Dear Rick:

I’m a Ford employee who’s been offered a buyout and decided to accept it.  My situation is I’m 62, single and totally debt free.  I have a very modest lifestyle and my pension will more than cover all my expenses.  In fact, I still will be able to save money.  I have a few questions I hope you can help me with.  You should know I’m an ultra-conservative investor.  At this point in time the only investments I have are CDs and I don’t want any stocks or mutual funds.  I used to invest in these but I just got too nervous even during good markets.  My first question is do you think I should take Social Security or wait?  My second question deals with the money from the buyout.  I will net approximately $100,000 after taxes and my question is would you go with a one-year or five-year CD?  Lastly, with the money in my 401(k), which is six figures, should I leave it in the money market at Ford or roll it into an IRA?

 Thanks.

 Jeff

Dear Jeff:
Congratulations on achieving the American Dream in the fact that you can retire without money being an issue. Although I encourage people to invest in equities, particularly through the use of mutual funds, I also believe that no matter how good the investment is it’s not worth causing health problems. Therefore, I believe in your situation, since you are in excellent financial shape, there is no reason why you shouldn’t invest in CDs. I have always believed that investors should not invest in anything that makes them feel uncomfortable or keep them up at night. Therefore, for you and your individual situation, CDs are the most appropriate investment.

When it comes to Social Security, I believe you should wait until at least 66 to collect your benefits. In fact, in your situation, you may even want to delay until 70 years of age. My reasoning is that by delaying Social Security you are effectively receiving an eight percent return on your money. The eight percent is substantially more than you’re going to get in CDs and that coupled with the fact that you don’t need the money, it seems to me it’s a slam dunk that you should delay your Social Security at least until 66. If you’re in good health at 66 and your financial situation is the same, then it may pay to further delay your Social Security until 70.

With regard to the money from the buyout, I would lean to a one-year CD versus a five-year CD. My reasoning is that we’re in a time period of rising interest rates and therefore, it doesn’t make much sense to lock into a five-year CD when rates are so low. A few years down the road when rates may be substantially higher, a five-year CD may make sense, but not now.

With regard to the buyout money, I do want to make a suggestion to you. As opposed to buying a CD, what you may want to do with the money is consider a program to convert your existing retirement account into a Roth IRA. The benefit to you is that by converting traditional money into Roth retirement money, that money will grow tax free and is not subject to the 70½ required minimum distribution rules. Therefore, by having money in a Roth IRA, it could give you greater flexibility in the future, which is something that we all want.

I would not convert money this year but potentially next when you’re in a lower tax bracket. As far as I’m concerned, what I would consider converting is enough each year to keep you in the same tax bracket. Remember, when you convert an existing retirement account into a Roth IRA, that money is taxable to you as ordinary income. Therefore, the advantage of the Roth is that you’re turning tax–deferred money into tax-free money and you are reducing your required minimum distribution in the future.

With regard to your existing 401(k) Plan, I would consider moving it. My reasoning for moving the money from the Ford 401(k) into the IRA is to give you the opportunity to shop CDs. In the Ford 401(k), there are very few options for the type of investor you are. However, if the money was in an IRA, you would have greater flexibility to shop CD rates around the country. Many people think that all CD rates are the same, but that is not the case. Particularly, internet banks and sometimes credit unions have much more competitive rates than traditional banks. After all, if you can make a few extra dollars on your money, why not?
Just to reiterate one point and that is, I’m a believer that when you invest your money you must feel comfortable with that investment. If you’re uncomfortable with an investment, it keeps you up at night or cause you health problems, you know it’s an investment you should avoid.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com