Putting all your eggs in one basket (or, the Windfall, Pt. 3)

[frugalone]

Hello--
I just met with the representative from the company that handles my employer's 403(b)/retirement funds. I wanted to know about putting more money aside for retirement. As it turns out, they will only put in 8%, so my increasing the amount I put aside into that account will only result in my "own" money--the college I work for won't put in any more. This was a bit of a disappointment. The last place I worked did 12%.

That said, I am still looking into how to invest the Windfall. My spouse and I agree that an emergency fund is of high importance, as well as putting perhaps $10K away for a car. The employer's pension company has its own bank now, complete with high yield savings, CDs etc. I will put the emergency fund into a high yield savings.

The rep recommended that instead of investing in CDs (which do not pay much in interest these days), I put the remainder of the funds in a Roth IRA. His company also has those. The cool thing about them, he said, is that you can take out the money you've invested from a Roth IRA, should you need it. The only thing you can't touch is the interest earned.

Questions: 1) Do you think this is a good way to go? 2) If I should do a Roth IRA, should I do it with the same company as my 403(b) or find another? (hence, the eggs in one basket title). 3) How do I find a reputable Roth IRA if I go outside the company mentioned above?

Thanks so much!

EDIT: I have gotten a raise of 3.5% this week. Yay!

[kib]

Roth is just nomenclature for a type of deferred tax designation, it's not a specific type of investment. A Roth could be a cd, a savings account, stock or just about any other vehicle. Nearly any bank will offer the tax designation of Roth if you choose it, they're insured like any other bank deposit. Any investment company like Vanguard will also let you set up a Roth portfolio. So any institution you'd find reputable to put your money is a reputable place to put your Roth. There are pretty small limits on what you can put in a Roth, just like other IRAs. I think it's currently $5,000 or $6,500 if you're over 50. How much are you looking to invest, and what kind of investment is he talking about? What you contribute to a Roth will affect other tax-deferred contributions you can make, and is dependent on income.

ETA: this rep is basically giving you two different things: advice in what to invest in, and tax advice. is he qualified to do both?

http://www.rothira.com/what-is-a-Roth-IRA

[frugalone]

He is a broker and a certified financial planner. The only other tax-deferred investment I have is my 403(b).

I'm looking to put aside about $10K for the future (possibly a new used car, a down payment on property, etc.) It will also be roughly $10K in the emergency fund. I have a couple of small debts (about $1K) to pay off), and I want to take a trip to England. I'm 51, BTW.

The type of investment his company can offer is called "social choice." It's a mixture of stocks and bond funds. My 403(b) is also a social choice. They don't invest in tobacco, nuclear energy, firearms, etc.



Roth is just nomenclature for a type of deferred tax designation, it's not a specific type of investment. A Roth could be a cd, a savings account, stock or just about any other vehicle. Nearly any bank will offer the tax designation of Roth if you choose it, they're insured like any other bank deposit. Any investment company like Vanguard will also let you set up a Roth portfolio. So any institution you'd find reputable to put your money is a reputable place to put your Roth. There are pretty small limits on what you can put in a Roth, just like other IRAs. I think it's currently $5,000 or $6,500 if you're over 50. How much are you looking to invest, and what kind of investment is he talking about? What you contribute to a Roth will affect other tax-deferred contributions you can make, and is dependent on income.

ETA: this rep is basically giving you two different things: advice in what to invest in, and tax advice. is he qualified to do both?

http://www.rothira.com/what-is-a-Roth-IRA

[rodeosweetheart]

Kib raises a really good question about how much you can put in a Roth in any one year. Was this money already in some form of tax-free or tax-deferred account? Maybe that changes how much you can put it?

If you put it in a Roth, you still have to invest it in something within the Roth, so I am not sure about the rep's recommendations, and I would be inclined to put aside money for a fully funded emergency fund and money for a car. Those could probably be put in cd's, in some combination.

I would definitely read some books on investing and talk to at least 5 reps from various walks of the financial industry. I'd start with banks and credit unions and work up to the investment people. I'd include Fidelity and/or Vanguard in the 5.

But I like your idea about funding the emergency fund and a car fund; those are great ideas!

[frugalone]

The money was in an annuity and was a gift from my mother. She paid the taxes due on it.

Do you have any recommendations for books on investing for someone who can barely do basic arithmetic? :)


Kib raises a really good question about how much you can put in a Roth in any one year. Was this money already in some form of tax-free or tax-deferred account? Maybe that changes how much you can put it?

If you put it in a Roth, you still have to invest it in something within the Roth, so I am not sure about the rep's recommendations, and I would be inclined to put aside money for a fully funded emergency fund and money for a car. Those could probably be put in cd's, in some combination.

I would definitely read some books on investing and talk to at least 5 reps from various walks of the financial industry. I'd start with banks and credit unions and work up to the investment people. I'd include Fidelity and/or Vanguard in the 5.

But I like your idea about funding the emergency fund and a car fund; those are great ideas!

[ApatheticNoMore]

I do think I like having my Roth in a separate account/investment company/etc. than my 401k. So while I can't fully make an argument why it is good as a major investment firm going broke itself seems unlikely ... I do prefer it.

The matching we have in our 401k is so nominal it's less than 3% of my contributions matching (which is a lot less than 3% of my salary), don't ask me what it's like to work somewhere with good benefits, like I would know.

[rodeosweetheart]

I had to think about the book question. Before I started reading investment books, I would be reading books about creating a sound financial base, as they usually get into investments but they also talk about meeting your needs and creating security. For that, I like Suze Orman-- Laws of Money is a good place to start--aso Barbara Stanney, Karen McCall, Dave Ramsey. For some basic investment books, if you decide to invest the money, then maybe The Bogleheads Guide to Investing. That book has a chapter "How to Manage a Windfall Successfully." I'm looking at that right now, and they give you four steps which sound pretty smart to me:

1. Deposit the money in a safe account for at least six months and leave it alone.
2. Get a realistic estimate of what the windfall can buy.
3. Make a wish list.
4. Get professional help.

Then they elaborate on those four steps and they do it really well.

Interestingly, their advice in number 4 is to start with talking to a CPA, which would not have occurred to me.

But if you park it in say, a money market account for six months, then you have time to read a lot of books and think it through!

[Zoe Girl]

i know there are crap interest rates all over, i have been doing my IRA accounts in laddered CD's however. Some are 5 years and then stepped down so one is available every 6 months. i want to start doing that with emergency funds but maybe every 3 months. it still is better than savings accounts. you can make those ROTH tyle as well.

[jp1]

I do think I like having my Roth in a separate account/investment company/etc. than my 401k. So while I can't fully make an argument why it is good as a major investment firm going broke itself seems unlikely ... I do prefer it.



I have just two words for you: Lehman Brothers.

Ok, I actually have a bunch more words. That said, your investment money is not typically actually at the investment firm, so it shouldn't really matter if the firm goes broke. Your investment should still be in the mutual fund or stock or whatever it is that you have invested in. The key word being "should". MF Global customers apparently lost $1.2 billion when that firm went bankrupt.

[kib]

I think the advice to start with a CPA is excellent. They have no agenda for which "product" you should invest in. They will also be able to tell you what the tax implications of both the windfall and the investment might be, and give you perhaps a better perspective on long-term goals. Personally, I find pressure to invest in any market-based securities to be suspect, and I despise the rah-rah of bright eyed young people telling me the market is the only place to be. For some of them, this current "correction" comes as a big surprise, but the bear market is an unpleasant reality.


Also, if you choose to invest in ETFs or mutual funds, you need to keep your eyes peeled regarding fees. Your return on investment can vary hugely depending on how much your "helpers" are going to keep for themselves.

ANM - jp1 is right regarding failure of an investment firm. However, if one is not actively managing investments, it might still be good to put money in more than one place as different firms may choose different balances and investments. You're not necessarily "diversifying" to go with two different firms, but you do have a better chance of CYA. Also, employer-managed options have tended to be really limited, while a personal investment has a lot more range.

[SteveinMN]

I think the advice to start with a CPA is excellent. They have no agenda for which "product" you should invest in. They will also be able to tell you what the tax implications of both the windfall and the investment might be, and give you perhaps a better perspective on long-term goals. Personally, I find pressure to invest in any market-based securities to be suspect, and I despise the rah-rah of bright eyed young people telling me the market is the only place to be. For some of them, this current "correction" comes as a big surprise, but the bear market is an unpleasant reality.
Please be aware that CPAs have specialties, much as doctors do. DD is a CPA but only does financial audits. She is in no way an investment or tax advisor any more than my Uncle Marty is. Ask for the right kind of CPA.

As for market-based securities, pretty much any security in which one invests is "market-based". Stocks and bonds are just obvious examples. Physical securities like gold and real estate are valuable only because people say they are and their value fluctuates as well. CDs and money markets also are market-based in the interest rates they offer; the danger (at least right now) is that their return is so low that you'll lose value to inflation.


ANM - jp1 is right regarding failure of an investment firm. However, if one is not actively managing investments, it might still be good to put money in more than one place as different firms may choose different balances and investments. You're not necessarily "diversifying" to go with two different firms, but you do have a better chance of CYA. Also, employer-managed options have tended to be really limited, while a personal investment has a lot more range.
Very good points.

We have two annuities as part of our retirement portfolio. We could have gone with one firm; as it is both companies we selected probably are "too big to fail" (<-- hate that term, BTW). But in addition to protection in case one of them does the big firework (viz. Lehman Brothers, Bear Stearns, Merrill Lynch,...), they offer complementary investment rules and approaches which will serve us as we draw from these sources.

[kib]

Good point about the CPA. I wouldn't expect any CPA to be an investment advisor, I was just thinking that understanding tax implications might be the best place to start creating a plan. So a CPA specializing in taxes.

Annuities are somewhat different because if the insurance company fails, you can lose your investment. They're insured state by state. If I understand investment firm failures, as the shares are market tied some other firm ought to be able to take over their management.

And you're right,"market-based securities" is redundant, I meant any vehicle with returns linked to the market. I occasionally see an MMM hotshot who's been market investing for all of five years blaring on about how it's all good. it's not always all good.

[iris lilies]

Good point about the CPA. I wouldn't expect any CPA to be an investment advisor, I was just thinking that understanding tax implications might be the best place to start creating a plan. So a CPA specializing in taxes.

Annuities are somewhat different because if the insurance company fails, you can lose your investment. They're insured state by state. If I understand investment firm failures, as the shares are market tied some other firm ought to be able to take over their management.

And you're right,"market-based securities" is redundant, I meant any vehicle with returns linked to the market. I occasionally see an MMM hotshot who's been market investing for all of five years blaring on about how it's all good. it's not always all good.

I enjoyed the panicked messaged from an MMM guy who was inquiring what everyone is doing about the recent market drop, only it was in the first few days of the descending Dow and the market dropped 300 - 400 points. Umm, dude, you shouldn't be IN the market if you are gonna get all panty wadded about that insignificant a drop. That's when war stories started up, the drop of Oct 1987, the 2000 dotcom bubble burst, and the real estate/everything else crash of 2007 - 2008. Sometimes it's nice to be old, we can calm the youngsters.

[Ultralight]

I enjoyed the panicked messaged from an MMM guy who was inquiring what everyone is doing about the recent market drop, only it was in the first few days of the descending Dow and the market dropped 300 - 400 points. Umm, dude, you shouldn't be IN the market if you are gonna get all panty wadded about that insignificant a drop. That's when war stories started up, the drop of Oct 1987, the 2000 dotcom bubble burst, and the real estate/everything else crash of 2007 - 2008. Sometimes it's nice to be old, we can calm the youngsters.

Please calm me! lol

[Tammy]

When things crashed in about 2008-09 I just kept contributing to my IRA like before. I was buying investments on extreme mark down. :)

[Ultralight]

When things crashed in about 2008-09 I just kept contributing to my IRA like before. I was buying investments on extreme mark down. :)

When things crashed in 2008-2009 I thought IRA stood for Irish Republican Army, not that I knew the difference between that and a retirement plan!

[kib]

I enjoyed the panicked messaged from an MMM guy who was inquiring what everyone is doing about the recent market drop, only it was in the first few days of the descending Dow and the market dropped 300 - 400 points. Umm, dude, you shouldn't be IN the market if you are gonna get all panty wadded about that insignificant a drop. That's when war stories started up, the drop of Oct 1987, the 2000 dotcom bubble burst, and the real estate/everything else crash of 2007 - 2008. Sometimes it's nice to be old, we can calm the youngsters. My personal experience with markets is, what goes up must come down. My market timing (not that I try to time the market, just coincidentally when I've been more active and when I've been out of the market) has been abysmal.

I understand that most people's experience is more like, what goes down must come up. Eventually past the mark it started at. I understand the value of steady investing through the floods and droughts, even though I haven't done it and perhaps it's late to start. I just get somewhat irked when I see someone with only bull market experience exclaim, basically, what goes up will keep on going up! Forever! NOW is the time to invest a big chunk, no matter what the signs point to, because it will always go up! Hmmmph.

[rodeosweetheart]

When the 2007-8 real estate/everything else crash hit it wiped many, many middle class families. So many people lost houses, businesses, half of what was in their retirement accounts. If you were hitting retirement age, you did not necessarily have the time for the market to bounce back. Not sure that the old advice about hanging in, market will go up again, was particularly helpful for them.

I lived through all the events you describe, IL, although I have only been an active investor for 17 years.

Actually, the recent market roller coaster freaked me out. There is no interest, anywhere, and my projections for fixed income living were originally made at a time when I could get 5% on cash in my IRA, just between trades. I could buy farm bonds at 11%.

It's such a different environment. Scary times.

[Ultralight]

Not calmed!

[ApatheticNoMore]

I've never trusted stocks. Uh you have to be raised with a great depression parent who says "never ever put your money in the stock market". But despite my deep distrust I own stocks and stock mutual funds, usually slightly bond heavy though. And I always think I should have more money for retirement just in bank accounts or CDs. Yea inflation I get it, but the stock market I do not trust.

[kib]

I agree, ANM. I also don't like the fact that the value is so volatile. Yeah yeah "opt for more conservative investments as you age". Fine. Except the closer I get to depending on systematic withdrawals, the wonkier it all gets. All the prevailing wisdom seems, honestly, like a lot of BS. ALL of my funds are down, sector, conservative bond, index. How do I draw 4% out of things that are down 10%, without quickly destroying my ability to go on having an income stream? The whole ball of advice seems designed by people too young to comprehend having to actually draw / rely on this money in real time (or, for that matter, at all. It's like they're playing a game of Monopoly where the job income never ends, one will be passing go and collecting $200 forever, and retirement savings is just an interesting pile to look at and never touch.)

... just my crusty opinion as I stare into the maw of impending "senior time". :sick:

[rodeosweetheart]

The whole ball of advice seems designed by people too young to comprehend having to actually draw / rely on this money in real time.

... just my crusty opinion as I stare into the maw of impending "senior time". :sick:

This. And I think they comprehend it just fine; we are expendable.

[iris lilies]

I've never trusted stocks. Uh you have to be raised with a great depression parent who says "never ever put your money in the stock market". But despite my deep distrust I own stocks and stock mutual funds, usually slightly bond heavy though. And I always think I should have more money for retirement just in bank accounts or CDs. Yea inflation I get it, but the stock market I do not trust.
Yes, I like cash. DH does not. But still, we've got a lot in cash.

[frugalone]

Thank you all. We have a close family friend who advises my mother and siblings on taxes and investments. I feel completely confident in talking to him. Will probably set up an appointment. In the meantime, the money is just going to sit quietly after I've paid off my small debts.

[Williamsmith]

I've just received my quarterly statement in the mail. I have intentionally avoided checking it out on the website. DOWN approximately 7 percent !

I'Ve still got 3 more years before I can take any of that investment out without a ten per cent penalty. My simple self wants to simply take it all out, pay off the debt I have and use the rest to purchase a few durable items and a chunk of real estate somewhere out of the way. Just kinda feels like Wall Street is making a fool of the working class and we have laughed it off.

[iris lilies]

I've just received my quarterly statement in the mail. I have intentionally avoided checking it out on the website. DOWN approximately 7 percent !

I've still got 3 more years before I can take any of that investment out without a ten per cent penalty. My simple self wants to simply take it all out, pay off the debt I have and use the rest to purchase a few durable items and a chunk of real estate somewhere out of the way. Just kinda feels like Wall Street is making a fool of the working class and we have laughed it off.

I hope our stash has dropped no more than 7% --my rough calculation is that the Dow is 5.8% down from its high. I am happy with the average market performance.

[Alan]

I've just received my quarterly statement in the mail. I have intentionally avoided checking it out on the website. DOWN approximately 7 percent !



I hope our stash has dropped no more than 7% --my rough calculation is that the Dow is 5.8% down from its high. I am happy with the average market performance.
Just checked mine this morning, I'm guessing my investment mix is a little more conservative which only brings me down about 2%. Much better than the 60% or so drop we experienced in 08.
I could start withdrawals now without penalty although I don't intend to do so for another couple of years, so hoping we can get back up into positive territory in the meantime.

[LDAHL]

I try to address the risk/reward fear/greed issue by a strategy suggest by William Bernstein. I'm planning to use a pension, delayed social security and laddered TIPS to set up a enough inflation adjusted reliable income to cover our basic needs (with "basic" fairly broadly construed). The rest is going into a more risky portfolio to cover most of the nice-but-not-necessary stuff. In bad times we should be comfortable and in good times we can be more self-indulgent.

[rodeosweetheart]

I'm down 2.6% over the last quarter--I am invested pretty conservatively, and that's why it is not worse.

My challenge is that there is no interest to be had. It's the same problem Kib talks about.

So I keep plugging along in the market, too. I just turned old enough to take out without penalty and moved my little 401k into an IRA. That felt good!

[kib]

I spent 4 years accumulating mattress cash and just changed my mind due to other people's big theoretical boogieman of inflation risk getting into my formerly intelligent head. I invested it in March. Basically, 4 years of 0% return and now 5% down from that. Could I be stupider? Sigh.

[sweetana3]

Balance, diversity, dollar cost averaging. Repeat.

If you cannot decide, move 1/3 at a time. Market timing is crazy and will generally result in worse returns.

[Williamsmith]

I spent 4 years accumulating mattress cash and just changed my mind due to other people's big theoretical boogieman of inflation risk getting into my formerly intelligent head. I invested it in March. Basically, 10 years of 0% return and now 5% down from that. Could I be stupider? Sigh.

you could have bought gold and silver with it. Feel better?

[kib]

you could have bought gold and silver with it. Feel better?Lol. yeah, maybe a little. :~)

[iris lilies]

I spent 4 years accumulating mattress cash and just changed my mind due to other people's big theoretical boogieman of inflation risk getting into my formerly intelligent head. I invested it in March. Basically, 4 years of 0% return and now 5% down from that. Could I be stupider? Sigh.
not stupid. I'm sure your investments are not all in one place. A 5% fluctuation isn't much.

[kib]

You're right, thanks for the reality check. It's just a crappy start after having missed (once again) the thrilling Up Up Up that everyone else got to ride. Feeling very very sorry for poor me today. Such terrible first world problems. :|(

[freshstart]

When things crashed in about 2008-09 I just kept contributing to my IRA like before. I was buying investments on extreme mark down. :)

this is totally me and it is killing me that I missed this go 'round and having to accept I am no longer allowed to contribute to retirement vehicles. Once I know all my finances in 2yrs or so, maybe I can get into taxable (gasp) investments. Investing is so ingrained in me, I absolutely hate that this is all so nebulous. What will ex want for child support since DD just could not take me being sick and her grandmother dying, albeit slowly, day and night anymore. He's gonna nail me to the cross, this is the situation he's been waiting for. Not knowing about SSDI. I have some EF and am itching to invest it but know that would be incredibly stupid right now.

as to OP, I didn't read whole thread, I love Roths but the rule was, I believe, that you can't take principle out until you have been invested 5 yrs. I would not tie one to your 403b, I would do it on my own. I do a mix of 4 Vanguard Index funds, low fees, I find Vanguard reps very helpful, depending on how much you invest, you may qualify for a session with a financial planner for free.

As for reading, when I was younger, the gigantic book by Jane Bryant Quinn really helped me. Editions have been updated. Financial Planning for Dummies by Eric Tyson, gives very good basic info, despite the title being obnoxious, it's a quick easy read, goes over basic how to invest. Unless you have debt, which I didn't, Dave Ramsey didn't do much for me. Boglehead books (books by Vanguard's John Bogle or one of his followers) are extremely helpful and they have some great Boglehead forums.

at any rate, I would take your time, do some reading, then decide if you need outside help.

I can't believe you had a 12% employer contribution. We started at a whopping 3%, 5%-ish recently

[profnot]

"Making the Most of Your Money Now" by Quinn is the best book on finances I have ever read (and I've read dozens).

It's like an encyclopedia of tools and strategies with great advice peppered throughout.

Great book for beginners, too. Get it from the library to see if you want to have it for future reference.

[freshstart]

her book was so helpful all those years ago, I may buy another and I never buy books, I'm a library freak. I remember going back to the book I had every time I had a change in life financial status; home buying, kids, wills, retirement planning. Eventually it was out of date but Jane Bryant Quinn was the most helpful financial planning author I have read.