Q: I am a retired dentist, age 57. I have a stock/bond portfolio currently at $800,000. My wife is still working (age 53) and is making...
Q: I am a retired dentist, age 57. I have a stock/bond portfolio currently at $800,000. My wife is still working (age 53) and is making $150,000. She still wants to work a few more years. We have no debt, and our house is worth $800,000. Also we have $34,000 in annuities (gaining 3 percent a year). Plus we have another $750,000 coming in from a sale of a business over time (the next five years).
I have recently received $500,000 in cash. This money has to be invested in something very secure. I understand that my wife and I can buy $60,000 in I Bonds ($30,000 from a bank and $30,000 over the Internet) each. So where do we put the other $380,000? I also thought about Treasurys in a three-year ladder.
A: Buy the I Savings Bonds and build the ladder — but make it shorter. Currently there is virtually no yield difference between two- and three-year maturities. Bloomberg.com, for instance, recently put the two-year Treasury yield at 3.52 percent. The three-year yield was at 3.56 percent.
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So there is no reward for taking the risk of a longer-term investment — unless short-term interest rates decline. The spread between two years at 3.52 percent and six-month Treasurys at 3.11 percent is also narrow — but the 42-basis-point difference gives you a tiny bit of “insurance” against a further increase in rates.
Bottom line: You should be able to keep your principal safe while getting a 3.5 percent yield. With a good parking spot for your money, you and your wife should then start to prepare for when both of you are retired. This involves two major steps.
The first is to start imagining the transition from her current earned income of $150,000 (plus your investment income) to a retirement based entirely on investment income and Social Security. With about $2 million in financial assets, that would be about $80,000, plus Social Security, probably another $36,000.
Unless your $800,000 house has very low operating expenses, supporting it will probably reduce your discretionary income.
The second is to examine the structure of your accounts. If most of your $800,000 stock/bond portfolio is in qualified accounts — such as Keoghs, SEP-IRAs and IRAs — you should consider doing a Roth conversion when (and if) the opportunity presents itself. This will get the tax liabilities out of your qualified accounts. It will mean you don’t have to make required minimum withdrawals at age 70 ½.
It will also mean that your withdrawals, when you make them, won’t be taxable and won’t cause your Social Security benefits to be taxed. Right now, it looks as though your Social Security income will be subject to taxation. Why did I say “when (and if) the opportunity presents itself”?
Our friends in Congress, masters of the “gotcha” game, don’t allow conversions if modified adjusted gross income is over $100,000. Fortunately, you and your wife will have an interesting opportunity planning her retirement transition. As with all things involving taxes and accounting, you need to go way beyond a newspaper column. Spend some time with your accountant.
Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at firstname.lastname@example.org. Questions of general interest will be answered in future columns.