Writes Alan from Iowa:

“I hate to admit it but I am relatively new to the stock market, and I am confused (but it seems so are all the experts who disagree with each other). My parents knew nothing about the stock market. My dad worked hard but invested nothing in the market because he didn’t understand it and was afraid of it. He put his money in the bank and some rental property (which caused him no end of grief — renters always called to have that leaky faucet or broken screen door fixed “right away” at 6 AM on a Sunday morning). So when I sold my publishing business back in 1983 I put all the funds into CDs. (“All” being around $750,000.) At first it was great, but then rates dropped and of course I missed a great time to be in the stock market. (I saw it rising but put off diving in because we all know the line you’re standing in moves slower than the one next to you UNTIL you switch lines. <g>)

“Then around 1991 I started reading two great books – Making The Most of Your Money, by Jane Bryant Quinn, and yours. I took the plunge, put 5%, then 10%, now roughly 40% of my “nest egg” into the market and have been rewarded really well. I read and memorized and obeyed the “don’t time the market” mantra and “invest for the long haul” (which I am; I won’t need to draw out that money to live on for 10, 15 years, maybe more) but now I’m told not to invest blindly but to “keep my eyes open” — but to what? The financial experts all say different things and, even more agonizingly, they all seem to make sense when I read them.

“I have my IRA money 100% in stocks now. The amount has doubled in the last 3 1/2 years, from $80,000 when I took it out of the insurance company to around $165,000 now (thank heavens I put half of it into Vanguard Index 500). A part of me thinks I should be happy with this phenomenal luck and take it back out, put it into 6 or 7% at the bank and let it ride for the next few years. Another part of me still can’t shake the “don’t time the market” saying I’ve tried so diligently to obey since “getting smart.” (With that “as soon as I do the line will start moving” thing in my mind again.)

“What would YOU do in my place? How would YOU stretch a $750,000 nest egg to live on for the rest of your life, if you were ‘only’ 43 and could live on $30,000 a year comfortably by buying smart, etc. as your book taught me to do?”

How about splitting your non-IRA money into thirds?

  • a third in the Vanguard Prime Reserves Money Market Fund, into which you’d put your dividends from the other two funds, and out of which you’d spend your $30,000 a year;
  • a third in the Vanguard Total Stock Market Index Fund, which might over the long run throw off 2% or 3% in dividends and 6% or 7% in growth to help keep pace with inflation;
  • a third in the Vanguard Total International Index Fund, ditto.

Based on how you say you invested the $750,000 you got from selling your company in 1983, and the frugal way you live, you likely have upwards of $1 million now. Plus that $165,000 in your IRA.

With reasonable luck, you should have more than enough to withdraw the $30,000 a year you need — in today’s dollars — for the rest of your life.

I suggest Vanguard because the annual expenses it nicks you for are about the lowest around. In the investment race, that gives your horse the lightest jockey. I suggest a third in the money market, because that would give you enough to weather a long storm. I suggest splitting the rest between U.S. and international stocks, because that takes a good deal of the risk from the equation.

As for your IRA, I think it could make sense to take some tax-free profits and sit on the sidelines for a while, as you suggest, even though this will get me into terrible trouble with the “don’t time the market” people (of whom I am usually one). In the next recession (there will be one, although only economist David Bostian seems to be predicting it any time soon), interest rates could drop a bit further (good if you’ve put some of your IRA into safe intermediate-term bonds) at the same time as corporate profits and, with them, stock prices could decline. If we never have a recession, or stock prices never decline, good — you’ll be doing very well with your two Vanguard equity funds, and with the portion of your IRA you kept in stocks (and/or switched into international stocks).

It’s important to note that there’s no single right answer here. You should do what feels comfortable. One of the great luxuries of having a nest egg, and of living frugally, is not to have to worry too much about these things.

It’s also worth pointing out that you obviously have the talent to earn some more money now, if you choose to do so. Once you’re 70 or 80, still with the prospect of another 20 or 30 years ahead of you, your options will narrow. I know you’re not twiddling your toes in the lake [Iowa has no lakes, and I know from separate e-mails that this man’s hard at work pro bono]. But you still should consider earning a few additional dollars while you’re still young to increase your flexibility when you’re older. [OK, Iowa probably does have lakes, just as Kansas probably has hills someplace. But not many.] No rush, but keep your eyes open to the right opportunity. Do I sound like a fortune cookie? [Minnesota — now there is a land o’ lakes.]



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