My wife and I are nearing retirement. I’m 64 and my wife is partially retired with full retirement income after 30 years of teaching. We live a modest life and have accumulated nearly $1 million in combined savings and 401(k). In about 8 months, I expect to see a windfall of about $400,000 come my way. I expect both of us to keep working part-time and hopefully to travel some in our retirement years. I am puzzled about how to invest that $400,000 with retirement so close.
“‘I want to live off dividends, pension, Social Security and part-time work. What would be the smartest approach and time frame for investing our windfall?’”
I like Warren Buffett’s approach — keep investing and just believe in America. I want to live off dividends, pension, Social Security and part-time work, and $400,000 is a lot of money to me. What would be the smartest approach and time frame for investing our windfall? What really puzzles me is knowing the economy could slip into a prolonged recession, and cash doesn’t look to dumb to have, especially with a 5% return.
How long should one hold on to cash before investing? If I invest the money, would it be best to invest over a certain time frame?
Buffett Fan
Dear Buffett Fan,
There are no psychics when it comes to the future of the U.S. economy. A majority of economists in a poll from the National Association for Business Economics have been predicting a recession this year, but that has not happened (yet). We are still waiting. So keep calm, carry on and, yes, take Warren Buffet’s approach and keep your eye on your goal.
I have some questions: Will you be living off your own Social Security income, or does your wife also receive Social Security? Do you have any outstanding debt? If so, pay that off first. Have you and your wife paid off your mortgage? Have you planned for long-term care? Do you have an emergency fund?
You hold the answer to the $400,000 question. Robert Seltzer, founder of Seltzer Business Management in Los Angeles, suggests quantifying your sources of income and the timing of when you plan to receive your retirement income, but he warns that you shouldn’t try to time a recession or the market. “That is a fool’s errand and is almost impossible to get correct,” he says.
“‘Where CDs and high-yield savings accounts are concerned, don’t stare the proverbial gift horse in the mouth.’”
Where certificates of deposit and high-yield savings accounts are concerned, don’t stare the proverbial gift horse in the mouth. With interest rates still high, high-yield savings accounts, Treasury bills, money-market funds and CDs are increasingly popular. A 5% return on fixed income “is not something that should be casually dismissed, as we have not seen these types of rates for many years,” Seltzer says.
But, he cautions, you may wish to be more conservative if you intend for these funds to supplement your income until your pension and Social Security kick in. If not? “You could actually afford to be slightly more aggressive with that cash if you are not dependent on it for monthly expenses and it becomes more of a long-term investment,” Seltzer says.
But again, don’t try to time the market. “It makes sense to consider the dollar-cost averaging approach to investing,” says Larry Pon, a CPA based in Redwood City, Calif. “This means transferring a set amount from your cash to investments. Please make sure you have a low-cost, broadly diversified portfolio.”
Down to brass tacks
Pons also has a gentle word of warning. “You will need to make sure your savings and 401(k) are properly allocated based upon your financial plans and risk tolerance,” he says, and “you will need to get realistic about the amount of dividends and interest your portfolio may generate to fund your cash-flow needs.”
And now, down to brass tacks. Assuming you can afford to live without access to that cash, how should you invest that $400,000? Paul Karger, co-founder and managing partner of TwinFocus, a wealth advisory firm in Boston, suggests a balanced approach across globally diversified equity and fixed-income mutual funds.
“We recommend an allocation of 70% fixed income and 30% equities, and we would invest these funds over time, perhaps 12 to 18 months, through a dollar-cost averaging program where you systematically move a portion monthly out of cash and into the portfolio allocation,” he says.
“‘You’re in a stronger position than many people who are facing retirement.’”
For the equity portion, Karger recommends dividend-paying stocks and dividend-growth funds. For the fixed-income part of your portfolio, he suggests intermediate- to longer-term bond funds. Dollar-cost averaging helps you avoid putting your funds to work at the wrong time and allows you to take advantage of any downside volatility, he adds.
“Once the funds have been fully invested at the end of the dollar-cost averaging period, we would recommend rebalancing your entire portfolio back to the intended allocations a few times per year,” he says. Note that dollar-cost averaging can help create good investing habits, but advisers have differing opinions about its long-term benefits.
Finally, you’re in a stronger position than many people who are facing retirement. Given your age, you should take a conservative approach to how you invest that $400,000. Most Americans believe they will need $1.3 million to retire, according to Northwestern Mutual. So congratulations on accumulating that first $1 million.
Readers write to me with all sorts of dilemmas.
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