Let's look at your individual holdings, and then I will comment on the
big picture. The WM Money Market Class A does not have a front-end
sales load, but it may have a charge of 1.00% when you sell any of
your investment in it if it is not held for 18 months (page 28). Its
expense ratio is 0.57% (page 29), which is about average for money
market funds. Source: "Prospectus" WM Group of Funds (March 1, 2005)
http://www.wamu.com/NR/rdonlyres/8F86AC84-10A8-4F4F-818C-16017078EBFF/0/WMGFUNDPROS_22805_with_MM_supp.pdf.
It is not yielding a whole lot (money market funds in general are
still quite low), so you do not want to get hit with the deferred
sales charge. On the other hand, that means that you cannot get your
money out of it for at least 18 months, which may be very
inconvenient. I would not use this for money you might need to get
your hands on in a hurry.
The Franklin CA Tax Free Income has a 4.25% load and an expense ratio
of 0.58%, with no deferred load. It is tax free, which is good, but
you paid nearly an entire year's worth of prospective returns at
current rates to get in it. The load amounts to a commission which is
paid to Washington Mutual for its advice. Bond funds are not yielding
a whole lot, so you really want to avoid paying sales charges for
them. Source: "Franklin CA Tax-Free Income A" Morningstar (2005)
http://quicktake.morningstar.com/Fund/Snapshot.asp?Country=USA&Symbol=FKTFX.
From your description, your husband will be entering the "income
phase" of the annuity. Once that starts, it is no longer worth
$200,000 but will simply consist of monthly payments based on whatever
payment rules your husband has selected and its value at that time.
The payments may be for a specified period of time, possibly for his
lifetime, or may be for the combined lifetimes of your husband and
yourself. In general, once he begins receiving payments, he is locked
into his selection. Source: "Variable Annuities" Washington Mutual
Inc. (2005) http://www.wamu.com/wmgroupoffunds/pub/educationplanning/retirement/variableannuities.asp.
You will have paid a sales commission when you purchased the variable
annuity. Variable annuities typically have high surrender charges, so
there would be little point in trying to change course now, and having
guaranteed income payments that you and your husband cannot outlive
(if that is the choice he has selected) can be very helpful in
retirement. You will want to know if the payments are indexed for
inflation or not. If they are, then they will grow over time as
prices rise. If they are not, then they will gradually be less
valuable as prices rise, meaning that you will need to make up the
difference with your other investments/or part-time work.
You describe your remaining investments as being in stocks, with a
total amount of $290,000. They sound well diversified across many
different types of stocks, which is good. You may want to focus on
larger company stocks as you grow older to reduce risk, but it is
probably fine as is.
According to the information you have provided, you have $80,000
spread between a taxable money market fund and a tax-free municipal
bond fund, a monthly annuity amount, and $290,000 in stocks of various
kinds. This means that of your liquid assets, just over 78% are in
stocks with the remainder in the taxable money market fund and
tax-free municipal bond fund. This is an aggressive but not entirely
unreasonable allocation of your assets given that you and your husband
are still both relatively young and could easily be retired for 30
years or more. You will need your investments to grow to offset
inflation, so having a significant percentage in stocks is a good
thing. As you grow older, you may want to gradually decrease the
amount in stocks in favor of more bonds to generate current income and
decrease your risk.
Since your husband will be receiving the annuity payments, and you
will be working part-time, I suggest you keep the majority of the
$80,000 in a tax-free municipal bond fund, where it will earn more
after taxes than will the taxable money market fund. You will want to
consider getting a no-load money market fund or high yield savings
account to keep your emergency fund in so that you can move money in
and out of the whenever you like without having to worry about loads
and deferred sales charges. I would also avoid buying any more bond
funds with loads. The returns on bonds do not adequately compensate
you for the sales charge, and there are perfectly good no-load options
out there. I particularly like Vanguard Group funds because of their
low expenses and lack of loads (http://www.vanguard.com).
While you have the option of rolling over your retirement plan
investments to Washington Mutual, there is no obvious reason to do so
if you are happy with your existing investment choices. You can
withdraw your funds from there if you like, and you can avoid paying
sales charges on the investments that Washington Mutual would put you
in. The hefty loads on their funds, which compensate them for their
advice, will materially decrease your investments. You have to ask
yourself if you can learn enough about investing to be worth saving up
to 5 1/4% of your investments by buying no-load mutual funds or
exchange traded funds. Personally, I would find that a very
attractive proposition. For example, if you managed the $150,000 in
your deferred compensation plan yourself, you could potentially save
up to $7,875 ($150,000*5 1/4%). You would also enjoy the investment
gains on your savings.
That said, while you have invested in relatively expensive investment
vehicles because of the loads/commissions, you have nonetheless built
a significant nest egg, and Washington Mutual does not appear to have
put you into anything inappropriate. In contrast, my grandmother's
bank put her portfolio into technology stocks during the boom and lost
most of her assets. I would certainly be concerned if they were to
suggest substantial changes to your investments at this point in favor
of more risky investments or were to regularly move you in and out of
funds. From your description, none of that is happening, so I do not
mean to concern you unnecessarily.
You might want to consider a fee-for-service financial adviser, whom
you could consult for an hourly rate when you felt you needed advice.
That would probably be cheaper in the long run than paying
commissions. You want to look for someone who is a Certified
Financial Planner.
It is great that you are planning to work part-time. That reduces
your need to depend upon your investments for your living expenses
right away, making it more likely that they will be there if you are
not able to work in the future. However, I encourage you to remember
that you have saved for retirement so that you can retire. Studies
suggest that you can be reasonably confident that withdrawing 3% of
your investment portfolio in the first year and increasing it by the
amount of inflation each subsequent year will not result in you
running out of money. This would suggest that you could spend $11,100
in your first year of retirement from your $370,000 in liquid
investments in addition to your husband's annuity payments without
being likely to run into financial distress under a reasonably wide
array of economic conditions.
Another issue for you to consider at this point in your life is
long-term care insurance, particularly if you are both still healthy.
You have enough assets that you certainly do not want to deplete them
to try to become eligible for Medicaid if one of you needs nursing
care eventually, but probably not enough assets to want to take the
risk of "self-insuring" by planning to pay for those expenses
yourself. There are many companies offering long-term care insurance.
Washington Mutual probably has a relationship with at least one firm.
You want to look at multiple providers before you make a decision
because each has different costs and benefits.
In summary, I think you have done well for yourselves, and while you
could save yourself some money by handling some of your own investing,
Washington Mutual appears to have done all right by you. I do not see
any obvious warning signs suggesting you should not continue as you
are. However, you should be aware of what you are paying for their
advice so that you can compare it with other sources of advice and/or
doing some of your investing yourself. I assume they will advise you
to gradually reduce your exposure to stocks over time as you get
older, but you should still maintain a significant exposure to stocks
in order to combat inflation (at least 50-60% in my opinion). You
need to make sure that your annuity payments are not going into a fund
with a front end or deferred sales charge so that you can pull them
out to pay expenses as you need to without penalty. Finally, I think
it would be a good idea to look into long-term care insurance to see
if it is of interest to you.
Sincerely,
Wonko |
