Q: My husband and I are both 66 and still working [but] would like to retire soon. We receive a total of $2,825 monthly from Social Security. We are losing quite a bit on our money in the 401(k), [where] we have about $400,000. Would you suggest we put the money in an IRA? We are afraid of losing so much of the money we have worked for. Why can’t we take the money, pay the taxes and put the remainder in a CD?
J.S.
A: It’s natural to be concerned about market volatility so close to retirement, and you may have a higher exposure to stocks than is suitable to your time frame and risk tolerance.
Most 401(k) plans have conservative investment options.
Withdrawing your 401(k) money, paying the taxes and dumping it all in certificates of deposit would be allowed because you are beyond 59 1/2, the age at which you can begin taking distributions without penalty. That probably wouldn’t be a smart move, however, because you would owe a substantial amount in taxes.
You could roll the 401(k) into an individual retirement account to continue deferring the income taxes on that money and then invest in certificates of deposit, but they may not provide the level of investment growth you need.
Settle on a strategy
Rolling the 401(k) plans into IRAs likely would give you more investment options and flexibility than your workplace plans, but first you should figure out how much of your current living expenses would be covered by $33,900, your projected Social Security income.
If it covers all your expenses, and you just want the investments for emergencies or to cover possible future Social Security shortfalls, locking up the money in a ladder of CDs is fine if it lets you sleep at night. Just compare account fees and product offerings at several banks, brokerages and mutual fund companies.
If it doesn’t cover expenses, you likely need an investment strategy in your IRA that will provide after-inflation growth, as well as a withdrawal plan. If you withdrew 4 percent in the first year of retirement, a common strategy, that $16,000 would bring your pretax income, with Social Security, to just under $50,000.Increasing withdrawals to keep pace with inflation over three decades in retirement will require after-inflation growth in your portfolio.
Vanguard Group, Fidelity Investments and Charles Schwab & Co. are among firms offering so-called managed-payout mutual funds that basically invest in a mix of stocks, bonds and cash with a goal of providing steady income in retirement. These might seem like an easy one-stop solution for someone unfamiliar with investing, but be aware they contain all the risks of the stock and bond markets. You buy them just like other mutual funds, and they most likely would be available inside an IRA.
Or you could place the money you will need in the next, say, three to five years in laddered CDs in your new IRA. Invest the rest in a low-cost, diversified portfolio of stocks and bonds and replenish the short-term account each year with distributions, knowing you have the flexibility to skip some years if markets tank. (Just remember, after age 70 1/2 you will be required to take annual minimum distributions from the account and move it to your taxable account.)
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Do your homework
Hiring someone to manage all this for you is another option, but you still will have homework, including background checks on the adviser and making sure you understand the strategy and costs.
Robert Isbitts, president of Emerald Asset Advisors of Weston, Fla., shared some non-traditional strategies for investors who are particularly wary of stocks.
Because he feels we are in a long-term bear market, Isbitts’ portfolios aren’t highly correlated to stocks or bonds. Though his minimum new account is $2 million, he uses mutual funds and exchange-traded funds publicly available to all retail clients that might sell stocks short, invest in alternatives such as commodities or real estate.
“This is one of millions of couples in this country for whom the biggest issue they have as investors is what they don’t know because they haven’t had the opportunity to be educated,” Isbitts said. “The traditional tool box [of stocks and bonds] may be all right if we are in another bull market like the ’80s and ’90s, but if we’re not they’ll need a second tool box, or a low-correlation strategy.”
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