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Need some retirement saving advice please.

14 years ago

I am embarrassed to admit, we know hardly anything about saving for retirement. I have purchased several books and reading a ton to try and learn. My husband is a police officer and contributes to a 457 deferred comp plan at work. We put in $600 per month. Should we stick with the 457?? Is this a good plan? The one thing about the 457 is it allows him to draw on his retirement before the age of 59 1/2 with no penalties. We are pretty sure he will retire before the age of 59 being that he is a police officer.

He does have a pension in place at work as well so for retirement, he will have his pension as well as what we have saved via the 457.

I am wondering about the Roth IRA though. I have been hearing so much about this but don't know if it's good in our situation. Should we be putting money into a Roth IRA? Should we be maxing that out (4,000 I believe) and then putting the rest into the 457? Should we roll over the money in the 457 into the Roth IRA? I think that is an option this year where before it was not. Keep in mind that he will probablly be retired before the age he can withdraw on the IRA. Probablly between 55-57 he will want to retire.We are 37. Right now we have a little less than 50,000 in his 457.

I guess what I am trying to figure out is should we invest in the Roth IRA but keep his 457? If he opted to retire early, he would have the what's in his 457 and his pension, which would be 82.5% of his pay at the time he retires yearly. Then he could draw on the Roth IRA at 59 1/2.

PLease offer you advice. I would greatly appreciate it.



Comments (18)

  • zone_8grandma
    14 years ago
    last modified: 7 years ago

    The best advice I can offer you is to get a good Certified Financial Planner (do a search on this list - there are some very good threads with some excellent links). Look for posts by jkom - she used to work for one.

    Really good, careful retirement planning requires a lot of knowledge. We started seeing a CFP about 4 years before DH retired (he retired 2 weeks ago at the age of 59). The CFP made a number of suggestions that had not occured to us; he also got me started carefully tracking our spending and net worth.

    Just make sure he (or she) is a Certified Financial Planner, because anyone can call themselves a "Financial Planner". The last person you want is simply someone who makes their money selling you insurance or stocks or mutual funds.

  • alphacat
    14 years ago
    last modified: 7 years ago

    If I understand things correctly, a 457 is like a 401(k) except that it allows for early withdrawal.

    If that's correct, then the first question is whether there is any employer matching for the 457. If there is, it's free money, so you should give priority to the 457.

    Otherwise, whether the Roth or the 457 is better depends on whether tax rates will be higher or lower during retirement than they are now. If you think they'll be higher, you're better off with the Roth, because you pay taxes now rather than when you withdraw. If you think they'll be lower, then the 457 is better.

    I expect that if you roll money over from the 457 to the Roth, you pay taxes on that money now. Whether that's a good idea depends on your tax bracket.

    Another question: How is the 457 invested? What are your options? One advantage of a Roth is that you can invest it any way you like. That's also a disadvantage, because you have to decide.

    FYI, $600/month may feel like a lot. However, if you invest that much for 20 years, and increase the amount you invest to keep up with inflation, you'll only have about $200,000 in today's dollars. That's assuming an inflation rate of 4% and an investment return of 8%. That, in turn, will only be enough to pay you about $8,500 per year in today's dollars, assuming you want the payment to keep up with inflation.

    So even though $200,000 may seem like a lot, you're really going to have to rely on his pension.

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  • jakkom
    14 years ago
    last modified: 7 years ago

    Thank you, zone8_grandma, for the kind words! I am definitely an amateur, but learned a lot of interesting stuff working in the banking, insurance, and then for the independent CFP (I also learned a lot about big system consulting for Accenture, but nobody cares about that job stint, LOL).

    Alphacat's point about the 457 employer contribution is spot-on. If the employer contributes, that's your maximum retirement savings vehicle. Also, the contribution limits for 457 plans are generally much higher than for a Roth IRA.

    Another consideration is the COST of investing those retirement funds. It will do you no good to focus strictly on the return you might make on either, nor the tax situation, if you do not have a good handle on what the investment managers for both the Roth and the 457 accounts are charging you.

    My DH is fortunate to be a member of CalPERS, the largest retirement fund in the world. They aggressively manage expenses and thus the individual fund costs vary, but fees are as low as you can get for overall fund management. This is apparently not true for all retirement fund management, as witnessed by some interesting stories in some of the finance magazines I get like SmartMoney and Fortune. Check your end of year statements carefully, or it will be in the prospectuses. A high management charge like 1.5%, on top of the fund expense charges, can really "eat into" your overall returns.

    If you can afford it, fund retirement to the max. If your DH's employer contributes, fund the 457 first, then the Roth. The Roth is a better deal than many pretax plans ONLY if you are looking at a 15-20 yr timeframe to accumulate those tax savings; but again, it is limited to $4K/yr which is miniscule.

    If you have the timeline and the $$$, fund both. You do not say whether you are also saving and working on your own. If you have any earned income for the year, you can fund a Roth in an amount equal to your own earnings, and up to the limit of $4K annually.

    You need to remember that your retirement savings are as a couple. What are you bringing to the table? For instance, when my DH retires, he can select the option of reducing his pension by about 11% to fund a survivor's benefit for me (or any beneficiary he chooses). That way, if he dies the beneficiary will continue to get the same pension amount he received. This is great for me, but it does mean an overall reduced payment.

    Some government pensions are not so generous, they will only fund the beneficiary 50% of what the original pensioner received. This is where a CFP - someone who actually has the license and experience to do estate planning, they are the ONLY legally-certified planners who can do estate planning - can come in handy, to help you figure out the various scenarios. It can be tricky to find one if you don't make their portfolio minimums. Most independent CFPs have at least a $250K liquid portfolio minimum.

    However, there are CFP-certified brokers who work for many of the big brokerages, including low-cost ones like Vanguard and Fidelity. This might be an option for you. They won't do anything complicated, usually it's just a plug-in-the-numbers software program, but it might at least give you a start.

    The best advice anyone can give you is to not panic over market hiccups, ignore the sensationalist media hype, save as much as you can, and diversify your portfolio. You can do the latter with a modest selection of market index funds, or the many retirement-date funds that just about everyone offers. Again, check the expense ratios for the funds themselves as well as what the fund management committee is charging.

  • thundersweet
    Original Author
    14 years ago
    last modified: 7 years ago

    They do not match his earnings in his 457.

    I feel so lost! We do not have a 250K fund. How am I supposed to find someone to help us figure this out?

    I am a stay at home mom and have been for the last 6 years. I will not be going back to work.

    There is a guy at our credit union that is a financial planner. I e-mailed him ask asked if he was a CFP. It is free of charge to it's members and I have heard he is really good. Would that be a good place to start?

    I feel so at a loss. Neither one of us knows what we are doing. Just putting money in. At the bottom of his statement it says, plan expenses and fees (a maximum of 0.1875% of asset value quarterly. Is that good or bad?

  • thundersweet
    Original Author
    14 years ago
    last modified: 7 years ago

    This may be a stupid question but here goes. You said most CFP will not work with you unless you have 250K minimum portfolio. Does this portfolio include any equity you may have in your home?


  • jakkom
    14 years ago
    last modified: 7 years ago

    Don't worry, the only bad questions are those which aren't asked!

    Unfortunately, the $250K minimum (I have seen CFP's who will take a $100K portfolio but that's pretty rare) is liquid investible assets only, so home equity is not included.

    Many times a CFP who is starting out will work on a time and expense account; e.g., hourly. The only way you can find one is to call around. Check their website (link below) for referrals in your area. There are CFP's who don't belong to this organization, so don't fret if you get a referral to somebody and they're not listed. It's just a starting point. You should always request references and check them out anyway. Finding a planner, like any other professional help, is as much as a matter of personal chemistry - can I work with this person? - as it is fulfilling a checklist of requirements.

    Even if you call around and no one is working on an hourly basis, ASK if they know anyone who is. It is not unusual for established CFPs to have had staff who have gotten their CFP designation and struck out on their own, so they may know someone who can help you.

    There are also excellent articles on the CFP website. Other good websites for you to learn about finances - something that I believe essential for everyone - are the Money magazine website, the AARP website and Yahoo website.

    A financial planner can give you advice about saving and investing. They CANNOT and should not give you any advice about estate planning as a whole; to do so would be breaking the law. If you are just starting out on investing, I would certainly suggest you take advantage of using the free financial planner offered to you. Like anything else, learning something new is just a matter of breaking down into small doses you can handle. The trick is to remember it is a long learning process. You cannot and should not hand over your money to anyone without fully understanding what they are doing with it. Investing is not a "set and forget" thing: ignorance often gets punished when it comes to money.

    thundersweet, since the employer does not contribute to the 457, I would suggest you fund a Roth to the maximum each year, then fund the 457 as much as you can possibly manage. Every rebate and refund should go into your savings account so that you have adequate liquidity in case of emergency, anywhere from 2-6 months of expenses depending upon your overall financial situation.

    If you have not made out wills, do so IMMEDIATELY. Type out a quick 1-pager for each of you, sign it and have your neighbors witness them. The reason for this is that in most cases, spouse to spouse transfers upon death are simple. But let both partners die, and it will leave a hideous mess if there are no wills.

    Here is a link that might be useful: Articles & Search for a CFP: website

  • lucy
    14 years ago
    last modified: 7 years ago

    Go to your bank - they have people who do nothing but investment and retirement work, and they can present you with a lot of options and explain them to you, which would make sense for you, and which wouldn't.

  • dreamgarden
    14 years ago
    last modified: 7 years ago

    zone_8grandma -Just make sure he (or she) is a Certified Financial Planner, because anyone can call themselves a "Financial Planner". The last person you want is simply someone who makes their money selling you insurance or stocks or mutual funds.

    Here is a little more information about CFP designations. This title is NOT bestowed by any securities regulatory organization. It's similar to the difference between an interior decorator and an interior designer. The latter requires a college degree and license, whereas the former may be usually a frustrated housewife looking for a reason to get out of the house.

    If your financial planner is also your stockbroker, then you are on safe grounds in terms of licensing. Your stockbroker has a Series 7 license that allows him or her to make trades on your behalf. Problems arise when individuals who call themselves financial planners give investment advice without the requisite licenses. Other than a Series 7-licensed stockbrokers, anyone who give advice about stocks and bonds must have an RIA license. Make sure the financial planner you choose to work with has this.

    Unlike money managers and mutual fund managers, financial planners rarely take control of your funds. Your money is usually deposited with a financial institution and the planner merely issues instructions on how the money is to be invested. Unless you give the financial planner discretionary trading authority, planners, like stockbrokers, must discuss with you each and every trade or investment idea.

    If you want to be involved in the day-to-day management of your money, choose a planner or broker, not a mutual fund or professional money manager. Put another way, planners and brokers are in the advice business, whereas money managers and mutual fund managers are in the management business.

    thundersweet -"There is a guy at our credit union that is a financial planner. I e-mailed him ask asked if he was a CFP. It is free of charge to it's members and I have heard he is really good. Would that be a good place to start?"

    A good friend of mine uses the CFP at their credit union. She says he has been very helpful.

    The is a poster here named Joyful guy. He used to be a financial planner. He frequently offers interesting bits of useful information. You might want to search through his posts to see what he has to say.

  • thundersweet
    Original Author
    14 years ago
    last modified: 7 years ago

    jkom51...thanks for all of the advice! Wow, you are good! After the reading I have done I was thinking we should do exactly what you posted above. Fund the Roth to the max and put the rest in the 457. I just wasn't sure if for us, it would be the best thing since dh will retire no later than 57 most likely. Roth you must wait till 59 1/2 correct? At 57 he would have 30 years into his county and would be eligeble for the full pension. We are working on our emergency fund now.

    Our home is valued at, at least 650,000 today. We currently owe 417,000. That will be paid off before retirement. At that time, our plan is to sell this house and move out to the country to a smaller, way less expensive, home. That's the plan anyway. So, we would have a rather large sum of money added to our nest egg at that time from the money we have in the house. We recently added an in law suite and my mom is living here with us. We won't be selling this house, more than likely, until it's paid in full. After my mom is gone, there will be no need to stay in this house.

    Thanks everyone for all of the advice! I did hear back from the guy at the credit union and he is not a CFP. He's just a financial planner.He did say he was there to talk with us at no charge or obligation and would be happy to look over our program. I think I'll start with him and see what he has to say. I will continue to read and learn on my own though. This stuff is fascinating!


  • jakkom
    14 years ago
    last modified: 7 years ago

    >>If your financial planner is also your stockbroker, then you are on safe grounds in terms of licensing. I take issue with this. The reason is that I have previously emphasized that there is a distinct difference between FIDUCIARY responsibility and ADVISORY responsibility when dealing with financial planners and brokers. It is really, truly critical that people understand this difference.

    Only registered investment advisors and Certified Financial Planners, both of whom are also brokers, are legally qualified AND required to have fiduciary responsibility to their clients.

    Simply put, only these planners are required to put the client's best interests FIRST.

    NO other planners are required to do this by law. Brokers who are not RIAs or CFPs, have the legal right, along with strong incentives, to recommend investments to you that offer them the biggest commissions. They are completely justified in putting their firm's interests before yours - and the law will back them up on it.

    In a recent investigative article by SmartMoney magazine (April 2007 issue), an amazing number of brokers botched this extremely basic question: they could not actually define what fiduciary responsibility meant when directly asked.

    The SEC announced in 3Q07 it was cracking down on big brokerage firms who were allowing their brokers to offer financial plans to their customers. This has resulted in the brokerages encouraging their staff to actually become CFP's. It isn't a cakewalk - the pass rate on the CFP exam averages less than 50% in most years, and requires continuing education.

    Re IRA distributions: You can pull down an IRA or Roth IRA early by using the rule of 72T. Just Google the term and you should find sufficient explanation.

    Yes, finance is actually an interesting subject, once you realize how closely it affects your future. Good luck!

  • joyfulguy
    14 years ago
    last modified: 7 years ago

    Hi Thunder's sweetie,

    First off, I am not a U.S. resident and know about as little as is possible about the (401)k, the Roths and 457s, etc., or whatever, so I can offer no suggestions about that aspect of your investment and retirement planning - which is a major factor of the concerns that you have.

    In Canada, we can hold bank-guaranteed certificates, mutual funds and individual stock issues - even gold - in our tax-deferred retirement accounts, a special kind called "self-directed" ones. Can you include individually-chosen stocks in yours?

    As your husband plans to retire in about 20 years, at a reasonably young age, does he have plans to become involved in some employed situation after that?

    Often people with law enforcement and security experience are welcomed in private agencies doing security-related things ... some even fight traffic tickets!

    You speak of him qualifying for 82.5% of latest salary level, rather than an average of whatever number of final years' as a pension following retirement.

    On the other hand, you refer at the same time to taking a withdrawal from one of your privately accumulated retirement funds ... does the 82% refer to only the pension, or does it include some funding from your personally accumulated retirement account, as well?

    I assume that this pension would start immediately upon his retirement, if it takes place at the regular time.

    Does it?

    If so, and assuming that some expenses earlier that were associated with his employment won't be necessary, plus a lower tax cost, it may be that your income requirement will be somewhat reduced after retirement.

    Except that you may want to travel and indulge yourselves in various other expensive activities, shortly after retirement, which might more than cancel out the purported reduction!

    Is his pension indexed to inflation, and is its rate fairly close to actual rates, or somewhat below that?

    Retiring prior to age 60 could mean that he might have 30 years of retirement, so the level of that inflation factor on his pension could well become quite inportant.

    You speak of your parent living "with" you. Is this arrangement a drain on your resources, or is the lady providing for the full cost of her living?

    Do you have an educated guess as to whether this situation may obtain for quite a few years (especially if you are subsidising her living)?

    Do you have, or expect to have, children?

    What expectation do you have that they may need funding for advanced education?

    Do you have plans to become employed at some time/for a period during the coming years?

    It seems to me that you have financial matters reasonably well in hand ... with $50,00. asset at age 37 and investing 1,200. per annum.

    You have a fairly expensive house (though maybe not considered so in your locality), with a substantial portion of the value having been paid.

    I would feel rather uncomfortable if I had a substantial build-up of assets all in retirement accounts, but no non-registered account that I could draw on in case of emergency.

    Many people plan to have some regular credit cards that they feel that they can use to cover emergencies as they come up.

    I feel more comfortable to see people do that if they can fund that emergency using a regular credit card ... but one should not forget that they usually charge 15 - 18% annual rate. I feel less pleased to see such costs put on to store-issued cards ... for they usually charge 25 - 28% annual interest rate.

    I like to see folks pay off all, or almost all, of the cost by the first due date, or within two or three months.

    I prefer to see them buy some quality equity-based assets not in one of the personal pension systems, perhaps mutual funds and ask to have the certificates issued (usually no charge), or stocks of a/some solid, quality company(ies) that they plan to hold for a number of years, then have certificates issued for them (often $35. - 50 fee per issue), which they can use as collateral for a fully-secured line of credit at their financial institution, usually unused, drawing on the line of credit to pay off the credit card balance owing before it starts accumulating interest costs.

    The interest on the line of credit will usually be about half of the rate that credit card carriers charge.

    One proviso - most lenders will only lend about $5,000. when they have underlying assets of about $10,000.

    Such loans make sense when buying cars, too.

    I prefer that to holding a number of money market funds or quickly cashable interest-bearing assets, for usually they produce very low rate of return (which in Canada is taxed at top rate).

    I have had a line of credit for upwards of 10 years, most of the time unused ... and I am not required to pay an annual fee for the privilege of having it operational, even if unused.

    Good wishes for increasig your knowledge of financial affairs. Don't let it get you down, intimidating you ... learning a little at a time can mean that you develop major, comprehensive as well as intensive knowledge, over a time.

    Ordinarily, I don't like to borrow to consume.

    But I may, on occasion, borrow to invest, as I feel that I can usually do so at almost nil net cost, such interest rates being deductible, here. And if I invest to earn 3% dividend on the stock, that pays part of the after-tax cost.

    Plus ... I gain the value of inflation, but the guy who puts his dollars into the bank in a guaranteed asset ... loses.

    As I near age 80, I carry about 80% of my assets in equity-based assets. Well ... it was that way a couple of weeks ago ... it may be some less, after the current market correction!

    Your sub-prime mortgage debacle has cost me about $14,000. in one major asset during the past 7 months!

    Have a great winter weekend.

    I need to get to bed, for I'm driving some entertainers out to a store opening fairly early in the morning.

    ole joyful

  • thundersweet
    Original Author
    14 years ago
    last modified: 7 years ago

    ole joyful, thank you for your response. You asked many questions I do not know the answer to but I am inspired to find out!

    His pension is in addition to his 457 retirement account. He participates in both. So, at age 57, he would be drawing on his pension (based on highest income over the last 3 yrs of emplyment) as well as his 457 if he chose to at that time. If he retires earlier that 57, he gets a reduced rate. Something like after 20 years 55% plus 2.75% for every year over 20. He is elegible for retirement at age 52. They have changed that to 62 for new hires but he is still elegible for retirement at 52. He will more than likely keep working until age 57 though depending on our situation at the time. And yes, he would proablly work extra cash jobs as a retired police officer. Traffic detail etc.

    My mom is definitely not a drain on us. She is full time employed (expected to retire this year maybe) with a very good income and retirement set up. She will never be a burden on our finances. In fact, we stand to inherit money after she's gone. Of course I would have to split with my two brothers but still!

    We are working to build our emergency fund now. We do not owe any money to anyone except house and cars.

    At retirement or before I expect our expenses to drop considerably. For one thing, the house would be paid for, our biggest expense. We would sell and buy (cash) a much smaller home with less operating cost ect plus pocket the extra cash left over, which would be a lot, assuming of course we could sell it: ) If the house was worth 700,000, we sell and buy a home for 200,000, that's a profit of 500,000. In this area we live, it would be worth more, I would imagine. That's just an example but I hope I am figuring this all right.

    I have no idea if his pension is indexed to inflation. I will find out though.

    I have two children and have not yet started a fund for them. I think it's more important to get myself set up first and then my children. I do not want to ever be a burden on them. I also plan to have at least one more child in the next year or so. I do not work or plan to go back to work.

    Thanks so much,

  • azzalea
    14 years ago
    last modified: 7 years ago

    Please be very careful. A lot of these accounts are NOT as safe as 'they' would have you believe. There are people already who have lost their retirement savings because they trusted that this was the way to go.

    My sister lost her entire retirement--after 30 years of working for the same company, and being in their national management. Why? because the company was sold, and the new owners raided the pension fund. She was supposed to have a very, very good pension. Now, she has none, and is delivering mail in her late 50's, trying to earn at least a little pension to help in retirement (but the USPS pension is never going to be enough to support her--she's going to have to work till the day she dies.)

    Also, there is a move afoot in Congress to deny social security to anyone who has private retirement savings (IRAs, etc) UNTIL they've exhausted those accounts. This has come up several times in the past 10 years or so. For the moment, it's been tabled, but do you really think that we boomers aren't going to be penalized? There are too many of us, and we're going to seriously drain they system.

    I don't believe in putting my money in any fund/plan/etc where someone else has control of it. I may not have made as much as some people over the years, but I haven't lost any, either. And I've been the one making the decisions, not some planner, advisor who is mainly concerned about lining his own pocket.

    Just please, be very careful, and make sure you control your retirement funds yourself.

  • jakkom
    14 years ago
    last modified: 7 years ago

    If your DH's government pension is similar to my DH's, you do not have to draw down the 457 until you want to. However, rules on these vary considerably and are generally re-negotiated with each union contract, so you need to always keep up on such union issues.

    The pension can be collected until death of retiree or death of survivor, if you've chosen survivor benefits - but the 457 is separate and all there is. Once you exhaust those funds, it's gone. If your DH plans to retire at 57 the money will need to last at least 30-40 years to provide supplemental income.

    For a long time, if you retired from my DH's union and set up the withdrawal program from the 457, you were not allowed to make any changes to the distribution schedule, regardless of how your circumstances changed! They have now altered that and allow full access and complete flexibility, which is a good thing.

    BTW, my bad - the IRA/Roth IRA limit for 2008 has gone up to $5K annually. Remember that you have until April 15, 2008 to fully fund your 2007 IRA.

    Your DH may or may not be eligible for full Social Security anyway. Many government agencies do not participate in Social Security, so unless you have worked 40 quarters for a company that did, you are not eligible to collect. Even for those who ARE eligible, like my DH, the Windfall Provision prevents him from collecting more than 40% of his full benefit, because he will receive a government pension.

    You are probably overestimating the amount you would spend upon "downsizing" your residence. It is safer to estimate you will spend at least 2/3 of the amount your present residence costs.

    I've collected some interesting articles on how to get started on financial planning and estimating retirement income (having gotten started on the subject way later than we should have, LOL). If you want to email me off-line, I would be happy to send them to you. You might find them useful.

  • dreamgarden
    14 years ago
    last modified: 7 years ago

    dreamgarden-"If your financial planner is also your stockbroker, then you are on safe grounds in terms of licensing."

    jkom51-"I take issue with this. The reason is that I have previously emphasized that there is a distinct difference between FIDUCIARY responsibility and ADVISORY responsibility when dealing with financial planners and brokers. It is really, truly critical that people understand this difference. Only registered investment advisors and Certified Financial Planners, both of whom are also brokers, are legally qualified AND required to have fiduciary responsibility to their clients. The SEC announced in 3Q07 it was cracking down on big brokerage firms who were allowing their brokers to offer financial plans to their customers."

    One can find an ethical stockbroker as well as a corrupt RIA or CFP. Due diligence is the key. Lets not forget what I said at the end of this paragraph from which this quote came from: "Other than a Series 7-licensed stockbrokers, anyone who give advice about stocks and bonds must have an RIA license. Make sure the financial planner you choose to work with has this.

    Both registered investment advisors and Certified Financial Planners are SUPPOSED to have a fiduciary responsibility but this isn't always the case.

    "According to the SEC, fiduciary breaches are the primary cause for broker/dealer arbitration actions and are the leading cause for civil and regulatory actions against registered investment advisers."

    RIA's as well as CFP's can have massive conflicts of interest as you pointed out yourself (SEC has been cracking down on big brokerage firms who were allowing their brokers to offer financial plans to their customers).

    I think azzalea said it best: "I don't believe in putting my money in any fund/plan/etc where SOMEONE ELSE has control of it. Just please, be very careful, and make sure you control your retirement funds yourself."

    Links that might be useful:

    False Fiduciaries

    Can you trust your financial adviser?

    How to find an Adviser-the Wrong Way

  • jakkom
    14 years ago
    last modified: 7 years ago

    And this is precisely why one should always request references, and check them out. In addition, of course, to checking the NASD database to see if any lawsuits have been filed against the broker (although those are distressingly easy to clear off the record).

    My old boss never gave less than 3 references, all people who had been clients for at least three years or longer. He had some clients who had been with him for three generations.

    Our current CFP we are using for my MIL was in fact trained by my old boss, over twenty years ago. He's been in business for himself since 1989 and has a well-established business. He has other clients like my MIL, and understands her concerns and ours.

    We do not use him for "day-to-day management." That's not how we look at investing - we prefer to always look long-term. We picked him specifically as our backup, because my MIL is incredibly ignorant about money and will never ever be able to learn to manage it. As long as my DH and I are alive, we can handle her affairs, but should anything happen to us (and remember, she is healthier than we are!), she has neither family nor friends who know how to handle a sophisticated portfolio that can keep her funds intact for the next 20-30 years.

    I prefer handling our own retirement funds, and have done a reasonably good job over the last 20 yrs. However, should anything happen to me my DH will take our portfolio to this CFP for handling. He understands the basics of investing; we discuss the market regularly, but it is simply not an interest of his. It is not feasible to advise everyone to "handle their own money" - most people are "investing sheep", buying at the wrong time and selling at the same. They have neither the interest nor the perseverence to be good investors, so better that they at least learn the basics of finance and estate matters, and then find what works best for them.

    Yes, there are lots of "bad" brokers, RIAs, etc. etc. Probably as many as there are incompetent lawyers, of which I've met a few of those, too. And we won't even talk about bad contractors or handyman, LOL!

    But there ARE good ones. Yes, good brokers and good CFPs and good attorneys, even - you just have to be willing to do the research.

    One reason I encourage people who have the assets to find a good CFP is that there is more that goes into planning for a solid financial future than just the retirement portfolio. And a good CFP can help analyze future scenarios in a holistic manner, and offer good referrals to other professionals.

    This can be very helpful. I have used the example before of a well-off young couple, both in hi-tech, that made millions off their stock options. It took two months before they received their estate planning document (at our office such plans were hand-done and incredibly comprehensive; no software shortcuts used) and then it took the couple over four months to complete everything we told them to do - they had to have personal trusts, wills, healthcare and durable power of attorneys, and an ILIT (irrevocable life insurance trust) completed. To start out they had to interview several attorneys to select one, so that took time; then all the paperwork started.

    This is why a CFP can be useful. Left to themselves, they had good intentions but had never completed any of these legal documents. Their son was four years old so it really was time for them to **Get This Done** - but without having hired on with a CFP, and specifically my old boss - they could have gone on for years without doing it.

    Is it a good idea? Of course! Just before I left his employ, a widow came in as a client. Her DH died suddenly - I don't think he was even 50 yet - and had left his affairs in a total mess. He had 401k's scattered in ten different firms, no estate planning done at all. The paperwork I had to do to consolidate everything was horrendous and time-consuming. So much so, it made ME finally consolidate my little scattered 401k's, LOL!

    The one thing you learn quickly about financial matters is that there is no one size fits all, that's for sure!

  • dreamgarden
    14 years ago
    last modified: 7 years ago

    > The one thing you learn quickly about financial matters is that there is no one size fits all, that's for sure!

    I agree!

  • joyfulguy
    14 years ago
    last modified: 7 years ago

    So do I.

    Congratulations on realizing your need and setting out on this journey of learning about your money and how to work with it effectively.

    There are two basic issues ... one is your income and how to deal with it to make each of those dollars coming in work most effectively.

    The other is your asset base and how to manage it to make it grow well, working harder for you than for the other guys ... and avoiding having too much of snipped off by the purportedly big-deal managers to slip into their pockets.

    Better to learn what you're doing, over the years, and become your own manager! Pay yourself those fees that they charge (probably wise to deduct the cost of some of your mistakes, as you learn). In the investment group that I've attended monthly for about 7 years, we call them the tuition fees in the University of Learning How to Manage Your Own Money!

    I bought some equity-based mutual funds over 20 years ago, charging 2.5% of the value of the current asset value of the account, annually. When you multiply 2.5 by 20+ ... what do you get? 50% of the value of my asset, right? Is that the original asset amount? No - the creeping value of the asset as it grew, over time.

    I started a thread (I think over on KT) a couple of weeks ago asking whether people had ever seen stock certificates grow like rabbits!

    Had a person bought 1 share of JNJ at the beginning of 1970 (I'm using this for illustration, not suggesting that you should buy it, or not buy it) about how many shares would they think that they'd own, now?

    If you go to Yahoo->Finance and put JNJ in the "Get quotes" box at upper left, you'll get a page that shows a lot of info about current situation of the shares, including a chart at lower right of the stock price movements today. Clicking at a long-term period under that chart will show you share prices over your choice of various periods ... plus info about several stock splits - twice 3:1, and 4 times 2:1.

    What does that produce? 1->3->9->18->36->72->144 ... right?

    Price in 1970 $180./share (in dollars each of which was "worth" a lot more than each dollar is now). Current price about $63.00. That is, $180. grew to about $9,072.
    How do you like them apples?

    Not only that ... I read somewhere a while ago about a numberof stocks which had increased their dividend annually for 25 years ... I think JNJ has increased theirs annually for 40 years, if I'm not mistaken.

    Which adds some sugar to the applesauce, right?

    When did you ever hear of a Guaranteed Investment Certificate acting like that?

    Also wise for you to learn to deal with both income and assets in a tax-effective way. If you can reduce taxes now, often a good idea to do so, if the system at issue is useful in your case.

    Deferral is frequently a good idea, as well, when available.

    In Canada, a number of people look at the current rate on a GIC and at the rates paid by a stock, and say they like the interest rate better than the dividend rates usually offered.

    But when Canadians earn a dividend on a Canadian stock, the tax rate used to be lower, and last year the system of calculation changed to make it even lower again.

    I can't believe how many Canadians I've run into over the years who didn't know that! Quite often ignorance carries a substantial price. I think that I've said to thousands, over the years, that learning how money works is an interesting hobby ... **that pays well**!! (I've said it so often, around here, that I think that people must be getting sick of hearing it!)

    Not only that, if you put your dollars into a investment where their numbers are guaranteed not to shrink ... they're almost always guaranteed not to grow either.

    I bought a stock over 40 years ago for about $4. and change, which at that time paid about a (tax-advantaged) nickel or a dime.

    Over the years the value of that stock has gone up, down and sideways. I could have sold it last May for about $107. ... and it pays me an annual dividend now of $3.48.

    There's one catch - it has been doubly involved in the U.S. sub-prime mortgage debacle. The share price dropped to the $80.s, then recovered to near $100., then slipped back into the $80.s ... and in the past few weeks, as the sub-prime issue got more complex, far-reaching and distressng, the share price dropped down through the $70.s, into the $60.s, closing since the first of the year in the $60.s ... and I suspect that the dividend rate will likely be cut.

    Am I about to sell it?

    No. I paid $4.20 over 40 years ago, and if I sell now, I deduct the $4.20 amount that I paid from the current $68.20 or so, leaving me with $64.00 capital gain. I divide that by 2, leaving me with $32.00 on which I must pay tax at my usual rate (i.e., added to the top of my other income this year).

    But it does leave me with the other $32.00 realized free of tax.

    However, I'm getting close to 80 years of age (79 next Wed.) and my current tax bracket is lower that will be the case if I leave all of those assets intact till I kick the bucket - for then some of them will be taxed at lower rates, but after that's used, others will be taxed at higher rates until they get to the top rate, and my executor will have to pay that on some of those realized capital gains, then.

    Also ... since I have no spouse (to which the tax-deferred retirement account could be transferred, tax-free at the moment, to be added to her assets, to provide her with income and on her death to have the residue added to her income and taxed then, at whatever rate) they'll be added to my income in that year, as well. Likely taxed at top rate.

    I've thought of selling some of the stocks that I've held for years, in order to have the taxable portion of the capital gain taxed now, at my usual lower rate ...

    ... but if I do that, I have fewer dollars to re-invest, to go on not only growing, but adding to earnings in those years, until my demise.

    As it is, I add those $3,000. or so that I'm required to withdraw from my tax-deferred retirement account annually to my annual income.

    Do you think that I should follow the advice of some hot-shot financial advisors who tell how to get that payment out tax-free?

    Borrow $50,000. to invest it in a variety of stocks, using well over $100,000. (I wish!) of stock certificates as collateral, making it a fully secured line of credit, at interest of 6%, i.e $3,000. per year, using my $3,000. annual payout from my retirement account to pay the interest. My deal with the lender is that I pay interest only on the loan.

    As the loan is used for investment, the interest is deductible.

    As an old fart that doesn't want to take heavy risks, I invest in some quality Canadian stocks - paying about 3% interest, and as they are taxed at low rate, I have about 2.5% after-tax income, which in other circumstances I would use to help pay the interest on the loan.

    Suppose I'd borrowed that money 15 years ago, paying interest only through those years. If my Dad died and left me $50,000. as a legacy, and I took it to the bank to pay off the loan, how much would I owe them?

    That'd be $50,000., right?

    That would have bought a lot of good things, 15 years ago ... much more than now. I gained from inflation.

    Suppose you'd put $50,000. into the bank, 15 years ago, and the bank paid you the agreed upon rent on your money, in the years between ... and you went to collect the value of your GIC today ... how much would the bank give you?

    Right! Exactly $50,000. That would have bought a couple of good cars, 15 years ago ... not now.

    I gained from inflation ... you lost.

    Such strategies should be used with discretion, taking into account various possible scenarios, some of them quite unattractive, with the operator able to deal with them without serious inconvenience.

    I never want to see my friends get margin calls on such loans, unless they're able to meet the shortfall, whether with other assets ... or immediate cash.

    Good wishes for using both your income and assets increasingly skillfully!

    As you have further questions, feel free to ask.

    If some of them seem a bit too private for you to feel comfortable with discussing in this public place, I'm sure that several of us who have responded here would be pleased to offer you our opinions should you contact us privately.

    ole joyful

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