Help with retirement planning

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ktrdsl23
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Joined: Wed Nov 09, 2011 12:02 am

Help with retirement planning

Post by ktrdsl23 » Fri Sep 11, 2015 8:47 am

I am helping my aunt with her retirement planning and had a few questions for the people here. I’ll first summarize the situation and then ask the questions at the end. Sorry, but it is a bit long.

Recently my grandmother passed away and left my aunt and mother with a larger inheritance than my aunt was expecting. She is single with two adult children and one grandchild. She turns 69 in November. She never had a real target retirement date but the passing of my grandmother gave her both a sum of money and a retirement home which is bringing a lot of questions to the forefront. My aunt is getting my grandmother’s home in Florida (she currently rents in NY). I’ve had my aunt pull together some information regarding social security and expenses.

Income:
Social Security Retiring Now - $2794.20/month
Social Security Retiring in Nov 2016 (after 70) – 2866.60/month
Also will receive a pension from an old job of 212/month
Her current apartment lease expires in June 2016

Main Assets:
401k – Approx $100k
Inheritance balance (after assuming home rennovation costs) - $250k
Annuity – 25k balance (don’t know the details)

Current Expenses (monthly):
Rent – 1156, Cable/Utilities/Phone – 340, Food – 400, Clothes – 100, Entertainment – 150, Laundry/Dry Cleaning – 200, House Cleaning – 80, Personal Care – 160
Total – 2646

Separately she spends about $3k/year on vacations. Some expenses will certainly go down once she stops working (clothes and dry cleaning) however she plans on getting a car which she doesn’t have now so she’ll have to pay for gas, insurance and perhaps a monthly payment for a car. To be conservative we are figuring that her expenses will stay reasonably similar. Taxes, HOA fees and home insurance will be much less than her rent so figuring the added expenses of the car perhaps it should be a wash. She doesn’t expect her leisure and travel expenses to go up but I’m a little skeptical of that due to all the new free time.

My first order of business for her is to get the money from my grandmother moved out of its current locations (mainly different funds at places like American Funds, Wells Fargo and Franklin Templeton) over to either Vanguard or Fidelity. I’m very familiar with investing however I’m not as comfortable doing things such as risk profiling. I want her to have access to a representative where she can answer basic retirement and investing style questions. I’d certainly prefer if she can get that for free considering she should have between $200-350k of assets.

The next thing for her to decide is when she wants to retire or at least start collecting social security. She plans on working until the end of the lease next June. As it gets closer she can think about trying to extend her lease month to month or else retire but live off savings until she turns 70. Finally I’ll say that my grandmother who recently passed away was 96.5 so there is certainly long life genes in the family.

Questions
1) Is Fidelity or Vanguard better for access to free investment/retirement advice with a real person or are they the same?
2) Are there any good online questionnaires I can point her to in order to get a sense for her risk appetite in determining her investment allocations?
3) If her tax bracket is fairly similar now to what it would be in retirement does it make sense to try and direct funds over the next two tax years from her taxable investment account to either a 401k or IRA?
4) What is a recommended and fairly safe withdrawal rate for a 25 year time horizon? I know I have heard 4% is now considered a little risky for 30 years but considering her retirement income and lower time horizon would 4% seem reasonable for calculations?
5) Even though it appears that her income should exceed her expenses in retirement would it still make sense to consider an immediate annuity to give a little more cushion for an increase in expenses and then just let the extra savings grow
6) Any other thoughts or comments that I haven’t mentioned? I have not discussed with her the importance of leaving a legacy/inheritance for her children and grandchild.

Thanks in advance for all of the help.

SGM
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Joined: Wed Mar 23, 2011 4:46 am

Re: Help with retirement planning

Post by SGM » Fri Sep 11, 2015 9:26 am

She would get more than you state above by waiting 1 year to collect SS. She should get an additional 8% for waiting 1 year which would bring the amount above $3k per month. She could use the SS retirement estimator. Put in last years income and the projected earnings for 2016 and then put in age 70 for retirement.
http://www.ssa.gov/retire/estimator.html

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bobcat2
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Re: Help with retirement planning

Post by bobcat2 » Fri Sep 11, 2015 10:40 am

SGM wrote:She would get more than you state above by waiting 1 year to collect SS. She should get an additional 8% for waiting 1 year which would bring the amount above $3k per month. She could use the SS retirement estimator. Put in last years income and the projected earnings for 2016 and then put in age 70 for retirement.
http://www.ssa.gov/retire/estimator.html
I agree with SGM. The gain from waiting to take SS in November of next year would be more than triple the amount in your post. There is an error in your SS calculations!

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

ktrdsl23
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Joined: Wed Nov 09, 2011 12:02 am

Re: Help with retirement planning

Post by ktrdsl23 » Fri Sep 11, 2015 11:02 am

Thanks. I'm just quoting the numbers she told me. I'll have her double check this.

Any thoughts on the other questions?

EricBackus
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Re: Help with retirement planning

Post by EricBackus » Fri Sep 11, 2015 11:47 am

SGM wrote:...She should get an additional 8% for waiting 1 year which would bring the amount above $3k per month.
She would get an addition 8% of her PIA, not of the age 69 Social Security income. Presumably the value in the original post is the Social Security she would get at age 69, which is 24% larger than PIA. The increase would be 1.32/1.24 times the age 69 income, which is only about 6.4%, and would bring the total to just under $3k.

Of course, this is just nit-picking, your basic point (that the original post must have miscalculated something) is no doubt correct.

Grt2bOutdoors
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Location: New York

Re: Help with retirement planning

Post by Grt2bOutdoors » Fri Sep 11, 2015 12:02 pm

ktrdsl23 wrote:
Questions
1) Is Fidelity or Vanguard better for access to free investment/retirement advice with a real person or are they the same?
For free advice you can read the various perspectives posted on the websites of Vanguard/Fidelity. However, in my mind, short of this forum, there is no real "free" in the real world, the end game usually results in trying to sell you something or make you pay for it. The level of assets your aunt has would qualify her as a "preferred" customer at most major banks, again, once they see those level of assets they are going to do their best to sell you something - the customer always pays in the end. What sort of investment advice does your aunt require? Usually, the best steps are to a) develop an investment policy statement based on your aunt's need, ability and willingness to take risk. If she has "won the game", there is no theoretical need to take risk, if she hasn't but has a limited amount of assets then she might take some risk, but not significant risk, you don't want to lose what you have; b)implement the plan and stay the course, the less tinkering the better, you only tinker when there has been a signicant upcoming or immediate change in circumstances. Otherwise, you stay the course.
2) Are there any good online questionnaires I can point her to in order to get a sense for her risk appetite in determining her investment allocations?The problem with questionnaires is one usually doesn't know what their true risk tolerance actually is until a market disruption occurs, she might say she's willing to accept moderate risk, in 2009 moderate risk would have incurred something on the order of a 25% decline in assets. Only then, does one truly know what their risk appetite might be.

4) What is a recommended and fairly safe withdrawal rate for a 25 year time horizon? I know I have heard 4% is now considered a little risky for 30 years but considering her retirement income and lower time horizon would 4% seem reasonable for calculations?Typically, 4% but that is dependent upon time horizon and family longevity history. If you are 70 and most don't make it to 80, then spending a bit more like 5-6% may not be a bad idea, however if family has lived until late 90's, then 4% may be the better number. Consider looking at the IRS Required Minimum Distribution Table for Singles, select her retirement age and see corresponding percentage next to it - IRS keeps careful track of mortality rates. Since apparently, the average age of death is roughly 85, that means 50% don't even make it to that age, but 50% do and may exceed it. http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf At age 70, IRS recommends minimum distribution of 1/27.4 or 3.65% in the first year. Each succeeding year, the denominator decreases and RMD amount increases.
5) Even though it appears that her income should exceed her expenses in retirement would it still make sense to consider an immediate annuity to give a little more cushion for an increase in expenses and then just let the extra savings growConsider purchasing a single premium immediate life annuity, only at the time the income is needed. Annuities are priced given prevailing interest rates and ages at the time of application, if rates rise in the future, your aunt will benefit from that along with her higher age. If she takes out the annuity now, she will have excess income (or will she?). If the money is from after-tax sources, a good portion of the payment in the initial years will be a return of capital; her own money! Nothing is free, this isn't a case of where you buy an annuity now and the insurance company will give you extra; insurance companies are in business to make money for their shareholders. It appears your aunt may come from a line of long lived relatives - if that is the case here, waiting until the money is truly needed will enable her to access a much larger payment down the road.
6) Any other thoughts or comments that I haven’t mentioned? I have not discussed with her the importance of leaving a legacy/inheritance for her children and grandchild.You may want to consider that.

Thanks in advance for all of the help.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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KlingKlang
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Re: Help with retirement planning

Post by KlingKlang » Fri Sep 11, 2015 12:19 pm

One factor that I wasn't clear on - does your aunt want to move into the house in Florida, or would she consider selling it and either continue renting or buying a house in New York?

ktrdsl23
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Re: Help with retirement planning

Post by ktrdsl23 » Fri Sep 11, 2015 12:27 pm

Thanks for those great answers Grt2bOutdoors.
KlingKlang wrote:One factor that I wasn't clear on - does your aunt want to move into the house in Florida, or would she consider selling it and either continue renting or buying a house in New York?
She will be moving to the house in Florida. She will need to spend some money renovating it which I subtracted from her inheritance balance in my post.

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KlingKlang
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Re: Help with retirement planning

Post by KlingKlang » Fri Sep 11, 2015 12:58 pm

KlingKlang wrote:One factor that I wasn't clear on - does your aunt want to move into the house in Florida, or would she consider selling it and either continue renting or buying a house in New York?
She will be moving to the house in Florida. She will need to spend some money renovating it which I subtracted from her inheritance balance in my post.

The reason that I asked is that many 69 year olds would be uncomfortable moving to a new state if they did not have any friends and family there. It also affects your expense estimates.

3) If her tax bracket is fairly similar now to what it would be in retirement does it make sense to try and direct funds over the next two tax years from her taxable investment account to either a 401k or IRA?

Your aunt will be required to begin making RMDs the year after she turns 70.5 from traditional IRAs in any case and also from 401(k)s if she has retired, so they would be only minimally useful. A Roth IRA or Roth 401(k) would probably be better.

Any free advice on retirement/investments that you receive will be pretty generic. Try to keep the investments as simple as possible. Would your aunt feel comfortable managing an investment portfolio or would turning her assets into an annuity simplify things?

The rest of the advice that you received from Grt2bOutdoors was excellent.

SGM
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Joined: Wed Mar 23, 2011 4:46 am

Re: Help with retirement planning

Post by SGM » Fri Sep 11, 2015 1:01 pm

EricBackus wrote:
SGM wrote:...She should get an additional 8% for waiting 1 year which would bring the amount above $3k per month.
She would get an addition 8% of her PIA, not of the age 69 Social Security income. Presumably the value in the original post is the Social Security she would get at age 69, which is 24% larger than PIA. The increase would be 1.32/1.24 times the age 69 income, which is only about 6.4%, and would bring the total to just under $3k.

Of course, this is just nit-picking, your basic point (that the original post must have miscalculated something) is no doubt correct.
Good catch Eric. One must base the 8% on the PIA at FRA, in her case age 66. The 8% is not compounded. Thanks, SGM

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