Investment strategies 4 years out from early retirement

[Ed B]

I need some growth in my 401k and with current market instability and the limited options in my company's 401k plan funds I don't see many good options. I have about $275k currently. I will have a company pension that I will receive when I retire that will replace about 40% of my current gross income. And I plan to take SocSec at 62 since men in my family don't live long lives. So my 401K assets will only provide a small percentage of monthly retirement revenue along with some occasional travel/vacation money while in retirement.

Since August 2015 I got out of equities and split my savings 65/35 with 65% in high quality AAA and AA US bonds that return about 2.5 % with average term of bonds being 3 to 6 years, and 35% in Stable value. I make a little in the way of investment performance from the bond fund but this is basically my "under the mattress" strategy.

That all said my financial adviser says the stable value portion is being just plain chicken. But even she says my company's plan doesn't offer many good options. So after some thought I am moving the money out of stable value fund and splitting that sum up with half of that going into my existing Bond fund; 35% in an S&P 500 Indexed Equity Fund and 15% in my company's stock (lmt). This is still a very conservative approach but I have little confidence in the equity markets right now and only marginal confidence in highly rated US bonds. Once I figure out how I will post an image that shows my fund options and their performance over the past month, three months, year to date, last 12 months, last 3 years and last 5 years,

I am curious what others in similar situations are investing in and how it is working for.

Thanks in advance.

 

[Don M.]

Trying to figure out the best place to invest for retirement is almost like trying to guess which slot machine at the casino is about to hit. If you talk to 5 different "financial advisers" you will probably get 5 different "opinions" on the best options for your funds. Money in the bank is almost worthless, with these ridiculously low interest rates, and some of these bankers are even talking about Negative Interest rates....where the banks would charge us money for keeping savings and checking accounts.

I would recommend doing some careful research on mutual funds...with an emphasis on those with the highest Morningstar and Lipper ratings....Fidelity, Vanguard, American Funds, American Century, etc.,etc. Look for long term performance, and a management team with several years of experience. Then, chose an option where you can move the funds around, as market conditions dictate...and follow the financial news closely, via CNBC, Bloomberg Business, Wall Street Journal, etc. Investing is a "commitment", and you Must assume the bulk of the responsibility for managing your funds....you can't count on anyone but yourself to look for your own best interests.

The markets are currently in a bit of turmoil, and there is quite a bit of risk. I think we are headed for another Housing Bubble, which triggered the 2007 crisis, and the Fed and this lame Dodd/Frank legislation is certainly not helping. Then, this years abomination of a Presidential election is keeping a lot of investors worried. "Caution" is probably the best current advice.

That said, I think the 401K/IRA program is the Best thing our government has ever done for the bulk of working people/retirees. I just wish this program had been in effect when I first started earning a paycheck...and had been wise enough to get into the program at its inception. I was able to build up enough in that program such that it supplies a nice portion of our retirement funding....and I monitor it closely, and move the funds once or twice a year, as market conditions improve, or deteriorate.

The best advice I can give is to "educate" yourself on the markets, and chose the best options for your particular needs. Watch the business channels on TV, read the financial news on the Internet, and read a couple of good books on the subject of investing. A couple of the best...IMO....are "How to make money in Stocks" by William O'Neal (the founder of Investors Business Daily), and "Yes, you Can", by Jim Stowers (the founder of American Century Investments).

Hope this helps in your search........

 

[Ed B]

As mentioned in the original post here are the investment options and the performance of each fund over the past 5 years as of Feb 29, 2016.

 

[Don M.]

For a retiree investment portfolio, I would look at 6 or 7% as being a minimal baseline...and over at least a 5 year period...10 years, or more, being even better. In this chart, only the S&P, SmallCap, and "Company"/ESOP funds would qualify...IMO. What company are you associated with, and how long have they been in business? Their 5 year results are excellent, but what are their long term prospects?

If "Longevity" is not a major consideration, a more aggressive portfolio might be your better option...once we see how this years election gives a better feel for what direction the government might take.

 

[Ed B]

For a retiree investment portfolio, I would look at 6 or 7% as being a minimal baseline...and over at least a 5 year period...10 years, or more, being even better. In this chart, only the S&P, SmallCap, and "Company"/ESOP funds would qualify...IMO. What company are you associated with, and how long have they been in business? Their 5 year results are excellent, but what are their long term prospects?

My company is Lockheed Martin (LMT). It has been doing excellent for several years but as with any single equity it can come down with a few bad WSJ articles. Morningstar considers it overpriced by about $20, but Morningstar considered it over priced by about $10 two years ago when it was trading at about $165.

 

[Don M.]

My company is Lockheed Martin (LMT). It has been doing excellent for several years but as with any single equity it can come down with a few bad WSJ articles. Morningstar considers it overpriced by about $20, but Morningstar considered it over priced by about $10 two years ago when it was trading at about $165.

I would think that Lockheed is one of the better companies to be associated with. Given our governments penchant to "police" the world, I doubt that Lockheed will ever see any protracted downturn. You should be safe in keeping a fair share of your holdings with their stock, and spread the rest into conservative and diversified investments. I tend to shun Bonds, as their returns are so Paltry....when I get the "jitters" about the markets, I usually hide out for a period of time in the money markets....which make Nothing, but don't go down. I also tend to shun Small Caps and International stock funds...as they are generally too volatile for my nerves.

Consider talking with 2 or 3 independent financial advisers, and consider their options. With a little careful planning, you can retain the bulk of your IRA, and just withdraw the annual profits, as a source of income that will supplement your pension and Social Security, nicely. When talking to Any financial advisers, make sure you understand any fees or expenses involved with any investments they might recommend....far too many of them will try to sell you on some program that requires frequent changes in your portfolio...giving them a tidy profit with each transaction....at your expense.

 

[Myquest55]

For those of you concerned about Financial advisors, I wanted to share a recent tidbit I learned. We work with Prudential Financial as well as Thrivent Financial. Both are available throughout the US. Prudential advisors only make money when they well you something. Thrivent advisors make a commission too BUT they also receive compensation from the home office when they can prove that they meet with you on, at least, an annual basis. I thought that was interesting and significant.

We are about 2 years away from actual retirement and our Prudential advisor left, a few years ago, on disability. We found a new advisor and he was happy to meet with us - once - but when he realized we didn't want to purchase anything new, the contact fell off. He wasn't interested in helping us navigate our existing investments that the previous advisor had set up for us. We were disappointed. I have a business degree but I am not financially savvy in the investments area so I like to stay in touch with someone who has that skill. I occasionally buy or sell stock but the big accounts are handled by professionals.

So we were relieved that Thrivent is very happy to meet with us - WHENEVER we have questions - or just once a year to review our position and explain - YET AGAIN - how this or that works. They have been very up-front with us about their commissions and we have been very happy with their service. Since my husband has Parkinsons, we are concerned with how long he can work. Our Thrivent advisors took our information (I keep a large spreadsheet up-to-date for all accounts) and came up with several "What If" plans for our future - no EXTRA charge! If we have to jump ship sooner, rather than later, we will be alright.

 

[WhatInThe]

Some general tips

1) Diversify including stocks, funds, cds, annuities etc

2) Always know exactly why you are buying a stock or mutual fund. Is it to buy low and sell high later or receive dividends and distributions.

-When looking at returns on a stock or fund make sure to differentiate from an increase in stock price and/or dividends awarded. With a mutual fund that will be used for steady income for example the actual payout/dividend are frequently referred to as the trailing or sec yield.

3) Don't be afraid to have some smaller funds and accounts for aggressive investing.

4) A general vague rule of thumb is have three years salary in savings or a pretty steady pension or 401 with a year salary in savings in bank. In other words be prepared.

5) Pay attention to results regularly.

6)Learn the taxes of investment income ie capital gains, qualified dividends, carry forwards etc. Do a year yourself in detail just to learn and/or keep taxes in mind when investing or cashing in.

7) Keep good records.

8) Pay down as much debt as possible prior and assume new debt will come or pop up more than once.

9) Always be learning. Research and staying up to date helps

Good Luck!

 

[Ed B]

Thanks for all the helpful responses

 

[mathjak107]

when it comes to allocations the very first question is who are you investing for ?

if you have a pension and it pretty much leaves you in good shape without your portfolio than you have two options . if you need less than 2% inflation adjusted you can go with just fixed income and inflation proof bonds .

but if it is legacy money than 100% equity's would still be appropriate .

no one can tell you what you want .

but if if you are counting on your portfolio for 3-4% inflation adjusted income then that is something else.

in that case you want to match the draw you need with the allocation that gives you the highest success rate that meets that goal .

usually 50/50 will provide a good balance up to 4% over at least 30 years .

what you may want to consider is how you get to that 50/50 mark , perhaps a rising glide path would be more comfortable .

since most damage is done to a retiree when they get hit with an extended downturn early on a good method is to reduce equity's down to say 30-35% a few years before . then increase them by about 2% a year until you reach your desired allocation .

that will protect you early on whle giving you a chance to re-earn back any lost gains given up down the road . remember ,if you need your portfolio to support you than the game changes . it may no longer be about growing richer , it may be now about not growing poorer .