Help with money system

[JWelch]

So I was talking with my wife's uncle who has worked at a shop for nearly 40 years. He talked with me very openly about his debt and finances because he knows I'm debt free and have a few extra shekels in the bank.

Long story short he's got $750k in his 401(k) and his "financial adviser" seems to be not doing an optimal job and telling him he's got to refinance things frequently, which is always costing him a few hundred bucks.

Furthermore he was told that his $750k should be paying him $1200 per MONTH. That didn't sound even close to me. More like $1200 per week. I just wanted to ask those of you who live off a money system what my Uncle can do to earn a good amount of interest with low risk from his retirement.

He's the kind of guy to give the shirt off his back to a total stranger but doesn't have much of a clue about money. It would be a tremendous gift to him if I can give him some sound advice.

I would really appreciate any help in this area from you kind gentleman who may be able to help point this ship in the right direction.

 

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[JWelch]

I understand that the input I receive may not be given by licensed professionals and will not be taken as legal advice.

 

[biophase]

So I was talking with my wife's uncle who has worked at a shop for nearly 40 years. He talked with me very openly about his debt and finances because he knows I'm debt free and have a few extra shekels in the bank.

Long story short he's got $750k in his 401(k) and his "financial adviser" seems to be dicking him around quite a bit and telling him he's got to refinance things frequently, which is always costing him a few hundred bucks.

Furthermore he was told that his $750k should be paying him $1200 per MONTH. That didn't sound even close to me. More like $1200 per week. I just wanted to ask those of you who live off a money system what my Uncle can do to earn a good amount of interest with low risk from his retirement.

He's the kind of guy to give the shirt off his back to a total stranger but doesn't have much of a clue about money. It would be a tremendous gift to him if I can give him some sound advice.

I would really appreciate any help in this area from you kind gentleman who may be able to help point this ship in the right direction.

$1200/mo is about 2% which would be good if he put it into something safe like a CD or Money market account. He's probably 55-65 years old. I don't know what his risk tolerance would be. But I would probably be shooting for at least 5% return.

 

[Nily]

Vanguard

 

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[CareCPA]

Some rambling thoughts (sorry, it's early).

High interest and low risk don't really go together - if they did we would all be invested in it.

Common wisdom from the early retirement community is that with a healthy stock/bond allocation (80/20), you can withdraw 4% a year, indexed for inflation, essentially indefinitely. This comes from studies that were done on historical returns, and are obviously no guarantee of future performance. There are many on this forum who avoid the stock market, and expect it to crash to zero in the near future (just my observations of previous discussions). I think if it crashes that hard, we will have a lot of other issues to worry about, so I don't worry about that too much in my plans.
My crystal ball is broken, so I'm not predicting a correction in the near term, but it would not surprise me at all if it happens. The market has been on a good run lately, a pullback would not be out of line.

One concern of going too low (i.e. full CD allocation), is that inflation will outpace your earnings. Meaning in a few years your money will be worth even less than it is today, even if you don't spend any of it.
Avoid high-fee funds, and front load mutual funds. Both will eat away at your returns.

I'm assuming your uncle is late 50s/early 60s. Unless the life expectancy in your family is abnormal, you could bump that withdrawal rate up to 5 or 6%, and still have very few worries about running out. This would put him around $40-45k a year. I'm also assuming Social Security will kick in here in a couple years. If your family has a long life expectancy, you will want to consider delaying that and allowing it to grow if he doesn't need the money right away. If not, that would add (I'm assuming), about $1-1.5k a month.

I would suggest looking closely at the financial adviser, and determining if he is working in your uncle's best interests. A lot of "advisers" are just insurance and investment salesmen, and have no motivation or need to put their client's best interests first.

 

[MidwestLandlord]

The S&P 500 has a 10% correction roughly once a year on average, and a 20% correction every 3.5 years on average.

It has not had a 10% correction since late 2015 early 2016, and a 20% correction since late 2008, early 2009.

As @CareCPA said above, a lot of advisers are just salesman. A quick way to know if his adviser is just a salesman, is he fee-based or free? If he charges per hour (or on a percentage of $ managed) then he is probably unbiased. If he does the work for free, he's making commissions on selling certain investments. (Edward Jones for instance...a lot of their investments have a 5% front end load on top of an annual fee, which is how they pay their scam artists...uhhh, I mean "advisers")

For $1200 per week, he would need a return of 8.3% per year. That's going to be very hard to do in my opinion. (using traditional investments)

He should be able to get 5%, which would be $37,500 a year, or $721 a week.

How to Never Work Another Day in Your Life, The Money-System Portfolio – Fastlane Entrepreneurs

(MJ's post ^^ is from 2012, and I have not confirmed the rate of return or risk level of the investments he talks about [it's 5 years later after all, so check them], but it's a good place to start for sure)

 

[CareCPA]

[...]
If he charges per hour (or on a percentage of $ managed) then he is probably unbiased. If he does the work for free, he's making commissions on selling certain investments. (Edward Jones for instance...a lot of their investments have a 5% front end load on top of an annual fee, which is how they pay their scam artists...uhhh, I mean "advisers")
[...]

I personally don't even like the % of assets under management (AUM) model either. If it is in your best interest to pay off debt, do you think that adviser is going to tell you to take money out of your investment account to pay that off? No, because it reduces his AUM, and his fees.
I'm a big proponent of flat fee or hourly fee. Many investors don't want to go this route because they see the money going to their adviser. It is much easier to hide that fee in the other payment models. However, flat fee (and to a slightly lesser degree hourly), have no incentive to dupe you into schemes that are not in your best interest. There is literally nothing for them to gain by it, and everything for them to lose.

 

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[MidwestLandlord]

I personally don't even like the % of assets under management (AUM) model either. If it is in your best interest to pay off debt, do you think that adviser is going to tell you to take money out of your investment account to pay that off? No, because it reduces his AUM, and his fees.
I'm a big proponent of flat fee or hourly fee. Many investors don't want to go this route because they see the money going to their adviser. It is much easier to hide that fee in the other payment models. However, flat fee (and to a slightly lesser degree hourly), have no incentive to dupe you into schemes that are not in your best interest. There is literally nothing for them to gain by it, and everything for them to lose.

That had not occurred to me. Excellent point.

 

[Joe Cassandra]

Many people forget about Closed-End Funds (CEFs).

You buy stocks/bonds at a discount and many pay out monthly distributions. They aren't super sexy because you'll rarely see a 50% capital gain on any of them. But, many pay out 7-15% yields each year. Of course, you gotta find the right one. I've followed two for a bit. They're trading low right now but siphoning out almost 8%/year. Won't put them here as I'm not an advisor nor want any legal ramifications.

Your uncle is most likely 60-80+... he's not looking for capital gains as much as income to live on. 8% per year is $60,000 plus whatever he makes in Social Security and/or pension (if he has one).

 

[JWelch]

Thank you all for your great input! Highly appreciated.

As a few of you alluded to it sounds as if the guy currently managing his portfolio is simply a salsesman who calls himself an adviser. I believe he is earning a commission on an ongoing basis rather than a one time or hourly paid fiduciary.

Avoid high-fee funds, and front load mutual funds. Both will eat away at your returns.

I would suggest looking closely at the financial adviser, and determining if he is working in your uncle's best interests. A lot of "advisers" are just insurance and investment salesmen, and have no motivation or need to put their client's best interests first.

Next time I meet with him I will dig a little deeper into where his money is actually being allocated and recommend possibly moving to Vanguard as well.

I believe he still would like to work for at least a couple of more years so hopefully making these moves soon will equate to a larger chunk of money for him when he's ready to call it quits with his job.

I did have some baseline knowledge of some of this stuff but I do not currently leverage a money system as an income I live on so I wanted to hear it strait from the horses mouth as they say.

Again you guys are awesome. I can't thank you enough. I'll provide an update in the future about any interesting findings if they happen to pop up.

 

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[MJ DeMarco]

Many people forget about Closed-End Funds (CEFs).

You buy stocks/bonds at a discount and many pay out monthly distributions. They aren't super sexy because you'll rarely see a 50% capital gain on any of them. But, many pay out 7-15% yields each year. Of course, you gotta find the right one. I've followed two for a bit. They're trading low right now but siphoning out almost 8%/year. Won't put them here as I'm not an advisor nor want any legal ramifications.

Your uncle is most likely 60-80+... he's not looking for capital gains as much as income to live on. 8% per year is $60,000 plus whatever he makes in Social Security and/or pension (if he has one).

Here ya go for more information!

Money System Management: Real Example, Closed-End Fund