| How to plan retirement funding & asset allocation? |
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maddoxsb
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| How to plan retirement funding & asset allocation? |
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I am almost brand new to investing/saving due to my recent divorce. My husband was responsible for all of this, while I took on other aspects of our life. In retrospect I could kick myself for being so out of the loop because now I know practically nothing about how money grows and where to put it.
Fortunately I think I have an okay (not great) savings going. I have a Roth IRA and money in a Vanguard account, in addition to a pension from teaching (I'm 39 and plan to teach another 17-20 years). I have a respectable checking account (I can provide numbers here if it helps).
I find myself looking for online calculators to give me some peace of mind that I'm doing things right and that I won't end up at retirement age penniless. I would be so grateful if any of you have a suggestion for a reliable online calculator that can help put my mind at ease or suggest another way I should be doing things with my money.
Many thanks.
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Tue Nov 16, 2010 5:39 pm |
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oldguy
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quote:
I have a Roth IRA and money in a Vanguard account, in addition to a pension
Factors - time, amount, return. Your 20-yr time horizon is fixed - and your monthly investment contribution is probably fixed (within a fairly narrow range). So that leaves 'return'. And it's a big factor - Eg, say that you invest $5000/yr ($100,000 total) - at 2%/yr return you'll have $124,000 - at 12%/yr you'll have $404,000 - a midpoint 8%/yr is $247,000.
BTW, your wealth doesn't quit growing just because you retire (I'm retired) - the $404,000 will be about $1,300,000 ten years later if you do not draw from it.
The Law of Investing - Risk and return are directly proportional. No-risk products - CDs, savings account - are designed to track inflation, they are designed to protect your purchasing power but not to grow. So you need to avoid the no-risk products in your wealth building accounts. High risk products result in failures and restarts, the long term result is usually not good (unless you are very lucky) - so you need to avoid high risk products. That leaves 'moderate risk', like many things, moderation wins. Invest in moderate risk products, purchase incrementally & steadily, don't sell, don't try to time the market - becoming wealthy is slow and boring (no corn future trades).
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Tue Nov 16, 2010 6:13 pm |
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RetiredInTX
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| Re: Reliability of online retirement calculators? |
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quote:
Originally posted by maddoxsb
I have a Roth IRA and money in a Vanguard account, in addition to a pension from teaching
By your own admission, you're 20 years away from (what would be an early) retirement. Time is your friend. The taxman is not.
You need to make some guesstimates as to 1) how much money you'll need per year in retirement -- usually somewhere 70%-100% of your current income, 2) how much money you'll get per year from your pension (and from Social Security if you're eligible). Subtract #2 from #1 and that's how much money you'll need to come up with per year from your own savings.
A standard rule-of-thumb says that you can start to draw down your savings in retirement by 4% the first year, increasing slightly each year for inflation, with a fairly low risk of running out of money during your lifetime. Put another way, take the amount you calculated above and multiply it by 25 to come up with the savings you should have in place at retirement time. That amount is your retirement savings goal.
So you need to figure out how much to salt away so that you'll have that money when you want to retire. Savings in tax-sheltered plans (IRA's, 401K's, 403B's, etc.) grow much faster than taxable accounts since the earnings keep compounding, and no taxes have to be paid until the money is withdrawn in retirement. You'll definitely want to fund your IRA each year to the maximum amount you can afford, up to the maximum amount allowed by law. (I assuming that since your employer provides a pension, there is no tax-deferred savings plan available to you at work.) The decision as to Roth or Conventional IRA depends on what tax bracket you think you'll be in when you retire. If it's a lower bracket, Conventional is preferred. If it'll be a higher tax bracket, then Roth is the winner. Nobody really knows what'll happen to the tax laws in the next 20 years, so it's a crap shoot at best. Several advisors recommend you have some retirement money in each type of IRA.
Since you're already a Vanguard customer, I would recommend that you invest in a couple of their low-cost index funds -- for example, 1/3 Total US Stock Market Index, 1/3 Total International Stock Index, 1/3 Total Bond Market Index. Then, once a year, you check to see if the fractions are still 1/3, 1/3 and 1/3. If not, sell some of the fund that's over-weighted to purchase more of the underweighted fund(s) to get back to your 1/3, 1/3, 1/3 allocation. That's what's known as rebalancing. It's v-e-r-y important that you do this.
Since the bond portion generates income, you'd certainly want to put that in your IRA account to keep the taxman at bay. As you get older, you'd want to lighten up on the stocks and increase your bond exposure, perhaps something like 1/4 Total US Stock Index, 1/4 Total Int'l Stock Index, 1/2 Total Bond Market Index by the time you reach retirement. The greater the percentage of stocks in your "mix" the greater the potential gains (and losses) and the greater the volatility. The bond portion is less volatile, but has lower potential upside. A 100% stock portfolio is too risky, but a 100% bond portfolio would be too tame -- there's a good chance it wouldn't grow fast enough to meet your goal. You need to come up with a "mix" (asset allocation) that grows enough to meet your goal, but isn't so volatile that the ups and downs keep you awake at night. That's a very personal number that only you can decide. But for someone your age 2/3 stock and 1/3 bond isn't outrageous.
I commend you for your efforts so far. You're doing better than I did. I didn't seriously think about retirement planning until my late 40's, and then had to put the savings pedal to the metal to build up enough to allow me to retire "on schedule". You're starting earlier, and time is on your side. Well done.
So, save as much as you can. Put the money into low cost, diversified investments. And, rebalance annually. And when the inevitable bear market rears its ugly head...stay the course. Don't sell in panic.
Note: I am not affiliated with Vanguard (or any other financial company).
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Thu Nov 18, 2010 6:39 pm |
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RetiredInTX
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quote:
I'd suggest 10% bonds at most for now.
I'd agree that in pre-retirement years the role of bonds in a portfolio is to smooth out the bumps that you'd find in an all-equity portfolio. Granted, the higher the bond percentage, the lower the potential return will be. But, if I'm 90/10 and the stock market drops 50% -- a 45% drop in total portfolio value, would I panic and sell at the bottom? If I would, then 90/10 isn't an appropriate asset allocation for me. That's why I think the exact asset allocation is a very personal decision. You need to pick a mix that you can live with bull or bear and still sleep at night. BTW the Fidelity 2030 and 2035 Freedom target-date funds are currently 25% and 18% bonds, respectively.
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Sat Nov 20, 2010 4:52 pm |
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RetiredInTX
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When I mentioned panic selling, I didn't mean pulling money out of the retirement account. In '08 when things were at their worst, I watched fellow employees bail out of stocks in their 401K and move their money into stable value. Those same folks sat on the sidelines during '09 and '10 and missed most of the recovery. If they had chosen an allocation they could believe in, and not succumbed to panic, they would be much better off now.
I stayed the course through that period, kept my allocation, and my accounts recovered nicely so that I was able to retire this year at my convenience, not my employer's. I also managed to max out my $22k 401K contribution and $6K IRA contributions for copilot and myself for 2010 prior to pulling the plug.
Coaster, I hope your plans work out. Incidentally, what part of WI are you from? I grew up in central WI (Waupaca Co.) and graduated from UW-Madison way back when. Been in TX for more than 30 years, though.
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Sun Nov 21, 2010 4:57 pm |
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TraderSmits69
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Coaster has it right, you need to stick with a game plan that is solid and appropriate for your situation. Asset allocation is a key criteria to get right for long run returns... its the asset class that determines most returns, not the individual stock or fund (if your focus is long term).
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Thu Dec 02, 2010 2:24 am |
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harrywinston
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As you can see when there are many balls in the game a asset allocation plan. I will recommend letting the plan that will help you create a financial advisor. Your goal is to bring into focus that fiscal picture, and this volatility with the time frame and comfort define the pension balance against.
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Tue May 31, 2011 12:31 pm |
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