A friend (age 61) is going to retire end of year and has $145k worth of their employers stock in a 401k. They would like to sell the stock and take it out monthly over time.

What would be the most conservative approach in regard to taxes and protecting their downside?

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Originally posted by losvaqueros:
A friend (age 61) is going to retire end of year and has $145k worth of their employers stock in a 401k. They would like to sell the stock and take it out monthly over time.

What would be the most conservative approach in regard to taxes and protecting their downside?

I’d look to roll the stock into a rollover IRA, then sell most, if not all, of it. Within the IRA they can sell with tax consequence and diversify. Whether to do an old school IRA or Roth IRA depends on their circumstances and plans. There are pros and cons to each.

They have the option of rolling it over into a Fidelity ira.

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What would be the most conservative approach in regard to taxes and protecting their downside?

Arguably the literal answer to this would be a "Single Premium Immediate Annuity". The value of the 401k is rolled into the annuity contract, and a guaranteed lifetime payment stream is initiated. There is no danger of losing the principle because the principle no longer exists. The principal risk is the insurance underwriter itself going insolvent, which is why you should check things like Moody ratings.

You don't have to put the entire 401k into the SPIA. If it was me, I think I'd put about half into a life annuity, then keep investing the other half.

So my question would be what company? Are they willing to buy it back for a premium?

Sounds like he can leave it as is or move it into another 401k/IRA account?

Be sure he understands the NUA option for this specific situation.

https://seekingalpha.com/artic...-make-costly-mistake

Your friend is aware he'll take quite a hit in SS benefits if he claims before full retirement age, yes? (66 years and 4 months for your friend.)

The $145k: That's in just the one stock, I hope? Because, as retirement savings goes, that won't go very far.

There's no way to cash it out w/o paying taxes. If he wants to get it out of his employer's 401k, w/o taking a tax hit on the full amount, he'll have to roll it over into an IRA.

Personally: I regard annuities as a bad deal, but that's just my opinion.

Annuities are not inherently bad or good. They are tools, like guns, that can be used constructively or not-so-constructively. They are very complicated, and it is easy to just throw your hands up and say stay away from them, but like most things making blanket absolute statements is not the real answer. Just the take from someone who sold them on a non-commissioned basis for ten years.

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Personally: I regard annuities as a bad deal, but that's just my opinion.

+2

There are plenty of stocks that pay a nice dividend plus appreciation.

Quick advice: roll it over to a Fidelity IRA; minimize cash out until age 70.5 when he has to begin taking minimum required distributions and pay income tax on those.
Fidelity has lots of funds including Vanguard funds available. Fidelity also has lots of educational information on their website, and advisors you can talk to.
According to Fidelity

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Importantly, representatives do not have a financial incentive to promote Fidelity mutual funds over non-Fidelity mutual funds.

The choice of investments in those is far too complicated for a quick answer.

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Originally posted by slosig:

quote:

Originally posted by losvaqueros:
A friend (age 61) is going to retire end of year and has $145k worth of their employers stock in a 401k. They would like to sell the stock and take it out monthly over time.

What would be the most conservative approach in regard to taxes and protecting their downside?

I’d look to roll the stock into a rollover IRA, then sell most, if not all, of it. Within the IRA they can sell without tax consequence and diversify. Whether to do an old school IRA or Roth IRA depends on their circumstances and plans. There are pros and cons to each.

FIFY.

I agree with this option. And at age 59 1/2, you can start drawing on your 401(k)/IRA without penalties. Just the regular income taxes.

I'd have to know which company stock you have before I give my preference of diversifying all of it or keeping some of the stock. But don't tell me because I don't want to know. At this point, I don't know if I would put the money in the Russell 5000. I am convinced of the theory that says we're still in a bull market but in the maturing portion of it. That's what my money manager says so I go with it. But if I was managing all of my money, I would be very much stressed at this point of the stock market.

Someone mention Social Security. You can start drawing on SS at age 62 but as mentioned, you take a hit. For me, waiting until I'm 66 1/2 for no penalty is a 33% rate of return of foregoing the early SS draw at 62. I hope your friend has other funds to tide him over. If he doesn't, then you gots to do what you gots to do and if he wants to retire at 61 and can't wait until 66 plus, then he'll have to take the lesser SS benefit. Worse things can happen like waiting for the full SS retirement age and then dying before drawing SS.

The one thing about annuities is that you are avoiding almost all of the risk but that comes at a price. The risk/reward is very real. To get very high rewards, you have to accept very high risks. To get very low risks, you're going to get very low rewards.

I do believe annuities have their place but it's usually (from my POV) for very high net worth people wishing to minimize estate taxes by using annuities as part of their strategy.

One can "titrate" their level of risk/reward by maintaining a certain percentage of their portfolio between stocks and bonds in order to get an expected rate of return and level of volatility.

Good luck to your friend.

Your friend should find a local financial planner who is trustworthy, meet with them, and map out their whole picture. There are so many variables and the consequences of being "wrong" at his age are potentially so high that he should be leaving it to the professionals, and specifically to one that can look at his big picture.

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Originally posted by DaBigBR:
Your friend should find a local financial planner who is trustworthy, meet with them, and map out their whole picture. There are so many variables and the consequences of being "wrong" at his age are potentially so high that he should be leaving it to the professionals, and specifically to one that can look at his big picture.

I would add, make it a fee based, not commission based, planner.

Otherwise look up Fidelity or Vanguard and have them do a direct transfer into a diversified low fee or targeted retirement age IRA and out of his company stock. No matter how well his old company might be doing right now, you don't want to have all your eggs in one basket.

And as usual in these discussions, stay the hell away from annuities and anyone trying to sell you some. Good for the salesman (high commissions, big surrender charges if you bail out, intentionally confusing/misleading to most, etc.), not so good for your friend.

The company and stock is PepsiCo. (PEP) 1250 shares purchased over a twenty year period.

PEP is about 24 times earnings, pays a $3.22 annual dividend. Yield at $118 is 2.73%. PEP earns 8.5% on assets and is at a bit more than 12 times book value.

Coca Cola (KO) is about 45 times trailing 12 months earnings, pays a $1.48 annual dividend. Yield at $45 is 3.29%. KO earns 6.48% on its assets and is about 8.8 times book value.

Which would you say is the better buy, or stock to own now?