Converting Gains to Chicken Money?

I am a 63 year old, single male, retired in 2008, relatively good health. I have used up all my funds from my taxable accounts and have started this year withdrawing funds from my 401K and IRA. My monthly SS benefit is $1,600. My annual budget is $60 to $65K. In July of 2009 I had approximately $1,000,000 in a combination of a taxable money market, a 401K and an IRA. Today I have $1,378,000 in my IRA and 401K (Vanguard STAR=$936K, Vanguard Target Retirement 2015 = $442K). I am thinking of taking some of my gains out of the market, (both stock and bond) by taking $300K from the Target Retirement 2015 account and putting it into a money market IRA, aka chicken money. That would leave roughly $1M in my Vanguard retirement accounts ($936K STAR & $142K Target Retirement 2015). Your thoughts?

Thanks,

Jim

Terry Says:  OK, it’s difficult, irresponsible of me to give approval or disapproval of your plan without knowing a lot more about you.  I suggest a financial planner — and would be happy to recommend one — if you let me know where you life.  They will give you more specific advice.  And part of that will include estate planning, and perhaps long term care insurance — because you could run through your savings pretty quickly if that need arose, and you would wind up in a state-funded nursing home — NOT a good option!  Part of the problem with generalizing advice is that we all tend to think we will go on living healthy,mobile, happy lives as we are now — and don’t realize the impact of longevity on money!

That said, let me make a few comments.  First, you have been enjoying retirement in the prime of life.  And you have benefited from a huge bull market that took the DJIA from 6700 to 17,000 during your retirement!  So you were able to live on your cash and still watch your assets grow.  Don’t make the mistake of thinking that will continue for the rest of your life.

The one thing that could stretch your assets most is if you could now take a job — with flexibility, because it is surely hard to go back to “work” — that could cover at least half of your planned spending (which, is after tax).  Thus, you could earn about $50,000 to “take home” roughly $30,000.  (Don’t forget that withdrawals from your pre-tax account will require income tax to be paid, necessitating a larger withdrawal than just using up after-tax money which you have been doing.)

If you don’t do that, I predict that when you reach age 75 you are going to face some real financial challenges — at a time when it might not be so easy to pick up extra money by working.

But that is why you need a certified financial planner (go to www.feeonly.org) to search in your area.

Now, to the specifics of your question, you are thinking of taking “chicken money” out of the “nearest” and most conservatively invested Target date fund.  Because it is a Vanguard fund, and they are known to have a greater exposure to equities in their funds, acknowledging the need to beat inflation, this might be ok.  But look at the assets in the STAR fund, as well.  You aren’t really reducing your market exposure all that much if you take cash out of the least risky/nearest date fund.