Is it worth starting investing if 7-8 years from retirement?

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spoonfork
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Is it worth starting investing if 7-8 years from retirement?

Post by spoonfork » Tue Nov 14, 2017 5:09 am

My parents have everything in their annuities and one rental property. They think that combined with their social security will cover them. They are self employed and have no access to 401k. Is it worth it for them to start a taxable brokerage account right now when they still have 7 or 8+ possible years before retirement? They are in the 28% federal and 9% california brackets. I was thinking just putting 50/50 into Total Stock market and the Intermediate Tax Exempt bonds and do a 60/40 conservative growth fund in their IRAs.

Caduceus
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by Caduceus » Tue Nov 14, 2017 5:14 am

If they are self-employed, they can still contribute to IRA, and they can easily set up a Solo 401k at most brokerages. No need to set up a taxable account, which is tax inefficient, especially at their tax rates.

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BL
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by BL » Tue Nov 14, 2017 5:18 am

I think you have the right idea.

Also you could help them set up an Individual 401k or IRA, depending on whether they have employees or not. You can get lots more set aside that way. Here is a comparison on Vanguard, although many others offer these plans:
https://investor.vanguard.com/what-we-o ... plans[url][/url]

spoonfork
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by spoonfork » Tue Nov 14, 2017 5:22 am

Caduceus wrote:
Tue Nov 14, 2017 5:14 am
If they are self-employed, they can still contribute to IRA, and they can easily set up a Solo 401k at most brokerages. No need to set up a taxable account, which is tax inefficient, especially at their tax rates.
They looked into the solo 401k with their accountant and they didn't really like the idea or it was too complicated.

The business is just the two of them and one part timer working fewer than 20 hours a week on min wage. I don't think I could convince them to set something like that up. But they do continue maxing out their IRAs. I just want to put their extra cash into something that could grow in the taxable. I'd be contributing 14k per year to it as well as a gift. Or if 7-8 years isn't worth it then I guess a CD is better than nothing.

ivk5
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by ivk5 » Tue Nov 14, 2017 5:39 am

Do it. Timeframe isn't 7-8 years - one doesn't withdraw all one's funds the day of retirement. I didn't see ages but they may need to plan for possibility of retirement lasting 20-30+ years. Especially important to invest to manage inflation risk over that time period if annuities aren't inflation-adjusted.

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Re: Is it worth starting investing if 7-8 years from retirement?

Post by niceguy7376 » Tue Nov 14, 2017 5:44 am

spoonfork wrote:
Tue Nov 14, 2017 5:22 am
They looked into the solo 401k with their accountant and they didn't really like the idea or it was too complicated.

The business is just the two of them and one part timer working fewer than 20 hours a week on min wage. I don't think I could convince them to set something like that up. But they do continue maxing out their IRAs. I just want to put their extra cash into something that could grow in the taxable. I'd be contributing 14k per year to it as well as a gift. Or if 7-8 years isn't worth it then I guess a CD is better than nothing.
They are good candidates for Solo 401k even with that one employee. They can contribute employee max of 18K for each of them.
It is not complex to set it up.
At their tax bracket, this would be a slam dunk.

spoonfork
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by spoonfork » Tue Nov 14, 2017 5:45 am

Ok thanks. I'll talk to them again and looking at the solo 401k Vanguard page it looks like the only administrative cost is $20 a year per fund. How long does it usually take to set something like this up?

aristotelian
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by aristotelian » Tue Nov 14, 2017 7:01 am

spoonfork wrote:
Tue Nov 14, 2017 5:45 am
Ok thanks. I'll talk to them again and looking at the solo 401k Vanguard page it looks like the only administrative cost is $20 a year per fund. How long does it usually take to set something like this up?
+1, Solo 401k would be ideal. If they delay their annuity and SS, they could withdraw from the Solo 401k practically tax free for a few years while increasing their benefits.

Takes about 10 minutes to do the paperwork, a week or so of waiting, and then another 10 minutes to work out the contributions and execute the transfers.

I believe if the account is set up by the end of the year, they would then have until April 15 to contribute for 2017.

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Re: Is it worth starting investing if 7-8 years from retirement?

Post by Grt2bOutdoors » Tue Nov 14, 2017 7:19 am

ivk5 wrote:
Tue Nov 14, 2017 5:39 am
Do it. Timeframe isn't 7-8 years - one doesn't withdraw all one's funds the day of retirement. I didn't see ages but they may need to plan for possibility of retirement lasting 20-30+ years. Especially important to invest to manage inflation risk over that time period if annuities aren't inflation-adjusted.
+1, so long as they are comfortable with the proposed allocation. It may be a shock for someone accustomed to zero fluctuations to see the value move up and down.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

J295
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by J295 » Tue Nov 14, 2017 7:50 am

No comment on how it should be invested, but whether it should be invested… Reminds me of the saying… when’s the best time to plant a tree? Answer: 20 years ago. Second best time: today.

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ruralavalon
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by ruralavalon » Tue Nov 14, 2017 8:15 am

spoonfork wrote:
Tue Nov 14, 2017 5:09 am
My parents have everything in their annuities and one rental property. They think that combined with their social security will cover them. They are self employed and have no access to 401k. Is it worth it for them to start a taxable brokerage account right now when they still have 7 or 8+ possible years before retirement? They are in the 28% federal and 9% california brackets. I was thinking just putting 50/50 into Total Stock market and the Intermediate Tax Exempt bonds and do a 60/40 conservative growth fund in their IRAs.
Yes, definitely worth it.

No matter what type of account is used, they can build up additional savings to give them a margin of error, in case there are expenses coming which they do note anticipate, or they live longer than they expect.

They could simply use an ordinary joint taxable account.

In the 28% bracket they could benefit greatly from an account that can produce a tax deduction. Since they are self-employed they could consider using a SEP IRA, SIMPLE IRA, or individual (solo) 401k. Vanguard, small-business plans,"Compare plans". Fidelity also offers the same types of plans. Fidelity "Retirement plans for small businesses ". The Bogleheads' wiki has articles on each type of plan. Boglehead's wiki, "SEP IRA". Boglehead's wiki, "SIMPLE IRA". Boglehead's wiki, "Solo 401k Plan".

If they or their accountant think that a 401k or solo 401ks are too complicated, a SEP IRA or SIMPLE IRA involve much less paperwork.
Last edited by ruralavalon on Tue Nov 14, 2017 8:23 am, edited 2 times in total.
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msk
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by msk » Tue Nov 14, 2017 8:19 am

If not 20 years ago then today is next best.
+1
I retired 18 years ago. Despite all the withdrawals I have made since then, my NW has gone up a factor 7.18x :greedy A bit of RE carried over from before retirement but soon thereafter 100% stocks. Retirement affords you time to manage your investments...

NotWhoYouThink
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by NotWhoYouThink » Tue Nov 14, 2017 8:47 am

What annuities do they have? In addition to opening investment accounts, they might want to look at whether they could reduce the costs (improve the performance) of their annuities. (Spoiler alert: They can)

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Watty
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by Watty » Tue Nov 14, 2017 8:55 am

spoonfork wrote:
Tue Nov 14, 2017 5:09 am
My parents have everything in their annuities and one rental property. They think that combined with their social security will cover them. They are self employed and have no access to 401k. Is it worth it for them to start a taxable brokerage account right now when they still have 7 or 8+ possible years before retirement? They are in the 28% federal and 9% california brackets. I was thinking just putting 50/50 into Total Stock market and the Intermediate Tax Exempt bonds and do a 60/40 conservative growth fund in their IRAs.
It would be good to have them take a hard look at their numbers. Being in the 28% federal tax bracket implies that they have around $200K in income so they may need a lot of retirement income to keep their same lifestyle in retirement.

Social Security will not cover much of that especially after one of them dies. The rental property can provide good income but they need to be careful to have good reserves for vacancies and maintenance. If they are managing it himself now then they might have to hire a property manager when they get older. One huge risk though is that they could still own the rental 30 years from now and by then the house and neighborhood may be declining and what is a nice property today could be marginal by then and might not provide as much income as they are planning on.

There was not much information about what their "annuities" are but in addition to almost always being a poor investment because of the high costs a huge problem with many annuities is that the sales brochures are often very misleading and give overly optimistic false projections that lead people to think they will have more than they are likely to actually get. They may also have very little inflation protection.

spoonfork
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by spoonfork » Tue Nov 14, 2017 10:14 am

aristotelian wrote:
Tue Nov 14, 2017 7:01 am
spoonfork wrote:
Tue Nov 14, 2017 5:45 am
Ok thanks. I'll talk to them again and looking at the solo 401k Vanguard page it looks like the only administrative cost is $20 a year per fund. How long does it usually take to set something like this up?
+1, Solo 401k would be ideal. If they delay their annuity and SS, they could withdraw from the Solo 401k practically tax free for a few years while increasing their benefits.

Takes about 10 minutes to do the paperwork, a week or so of waiting, and then another 10 minutes to work out the contributions and execute the transfers.

I believe if the account is set up by the end of the year, they would then have until April 15 to contribute for 2017.
I called Vanguard and they say we are not eligible. The part time employee has a w2 so she is considered a "common law" employee and we can't do the solo 401k.
NotWhoYouThink wrote:
Tue Nov 14, 2017 8:47 am
What annuities do they have? In addition to opening investment accounts, they might want to look at whether they could reduce the costs (improve the performance) of their annuities. (Spoiler alert: They can)
They each have something called Metlife Single LIfe and it has a 15 year guarantee after they turn 70. And it's in their IRA and I told them to stop paying into it until I research it more. Annuities are confusing.

ZWorkLess
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by ZWorkLess » Tue Nov 14, 2017 10:39 am

I suggest you investigate the SIMPLE IRA.

I set one up through Vanguard for our own small business. We have a dozen employees, about 2/3 of whom are eligible for the SIMPLE IRA and also use it. My spouse and I are both on payroll and use the SIMPLE IRAs. We've had it 2 years, and it's been awesome.

For your folks, they can each (assuming both are 50+) put in pre-tax up to $15,500 (12,500 standard limit plus 3000 catch up contribution for being 50+), plus a match from the business of 3% of their salaries -- so maybe an extra 2000-3000 each or more depending on how they structure their pay. They can limit eligibility for "staff" to 2+ years of employment plus 5000/yr of pay, so if their PT employee doesn't meet that, they won't have to let them participate. If their PT employee meets that, their only cost will be matching up to 3% of the person's pay, so a nominal cost.

The SIMPLE IRA is very easy to set up through Vanguard. I did it. Sign up paperwork took a couple hours. Annual paperwork takes a few minutes -- maybe an hour max -- each year. Contribution process/paperwork takes a couple minutes per pay period -- just a few clicks. You have access to zillions of excellent Vanguard funds. Extremely economical to set up and manage.

There might be time to still get it set up for 2017 if you are super fast. If they don't have an urgent need to get it set up for 2017, then just try to get it done ASAP to get it rolling for 2018.

ZWorkLess
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by ZWorkLess » Tue Nov 14, 2017 10:44 am

ps. Say each can put 18,000 total (15,500 from self, 2,500 from company match) into a SIMPLE IRA for 7 years. That's 36,000 total per year. Times 7 = $252,000 in contributions in 7 years. Not including gains during those seven years. Total rough guess, that might be worth $400,000 total 7 years from now. Not insignificant $$ in my world. No taxes on gains or distributions until they are taken . . . pretty sweet deal. If they can afford to fully fund the SIMPLE IRAs, it'd be well worth the trouble, IMHO.

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Re: Is it worth starting investing if 7-8 years from retirement?

Post by bertilak » Tue Nov 14, 2017 10:51 am

Their investment portfolio will serve them not only from now up to the point of retirement but will serve them through many (we hope) years IN retirement.
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Caduceus
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by Caduceus » Tue Nov 14, 2017 5:12 pm

spoonfork wrote:
Tue Nov 14, 2017 10:14 am

I called Vanguard and they say we are not eligible. The part time employee has a w2 so she is considered a "common law" employee and we can't do the solo 401k.
If your parents can take full advantage of the Solo 401k, they can contribute hundreds of thousands of dollars if they wish over the next 8 years cumulatively. The tax benefit for small business owners is crazy awesome. So, if their only employee is one that works a few hours a week at minimum wage, I suggest they consider doing that work themselves because whatever minimum-wage work they do will end up getting paid, in real terms, after taking into consideration the tax benefits, at a very high rate. It's like getting paid the hourly wage of a corporate lawyer for sweeping the floor. Just do it!

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Earl Lemongrab
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by Earl Lemongrab » Tue Nov 14, 2017 6:42 pm

As I recall, an employee that works less than 1000 hours per year does not have to be included in the plan.
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by David Jay » Tue Nov 14, 2017 6:56 pm

spoonfork wrote:
Tue Nov 14, 2017 10:14 am
Annuities are confusing.
And whom do you think benefits from that complexity? The insurance company or the buyer?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Is it worth starting investing if 7-8 years from retirement?

Post by arcticpineapplecorp. » Tue Nov 14, 2017 6:59 pm

maybe the tax bracket was the issue, but couldn't they also put money in Roths for the next 7-8 years (or backdoor Roths if not eligible for regular) and since they don't "need" the money since SS will cover them, the money could grow and could be passed to heirs tax free. They wouldn't have any RMDs on the Roths, which works because they don't "need" the money.
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epictetus
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Re: Is it worth starting investing if 7-8 years from retirement?

Post by epictetus » Tue Nov 14, 2017 7:01 pm

will they be comfortable seeing the value of their portfolio decrease by 25-30% at any time? have to expect that at any time at a 50-60% stock allocation.

if they are not and end up selling after it has gone down they would be better off staying in something less volatile
Focus on what you can control

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