSMX. Or you could find some other funds to tilt your portfolio. For example, a small cap value fund or a small cap foreign fund.

I know I have not laid this out in a nice orderly manner, so maybe you can echo it back to me to see if you understand what I wrote?

(BTW, these 4 funds would have everything that the list of ETFs proposed by your friend would have, but cheaper and easier to deal with.)
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CONFUSED! WHAT SHOULD I DO WITH MY PORTFOLIO?

Postby jmzf1958 » Sun May 02, 2010 11:12 am

Thanks again for the reply. Just so I understand, I'd put:

$100,000 in VBMFX (Bonds)
44,000 in VIPSX. (Bonds)

The above amounts would go in my IRA.

$60,000 in VFWIX
100,000 in VTSAX
$56,000 in VTSMX or a small cap value or foreign fund.

Are these mutual funds or index funds, and are they automatically rebalanced?

Can I make regular monthly contributions to these accounts through Scottrade or should I open an account at Vanguard. When would it be time to reassess my funds, or can I keep the same ones past age 65, etc, just possibly changing the allocation?

My financial advisor told me I could not contribute to a roth because the money I receive is not considered income from a job. I wish I could. If I was able to, how much would it cost me?

Thanks so much for any and all answers! Judy
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Re: CONFUSED! WHAT SHOULD I DO WITH MY PORTFOLIO?

Postby livesoft » Sun May 02, 2010 11:23 am

jmzf1958 wrote:Thanks again for the reply. Just so I understand, I'd put:

$100,000 in VBMFX (Bonds)
44,000 in VIPSX. (Bonds)

The above amounts would go in my IRA.

$60,000 in VFWIX
100,000 in VTSAX
$56,000 in VTSMX or a small cap value or foreign fund.

You got it.

Are these mutual funds or index funds, and are they automatically rebalanced?

These are index funds and they are mutual funds. They are index mutual funds. They are not automatically rebalanced. You would have to do any rebalancing manually. Please see my note at the end of this.

Can I make regular monthly contributions to these accounts through Scottrade

Not really since Scottrade would charge you way too much in fees to do so.
or should I open an account at Vanguard.
Yes, open an account at Vanguard.
When would it be time to reassess my funds, or can I keep the same ones past age 65, etc, just possibly changing the allocation?
You can keep the same ones forever and perhaps change the ratio of equities to fixed income whenever you want.

My financial advisor told me I could not contribute to a roth because the money I receive is not considered income from a job. I wish I could. If I was able to, how much would it cost me?
That is true. No, earned income, no new contributions to IRAs. However, you can CONVERT some of your current IRA money to a Roth IRA by paying the taxes. Many folks do partial conversions while remaining in a low tax bracket. I think with your stated goal of passing money onto your children, that conversion of the IRA to a Roth IRA a little bit at a time over several years is something you should be doing. Did the advisor not mention conversion?

Note: Another possible asset allocation is to go with one fund: A target retirement fund or life strategy fund with the asset allocation that you desire. Such a fund would be composed of index funds and would automatically rebalance. Such funds have a mix of equities and bonds, so are usually not as tax efficient for folks with taxable accounts like you. It is a possibility though if you prefer to pay more taxes to get simplicity.
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Re: Confused! What should I do with my portfolio?

Postby YDNAL » Sun May 02, 2010 11:42 am

jmzf1958 wrote:INVESTMENTS NOW:
$200,000 - IRA
$160,000 - TAXABLE ACCOUNT

I also have land for sale that I should come out with $75,000. I wasn't sure whether to invest this money or pay down my mortgage.

Judy,

Now we know more and livesoft helped you understand Broad index funds and where to put them.
1) Consider proceeds from land sale to paydown your mortgage.
2) If you want something really simple:

Taxable
$160K Total World (VTWSX or VT (ETF*))

IRA
$200 Total Bond (VBMFX or BND (ETF*))

This 45/55 Stock/Bond allocation is fully diversified. If you wanted more Stocks, for instance, just split the $200K in the IRA to buy more Total World (VTWSX). Isn't that simple?

* ETFs at Vanguard are nothing more than another share-class of the same index mutal fund.
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Postby ResNullius » Sun May 02, 2010 11:55 am

You've had all good replies. The fact is that you can live comfortably off of your guaranteed income form pensions/disability/SS, with money left over. As a result, your portfolio doesn't need to be overly conservative, but you still should be prudent. I would use a 60% equity and 40% fixed allocation. Within your IRA, I would put the fixed assets, with the equities for your taxable portfolio. I would keep it simple, as in either the Total Bond Index for the fixed, and the Total Stock Market Index for the equities. Yes, you can and/or could do many other things, but this is a simple, safe, and easy to follow way to go. First of all, get away from those load funds and high expense ratios, and then tell your financial advisor to give you your money back.
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Re: Confused! What should I do with my portfolio?

Postby dbr » Sun May 02, 2010 12:15 pm

jmzf1958 wrote:As an aside, my financial advisor did some retirement planning for me at a cost of $2500! It included advice on changes in my will ($500 - probably took her about an hour), $300 - opinions on what to invest in, then referred me to a stockbroker who works with her company. Also did a annual after tax spending graph based on my income and investments to age 65 - $1800. She said that takes a long time, but it looks to me you could key this into a computer program and have it done in a short time. It's really not that helpful. Do you think I got ripped off? I feel that I can't really trust anyone!

Any opinions would be helpful! Thanks. Judy


It's notoriously difficult to find people who will do financial work for a fixed fee in the first place, so I am not sure you got ripped off on cost. Possibly someone might have done that kind of work for less, but on a one time basis the whole is relatively penny ante.

A different issue entirely is the value of what you got. Advice on your will could be anything from extremely helpful financial advice to incompetent legal advice. If you did take action on this advice, it should be with the additional advice of a competent attorney, unless the financial advisor also is an attorney practicing in wills and estates.

Opinions on what to invest in are what one hires a financial advisor to do. Here on Bogleheads most people would be of the opinion that if that advice was not to go to Vanguard or an equivalent and buy low cost mutual funds or similar, then you might have gotten bad advice. Sending you to a stockbroker does not sound promising.

The quality of the "spending graph" could be anything. If you had never thought before at looking at your lifetime projected spending and how it will be funded, then simply the existence of such an effort might be invaluable. If nothing else learning how to look at such a thing on your own would be very good.
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Re: Confused! What should I do with my portfolio?

Postby jmzf1958 » Tue May 04, 2010 6:50 am

jmzf1958 wrote:HI. I'm new to this board. I've heard great things about Vanguard and would like some advice on restructuring my portfolio. I have been very confused about what to do these last few years and I'd like to be in mutual funds or ETF's with passive management long term. I have been talking to an advisor who is recommending the following funds, 70% equity and 30% bonds:

AMERICAN FUNDS WASHINGTON MUTUAL - 23%
AMERICAN FUNDS CAPITAL WORLD GROWTH AND INCOME - 20%
AMERICAN FUNDS CAPITAL INCOME BUILDER - 18%
FRANKLIN RISING DIVIDENDS - 9%
MANNING & NAPIER PRO-BLEND MODERATE TERM - 9%
FRANKLIN SMALL CAP GROWTH - 4%
PIMCO TOTAL RETURN - 4%
THORNBURG INTERMEDIATE MUNICIPAL - 13%

These are load funds and the load depends on how much I invest. I'm figuring the average load will be 4%. And I need to pay the ongoing expenses. My advisor is telling me my returns will be much better and I'll come out farther ahead with the above funds instead of going with index funds as my friend recommended. His recommendations are as follows:
SPY - 55%
MDY - 9%
IWM - 8%
LQD - 7%
HYG - 7%
EEM - 7%
EFA - 7%.

Of course, the index funds have very low expenses.

My question to you is this: What do you think of these two options? And
What Vanguard funds can do the same thing for me? I'd like to switch to Vanguard either mutual funds or ETF's, like I said, something I don't have to worry about too much, or go with the index funds if the returns are the same. I've read that expenses can take a huge chunk out of your returns.

This is my situation: I'm 52, divorced and retired on a disability pension. I have two children, 24 and 20 who are almost on their own - another couple of years.

My income is:
$18,600 tax free to age 65 (no cola) (private disability policy)
$20,700 tax free for life (no cola) (worker's comp)
$34,176 New York State disability pension for life (1 to 3% cola up to the first $18,000
$27,672 social security for life (with cola).
THE TOTAL IS $101,148 gross. I am in the ten percent tax bracket.
I also have $6000 per year in rental income for a total of $107,148.

I have an emergency fund.
My outstanding debt is $100,000 mortgage, 15 years bi-weekly at 4.375%, payment of $380 every two weeks. Mortgage was taken out in April, 2010.
Car loan of $21,000 at 3.74%, 2 years 7 months remaining with a payment of $735.

INVESTMENTS NOW:
$200,000 - IRA
$160,000 - TAXABLE ACCOUNT

Also, I will be making $14,400 a year in annual investments to a taxable account.

I also have land for sale that I should come out with $75,000. I wasn't sure whether to invest this money or pay down my mortgage.

As an aside, my financial advisor did some retirement planning for me at a cost of $2500! It included advice on changes in my will ($500 - probably took her about an hour), $300 - opinions on what to invest in, then referred me to a stockbroker who works with her company. Also did a annual after tax spending graph based on my income and investments to age 65 - $1800. She said that takes a long time, but it looks to me you could key this into a computer program and have it done in a short time. It's really not that helpful. Do you think I got ripped off? I feel that I can't really trust anyone!

Any opinions would be helpful! Thanks. Judy


I posted this previously. This post includes the $14,400/year in taxable contributions. Any and all advice is appreciated. I'm meeting with the stockbroker on Thursday. I don't want to make the wrong decision! Thank you again.
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Postby dbr » Tue May 04, 2010 10:07 am

As a poster here I have never been comfortable suggesting to individuals specifically how they should invest. In this case, however, I would like to suggest that it is a mistake to invest in loaded funds in which 4% of your wealth will disappear as soon as you walk in the broker's door. It is true loads go down with greater investment, usually down to zero about the $1M mark, but it is still a bad idea.

I would also like you to be very careful not to allow this broker to put you in a wrap account where 1% or so of your assets go to him every year to keep the account. In that case, he will probably tell you that you can avoid the loads, which is true, but it is a bargain with the devil.

I also advise you not to allow any broker discretionary trading with your account. That kind of trading means the broker can buy and sell without your permission, which is a very bad idea.

If I were you I would consider canceling the meeting with the broker and instead calling Vanguard for a conversation with them.

I think you have time to think this through more carefully. Previous posts have made good suggestions.
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CONFUSED! WHAT SHOULD I DO WITH MY PORTFOLIO?

Postby jmzf1958 » Tue May 04, 2010 12:56 pm

Thanks for your advice. Great ideas. DBR, it is a good thing to have an income and spending graph til age 90 - just seems like it cost quite a bit, but they do get paid for their advice. I talked to my financial advisor again. She suggested the funds I buy, then sent me to the stockbroker. I again asked her if she would recommend anything like Vanguard or low cost index funds. She said she could, but I'd have to pay the one percent wrap fee. (I can do this on my own with the help of this forum.) She also said the funds she gave me have better gains than vanguard and index funds. From what I understand, I'd do much better with vanguard funds because of the low expenses.

DBR, your advice is good. I do not want to give the stockbroker any more than is necessary. The reason I went to her is because I felt like I might need someone help me stay calm and unemotional when the market goes down, but it's a high price to pay for that.

I have been in individual stocks and etf's this past eighteen months in my IRA. I have gained 50% from the bottom. I think I could have done better, but I got caught up in trading and really didn't know what I was doing. I also cashed out a taxable fund when the down was at 9100 and paid off my house, car and some land. Looking back, I should have stayed in the market, but I panicked. That's why I want to be very careful where I go from here. Regret is hard to live with. Judy
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Postby retiredjg » Tue May 04, 2010 2:44 pm

Judy, the funds suggested by the advisor have a load (as you have already noted). In addition to that, they cost more each year for similar funds at Vanguard. Those funds really have nothing to offer you but higher costs.

You make a good point that you might need someone to help you stay calm. However, you can do that for yourself if you learn some more about investing. Also, you can get some help here. If you have not done it already, check out the reading list supplied above by YDNAL. Also, give a good long look at our Wiki (link at top of page).

After you have done those things, you'll understand more about why using the advisor and the advisor's funds is such a poor idea.
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CONFUSED! WHAT SHOULD I DO WITH MY PORTFOLIO?

Postby jmzf1958 » Mon May 10, 2010 7:34 am

Who would I go to to help with the roth conversion? If I switch to vanguard, would they help with that? Also, how much more over the long term would I pay in expenses, etc, going with the advisor's funds versus vanguard? I've heard the difference can be a lot. Thanks. Judy
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Re: Confused! What should I do with my portfolio?

Postby YDNAL » Mon May 10, 2010 8:44 am

jmzf1958 wrote:Who would I go to to help with the roth conversion? If I switch to vanguard, would they help with that?

Judy,

Call Vanguard and they will walk you through the paperwork. It's really no big deal.

jmzf1958 wrote:Also, how much more over the long term would I pay in expenses, etc, going with the advisor's funds versus vanguard? I've heard the difference can be a lot. Thanks. Judy

Quickly.... $100,000 compounded (annual) at 3%* vs. 4% for 20 years represents almost $42,000 in less money to you.

* A 1% difference paid to an advisor, for instance.
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cONFUSED! WHAT SHOULD I DO WITH MY PORTFOLIO?

Postby jmzf1958 » Mon May 10, 2010 9:01 am

so if I invest $350,000, I'd lose $147,000, plus I'd lose one percent of any contributions?
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Re: Confused! What should I do with my portfolio?

Postby YDNAL » Mon May 10, 2010 9:56 am

jmzf1958 wrote:so if I invest $350,000, I'd lose $147,000, plus I'd lose one percent of any contributions?

Yes, 1% (in the example) to the advisor including lumpsum + additions + growth.

S/he (the advisor) takes the fee based on the account value (assets under management - AUM) as it grows over time - and that includes the growth in the account.
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Re: CONFUSED! WHAT SHOULD I DO WITH MY PORTFOLIO?

Postby Scottner » Mon May 10, 2010 1:49 pm

livesoft wrote:
jmzf1958 wrote:Can I make regular monthly contributions to these accounts through Scottrade

Not really since Scottrade would charge you way too much in fees to do so.

Livesoft is correct in that the initial purchase of Vanguard mutual funds is $17 per fund. HOWEVER, you can signup for subsequent systematic purchases of those funds for only $2 per trade. While not quite free like Vanguard, $2 certainly is not excessive in terms of fees. It all depends on what you want to do though. Vanguard is fine if all you will do is invest in Vanguard funds and ETFs. If you want to do "un-Boglehead" like things such as purchase individual stocks, options, or even non-Vanguard mutual funds, Scottrade is much more economical in the long run as Vanguard brokerage fees can be quite high.
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Postby jmzf1958 » Sun Sep 26, 2010 6:39 pm

Thanks for all your opinions. I did not go with the stockbroker. ResNullis, previously you said I could live off of my monthy income from pension, ss, and workers comp. My financial advisor (who, of course, wanted me to invest through her), told me I should be saving an additional $14,000 per year up to age 65. I have been saving and will continue to do so, but I got a bit worried when she said I don't have enough monthly income to live in retirement without saving this $14,000/year. She also said I needed to sell my house (worth about $280000 now, started out at $329,000 a year and a half ago, and put part of the proceeds into investments.) My expenses in retirement will be about $4500/month at the most. The rest of my income will go into savings ($3500/month). A rough calculation showed my pension, workers comp, and ss is worth $2,540,000 from age 65 to 90, adjusted for colas. I have $190000 into my IRA and will have another $50,000 to 100,000 to invest from the house sale. (Some of my previous figures were projected.) I feel very fortunate to have this income for life, and I wondered if you or anyone else have any opinions on whether my monthy income will be enough to retire on, with the rest being "extra" for savings, etc. Thanks for any and all opinions. Judy
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Postby retiredjg » Sun Sep 26, 2010 7:09 pm

Without looking back through the whole thread...are you planning to be getting SS and Workman's Comp at the same time? If so, I'm not sure you can do that. (I'm not sure you can't either.)
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Postby synergy » Sun Sep 26, 2010 7:10 pm

I believe that you are the only one who can determine your future expenses. Keeping track of your expenses and making a budget is the best way to understand what your normal expenses will be. Don't forget to account for healthcare, maybe long term healthcare, vacations and emergency funds-new roof, water main break, etc. I have been keeping track of my living expenses for several months and my wife and I seem to spend about $8500 not counting savings or income taxes. If we can shave 1 or 2 grand a month, we can be comfortable on $84K annually.

This is the number you need to figure out. Good luck.
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Postby jmzf1958 » Mon Sep 27, 2010 2:48 am

I'm getting workers comp (NYS lifetime payments of $400/week, no offset), and I'm also getting SSD, which will be SS when I am 65. The $4500 figure includes vacations, emergency fund and savings. I have lifetime medical through my New York State pension, so health care isn't an issue. I cannot get long term care insurance because of my disability. I am concerned about inflation and the cost of living having an effect on my monthly income. There is no COLA for the workers comp and about a 1 1/2% COLA on my pension up to $18,000. SS has a COLA. I hope this helps with any opinions of my situation! Judy
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Postby retiredjg » Mon Sep 27, 2010 4:22 pm

Judy, some things are not making sense to me.

You say your expenses will be $4,500 a month ($54,000 a year) and you'll be putting $3500 a month ($42,000 a year) into savings. Your income is about $100,000 a year.

But your question is "will my monthly income be enough to retire on"?

I do understand that not all of your income is cola'ed (if that is even a word) and that inflation might eat up a good deal of what is currently extra income. But you also have $190,000 in IRA and up to $100,000 in savings and $6,000 annual income from a rental property.

I guess I don't understand why you are asking if you'll have enough money.

About your investments. Apparently you sold out your investments at some point and you indicate you might have trouble staying with the market on the next downturn. The solution to that is to invest your money more conservatively - more bonds, less stock.

It's unclear to me what your stock to bond ratio was when you sold out. It is also unclear why your estimated expenses changed from $85,000 a year to $54,000. You sold the house you were living in? If so, are you now renting? I guess the bottom line is your numbers and apparently your situation have changed so much since your first post, it's hard to figure out your situation. So it's hard to offer any help.

If you want advice on how to invest your money, I think your conversation earlier this year with livesoft is a good path to follow. There are a couple of other good paths too. But the first thing you have to decide is what stock to bond ratio you want. We know you need more bonds than you had before, but what did you have before?
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Postby jmzf1958 » Mon Sep 27, 2010 5:52 pm

To answer some questions, my expenses will be around $4,500/month after my house is sold, and I'll have up to $100,000 to invest in addition to the $190,000. My previous stocks/bonds ratio was 85%/15%. The reason I'm asking if my monthly income is enough to retire on is because my advisor doesn't think it is and says I should save $14,000/year until age 65 in addition to selling my house so I'd have up to $100,000 to invest.

I need a second opinion from this board. I think my stocks to bonds ration should be around 70/30 or 60/40.
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Postby retiredjg » Tue Sep 28, 2010 10:47 am

Please help me understand a few things.

On 5/2/10 you had
    $200,000 - IRA
    $160,000 - TAXABLE ACCOUNT
    $100,000 mortgage, 15 years bi-weekly at 4.375%
    Car loan of $21,000 at 3.74%
But on 5/4/10 you said "I also cashed out a taxable fund when the down was at 9100 and paid off my house, car and some land."

1) So what are your current debts?

2) What are your current assets?

3) Do you still have some land for sale? (Do you owe money on it?)

4) Do you still have about $6k a year income from a rental property?

5) Why are you selling your house? If the house is only costing you $380 every two weeks, do you think you can rent a place for less than that? Or if the house is paid off, why are you selling it?

The reason I'm asking if my monthly income is enough to retire on is because my advisor doesn't think it is and says I should save $14,000/year until age 65 in addition to selling my house so I'd have up to $100,000 to invest.

But I understood you are/will be putting $42,000 in savings each year for several years, not just the $14,000 a year the advisor suggested. Am I confused?

I'm sorry to be asking all these questions, but I just can't figure out what you have and what you owe.

I think my stocks to bonds ratio should be around 70/30 or 60/40.

An opinion:
    70/30 is too aggressive for a person your age (52).
    70/30 is too aggressive for a retired person unless it is certain the money will be passed on to heirs.
    70/30 is too aggressive for a person who panicked and sold in a downturn.

    60/40 is reasonable for a person your age (52)
    60/40 might be too aggressive for a retired person
    60/40 might be too aggressive for a person who panicked and sold in a downturn

We can talk more about your stock to bond ratio later. Let's get the other part straightened out first. Then we can work on the portfolio.
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Postby jmzf1958 » Tue Sep 28, 2010 11:38 am

I know this is confusing. Things have changed a lot. I'll try to clear this up.

I had projected I'd have $160,000 in a taxable account (I almost sold my home at more than what it's on the market for now, but sale didn't go through.) I did cash out a taxable fund and paid off my primary house, part of the land, and a different car.

Current debts:
$100,000 mortgage, 15 year biweekly at 4.125% on rental property (Payments of $380.00 every two weeks.)
$19,000 car loan, 2 years 3 months left to pay, at 3.74%.
$85,000 heloc at 4% variable (with 2% cap each year, lifetime of 6%, and this will not reset until August of 2011.) Part of the land and improvements to my rental property make up this heloc.
TOTAL: $204,000

Assets:
$280,000 - primary home
$175,000 - rental property
$65,000 - land
$20,000 - paid off car
$190,000 - IRA
TOTAL: $730,000

So my net worth equals $526,000.

I do not have $6,000 a year from my rental property. I have $18,000/year from the rental property. The new tenants pay me $1,500/month and they pay all utilities. The rent covers my mortgage, taxes, homeowners, and 1/2 of the heloc payment. When I sell my primary house and move into the rental, I will no longer have rental income.

I hope this helps.
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Postby retiredjg » Tue Sep 28, 2010 12:38 pm

Yes, that helps a lot. I need to give this some thought, so bear with a little delay.

I'm still curious why you are selling your current home which is paid for. Do you want to sell it? Are you convinced you need to sell it? Is it too big? Because the advisor thought you should?

The reason I'm asking is that the rental house is bringing in $18,000 a year. You are only paying out $9,880 on it's mortgage. So you have a net gain which you will lose if you move into it.

Right now you are living in a paid for home. Seems to me you would be losing income by selling your home and moving into the rental. What am I missing?

Also, am I correct that you are saving $42,000 a year or is that an estimate that depends on selling your current house? If you are not saving $42,000, how much are you saving?

I'm still confused, but making progress. :wink:
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Postby jmzf1958 » Tue Sep 28, 2010 2:04 pm

Hi again! I definitely want to sell my house - it's 2300 sq. feet and on five acres. I'm divorced and hire most everything out. My son helps out, also, but he'll be gone in a year or so after college. My daughter, 25, will graduate with her masters in May, and she won't be back to live at home. The taxes and expenses on my primary residence are higher than another house would be.

Also, if I sell, I can pay off the heloc, car and rental home. I'd have no debt plus a little more in the bank for emergencies.

I've also thought about keeping the rental as an investment and buying another house for myself with some of the proceeds of the sale of my primary residence. I could probably buy a home for around $120,000 to $130,000. I'd also pay off the heloc and car. I'd keep the 100,000 mortgage on the rental. I'd be able to put a little more in the bank for emergencies but wouldn't have much left to invest, but I'm thinking the rental will be my investment.

Saving $42,000/year depends on selling my primary home. I'm saving about $1,000/month now. I'll save more when the kids are totally done with college. Yeah!

I hope you're not confused anymore! Thanks. Judy
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Postby retiredjg » Tue Sep 28, 2010 2:36 pm

Ok, that puts things in a different light. I'd still like to take a little time to think about things.

Are your investments still in individual stocks and ETFs? If so, what type and where are they located?
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Postby jmzf1958 » Tue Sep 28, 2010 3:24 pm

No. My IRA ($190,000) is in cash in an account at Scottrade.
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Postby retiredjg » Tue Sep 28, 2010 3:41 pm

Is there a separate emergency fund or other savings account sitting around somewhere? Not asking about a small slush fund of a couple of thousand dollars or your vacation money, but anything substantial in savings that does not have a short term purpose and should be included in your "retirement" portfolio.

If not, I'll assume the $190k in cash is the only thing that needs to be invested now. Maybe you'll have more later.
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Postby jmzf1958 » Tue Sep 28, 2010 4:29 pm

Unfortunately, no. Made some financial and investing mistakes and raised my two kids pretty much on my own without a lot of financial help and put them through college (almost).
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Postby retiredjg » Sun Oct 03, 2010 1:51 pm

Ok Judy. So sorry about the delay! This is how I understand your current situation.

You are 52 years old, retired on disability. You currently own the house you live in, but it is on the market. You (and the bank) own a rental house which currently pays its own mortgage, insurance, taxes and some on your HELOC. You also have a car loan and a loan on some property (which you are trying to sell).

You have no separate emergency fund, but you do have secure income that covers all your expenses. You also save about $1,000 each month. When the kids are fully fledged, you'll have more to save.

When you sell your house, you will pay off all the loans (car, HELOC, mortgage on rental if you decide to live there).

One of your disability incomes ends at age 65. After that, you'll have about $82,548 annual income, only some of which is cola'ed. This is where my speculation starts: You expect this income to be sufficient (even generous) at first, but by late life 85 to 100, you are not sure this will be adequate due to inflation.

You currently have $190k in an IRA in cash or money market or something similar. Right now, that is the only money you have to invest. If you sell your home, after getting rid of any debt you have, you expect to have more to invest - maybe $100k or so.

You have two questions.
1) Do you have enough money?

2) How to invest the IRA?

I can't help much on question #1. I'm not qualified in any way to judge that other than just a layman's guess. Assuming the advisor is right (and I do assume she is right) you are doing everything the advisor suggested - sell the house and save money now. So I'm guessing you do/will have enough money.

About how to invest the money you have, here is an opinion. Ordinarily, at age 52, I'd be comfortable with 30% to 50% in bonds and I think you are thinking somewhere along the 30% bonds theme. You, however, are no longer in accumulation mode (or accumulating much, anyway) so your emphasis needs to change from "growing your portfolio" more to "preserving what you have, while having some growth". If you choose a 70% stock/30% bond portfolio now, you must be prepared to see 35% of that portfolio disappear in the next downturn. In other words, your $190k could drop to $124k. I'm not sure you should be on board with that.

I'm thinking a stock to bond ratio of 50%/50% is more appropriate. With that, you would likely not lose more than 25% of your portfolio in the next downturn. And there are still enough stocks in there for continued growth.

Whatever you decide, one of Vanguard's Target Retirement Funds would be a perfect investment for you. Target Retirement 2010 holds right at 50/50. Target Retirement 2015 holds about 60% stock/40% bonds. Here's a website to check these funds out.

The target retirement funds are rebalanced for you and they creep toward a higher percentage of bonds as time goes by. If it is creeping too fast, you can just exchange some or all of the fund for the "next youngest" fund to achieve the stock to bond ratio you want.

There are numerous other ways invest your money, but this is the easiest. Does this idea appeal to you?

Now, when you sell the house and have more money to invest, you need a different approach, maybe. Since you are in the 10% tax bracket, it may not matter much.

For a higher tax bracket, it would be better to hold your bonds in the IRA and your stocks in the taxable account. Here's an example.

$100k taxable
$56.5k Vanguard's Total Stock Market
$43.5k Vanguard's Total International (soon to be large, mid, and small cap, also containing emerging markets) 15% of portfolio

$190k IRA
$45k Vanguard's Total Stock Market
$145k Bonds (split between Total Bond Market and TIPS) 50% of portfolio

This idea is almost identical to the Target Retirement Fund, but split into its components for tax efficiency. Again, in your tax bracket, I'm not sure it matters much and you might prefer to hold a Target Retirement fund in each location for simplicity.

One last idea - when you are much older, say 75 or 80 - you might consider a Single Payment Income Annuity (SPIA) for half your money. It would be like a pension - pay you a certain amount each month - guaranteed income. Don't look at other types of annuities as most are not in the purchaser's best interest.

Mull these ideas over and let me know what questions you have.
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Re: CONFUSED! WHAT SHOULD I DO WITH MY PORTFOLIO?

Postby nonnie » Sun Oct 03, 2010 6:04 pm

jmzf1958 wrote:Who would I go to to help with the roth conversion? If I switch to vanguard, would they help with that? Judy


Who does your taxes? That is the person who would be able to advise you on the advisability of a Roth conversion and how much to convert each year. Once you decide you want to do it, it's very simple to open a Roth IRA and move the designated amount from your regular IRA to your Roth. The custodian where you open your Roth can help you-it's very easy at Vanguard. You can do this at any amount you wish (be careful that you don't do too much and get bumped into a higher tax bracket) every year if you wish.

Nonnie
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Postby jmzf1958 » Wed Oct 06, 2010 8:27 pm

Hi. I've read your suggestions. The idea of a target date retirement fund sounds very simple, and I like the fact that they rebalance automatically. Would I put all the money in the one target date fund? Is the SPIA like a variable annuity? What is the reason for waiting until I'm older to get it?
Have you heard of the Nationwide Destination B variable annuity? It guarantees to double your money in ten years. When would be the right time to get back in the market and how should I go about it? Thanks. Judy
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Postby retiredjg » Wed Oct 06, 2010 9:31 pm

jmzf1958 wrote:Would I put all the money in the one target date fund?

Probably. You pick a target date fund by the stock to bond ratio it holds. Ignore the date in the name. If there is a fund near the stock to bond ratio you desire, pick it. If what you want is right in the middle of two funds, use half of each. Every couple of years, check the funds to be sure they have not not migrated out of the range you desire.

The link above takes you to a chart that shows what each Vanguard target date fund holds. Some other companies also have decent funds. Some companies, even good ones, have lousy target funds. Look for a company that uses only low cost index funds in their target funds.

Is the SPIA like a variable annuity?

No. Not even close. A variable annuity is a container that can be useful to some very high income people who have a compelling need to shelter income from taxes. A variable annuity is also a product that pays a high commission to the people who sell them.

As could be predicted, it is not unusual for salespeople to sell a VA to a person who does not need one - they make more money that way and they are not restricted from this practice even though it is unethical.

You do not need a VA in your situation. A VA offers nothing you need and the expenses, even after the commission you pay the salesperson, are high. If someone is trying to sell you one, my opinion is that you should politely say no and be suspicious of anything else that person offers because that person probably does not have your best interest at heart. This is a mean and cruel thing to say, especially if that person is a "friend", but this seems to be a very common occurrence.

What is the reason for waiting until I'm older to get it?

1) You don't need more income right now. You have plenty of income right now. The SPIA would only be helpful to you if you foresee that you are soon to have less income than needed. For example, if at some point you are needing $1000 a month from your nest egg (in addition to the pensions and other income), if you bought an SPIA that paid you $1000 a month, that would be guaranteed income.
2) You get more money when you get them later in life. Probably after age 70.
3) Interest rates are low now. What they offer you depends on the current interest rate. If you ever need one, try to buy when rates are up.
4) It is quite possible you will never even need an SPIA. It is quite possible your various incomes will always be enough. Don't buy one unless you actually need it.
Have you heard of the Nationwide Destination B variable annuity? It guarantees to double your money in ten years.

I have not heard of it, but this is the type of sales pitch they use. Do not fall for this. You do not need a variable annuity. It is a product designed to make money for the salesperson, not you.
When would be the right time to get back in the market and how should I go about it? Thanks. Judy

You should get back into the market when you realize you are not at the stock to bond ratio you think you should be holding. Right now you are holding 100% fixed, but you think you should be holding X% stock and Y% bonds (fixed). So it sounds like the time is now.

Opinions vary as to how to get back in. You could buy it all in one lump sum. Many find this hard to do. If you cannot do this, buy a chunk now (not a little chunk - buy something substantial) and then invest more every week/2 weeks/month. I'd try to get all the money into your chosen stock to bond ratio in 6 months or a year. Make a plan and follow it. Ignore what the market does. Make a plan and follow it. The exception is this - if the market is dropping, you might realize that what you intend to buy is actually "on sale" and buy some extra.

Be sure the stock to bond ratio you pick is one you can live with in good times and in bad times (the next crash). If you try to get in and out at the "right time" you will surely lose money.
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Postby retiredjg » Fri Oct 08, 2010 11:37 am

http://www.vanguardblog.com/2010.09.24/annuities-for-retirement-income.html

Here is a recent article about income annuities that you might find helpful. This is the type of annuity I thought might be useful in later life if you see that your remaining money is getting tight. And in this article is a link to a longer paper on the subject.

In spite of having the same word in the name, a variable annuity is a completely separate animal and you need to be sure you don't get them confused. A variable annuity is appropriate in a few specific situations, but not yours, in my opinion.
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Postby jmzf1958 » Thu Oct 21, 2010 10:00 am

Retiredjg, and everyone else, thanks for all of your help. I will be going with the index funds, for sure.

I'd like to get some opinions from all of you. My primary house has been on the market for a year and a half now, and the price is $279,000. If I'm lucky, I'll come out of it with $265,000. At this price, I feel like I'd be giving it away. I was going to move into the rental house I have which is worth about $175,000. I'm reconsidering selling the house I live in now because the market is so bad. I have a one year lease on the rental property with good tenants who pay rent that covers the expenses.

My plan was to sell the house I'm in, pay off the now $100,000 heloc, pay off the $100,000 mortgage on the rental property, pay off my now $17,000 car loan, and put the rest ($48,000) in my emergency and savings accounts. My plan was to move into the rental property. When I sell my land (hopefully for about $65,000), I will invest it.

I really do like the home I'm in, but it's big, so I'm thinking of refinancing in the amount of $115,000 (paying off the $100,000 heloc), with a 15 year bi weekly mortgage at 3.5% at $822/month. I would use the extra $15,000 to renovate my home so I could have a 2 to 3 bedroom apartment to rent out at $1000 to $1200/month. This would pay the mortgage and some other expenses. I would keep my rental home, also. Both homes will be paid off when I'm 65 at which time I could sell both properties (hopefully, at a higher price) and buy a small house, using the money from the sale of both houses to purchase a new home and have money for retirement.

I will still be able to save money each month for retirement and have two rental properties to write off. When I sell my land (for about $65,000), have an emergency and savings fund, set about $20,000 aside to help my children with a down payment on a house/weddings/etc. There may be about $20,000 left to invest.

Any opinions on what the would be the best decision financially and otherwise? Thanks again. Judy
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Postby retiredjg » Thu Oct 21, 2010 11:35 am

Is the current HELOC on your home or your rental property?

Did the HELOC get bigger in the last few months?
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Postby jmzf1958 » Thu Oct 21, 2010 11:39 am

Hi! Thanks for responding so quickly. The heloc is not on the rental property. It's on the home I live in. Yes, it did get bigger in the last few months.
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Re: Confused! What should I do with my portfolio?

Postby nimo956 » Thu Oct 21, 2010 11:49 am

jmzf1958 wrote:These are load funds and the load depends on how much I invest. I'm figuring the average load will be 4%. And I need to pay the ongoing expenses. My advisor is telling me my returns will be much better and I'll come out farther ahead with the above funds instead of going with index funds as my friend recommended.


I've seen this advisor response to index funds mentioned a few times on this forum now, and I just want to point out that this is nothing but pure speculation. There is absolutely no guarantee whatsoever that an active fund will outperform a comparable index fund. Maybe it will, maybe it won't. What you do know for sure is that you will pay much more in expenses for the active fund. The only way I'd invest in it is if the advisor signed an agreement guaranteeing to pay me the difference if the active fund underperforms. Gee, I wonder why they'd be unwilling to do that given that it's such a sure thing that "returns will be much better and [you'll] come out farther ahead?"
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Postby retiredjg » Thu Oct 21, 2010 7:06 pm

Current
Home - $100k HELOC at 4% variable (with 2% cap each year, lifetime of 6%, and this will not reset until August of 2011.)

Proposed
Home - $115k Mortgage with a 15 year bi weekly mortgage at 3.5% at $822/month

And everything else remains the same? (Mortgage on the rental property, land for sale, etc.)

Well, I'm guessing here, but if it would take you 15 years to pay off the HELOC, it might be a good deal since the HELOC rate is higher and could go even higher than that. And it would be nice if you get some rental income from it by making a separate apartment in your house.

Truth to tell is that I don't really know. It is possible that your overall payment in the long run would be larger. If others don't give a reply that is helpful you might want to start a new thread. It is likely that there are not many people following this thread any more.

But I'm concerned about something. You started with an emergency fund and no HELOC (or none mentioned). Then the emergency fund disappeared and and a HELOC of $85k appeared. Now, the HELOC has grown to $100k. But....you theoretically have more money coming in than you need to live on right now. I just don't get what is wrong with this picture.

Perhaps you can see, from an outsider's point of view, that it looks like you are getting more in debt instead of saving the extra you have coming in. Please do not feel that you need to explain this to us - it is none of our business. But if your debts are growing, you need to take a close look at just what the problem is.

What I'm concerned about is that you'll soon have 2 mortgages AND an HELOC!

What I'm concerned about is that you may be contributing more to your children's needs than you can afford. Tough to think about, but your retirement situation supersedes their education and car needs. They can borrow money for an education or a car. You cannot borrow money for your old age. In fact the best gift you could give your children is to have your old age finances taken care of without their help.

And why would you ask if you have enough money to live on and then a few weeks later talk about having $20k to give the kids? Are you sure you don't need that $20k? Seems to me you need to invest it for your future and leave it to the kids if you have money left at the end.

So maybe I'm overstepping here, but your situation is such a moving target that I'm pretty bewildered by what your situation is. So with that in mind, I really have no idea if refinancing your home is a good idea or not.

I hope someone else can help you with this. Sorry that I can't be more helpful, but I have no idea what would be your best choice.
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Postby jmzf1958 » Fri Oct 22, 2010 11:33 am

Thanks for trying to help. I've had the heloc on my home for a year now. I've had to take more out on it to do some more renovations to the rental property to be able to get the $1500/month rent, plus some unexpected expenses came up. But my situation seems to be ever changing lately, so I think I'll ask for advice when things settle down. Judy
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Postby retiredjg » Fri Oct 22, 2010 11:45 am

jmzf1958 wrote:... so I think I'll ask for advice when things settle down. Judy

If your question is simply trading the HELOC for a mortgage, that could just be a numbers thing. I just don't know enough to do the numbers on it. Perhaps a thread on just that would be more helpful.

The terms of the HELOC (interest could go up 6% over the life of it if I understand correctly) worry me if the HELOC is not going to paid off quickly. I would think that would weigh in on the side of the mortgage.
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I am worried

Postby Laura » Sat Oct 23, 2010 3:02 pm

Judy,

Retiredjg brings up an excellent point. Your financial situation is getting progressively worse and very quickly. This worries me. When you started posting back in May you described a fairly strong financial situation. Since then you have added a significant amount of debt which will quickly eat up a lot of your cash flow. If your financial advisor was not correct about needing to save more money before, they certainly are correct now. You must stop the spending or you will face a very difficult future.

Taking on additional debt to turn part of your house into apartments you can rent also doesn't make sense. Have you considered trying to rent the house you are living in right now and moving into a smaller, less costly rental home or apartment? You can then try to sell both homes when the market improves. I normally don't recommend this but you need to do something to stop the financial bleeding.

Retiredjg also mentioned not paying for school or cars for your children. I know this sounds like a painful step to take but your children can borrow money for those items but no one will loan you money for retirement. The best gift you can give your children is to position yourself for financial independence in your later years. They probably won't look at it that way right now but will appreciate your efforts when they are older. You simply cannot afford to pay for these items plus all of your debt.

In fact, if you own two cars you need to sell one and use any proceeds to pay down your HELOC.

On the question of the HELOC, the variable rate is a real problem. Rates are low right now so taking out a mortgage at a low, fixed rate, probably makes more sense. Close out the HELOC and try to get your spending under control.

Now is the time to tighten the belt and make sure you are on the path to a secure financial future.

Laura
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Re: Confused! What should I do with my portfolio?

Postby YDNAL » Sat Oct 23, 2010 3:18 pm

Judy,

This thread will be 6 months old shortly and a lot of information/changes/updates are scattered all over the map. I, for one, can't get myself to read through it - plus, I wouldn't chance it that I miss some major piece of information.

May I suggest the you start a new thread and you could actually refer to this thread with a link? Take your time and make sure ALL PERTINENT information is included.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Postby jmzf1958 » Sat Oct 23, 2010 3:44 pm

Hi. Great suggestion. I will start a new thread soon. When I started out, I had thought I'd had my home sold and would be moving, so I started this thread giving money amounts I thought I'd have when I closed. My home did not sell, so I'm going to start this over in the next few days with exactly what my situation is now. Thank you, everyone!
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