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Help investing for newly retired couple

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  • Help investing for newly retired couple

    My parents asked me for their help on investing their money.

    They are a Retired couple, aged 67
    totally debt free including the home
    right now living basically off social security, a $500 month pension and severance from their old jobs which will run out soon. They figure they will need to pull an additional $1000 a month fairly soon here. They really don't spend money on much besides necessities.

    They do not want to go the planner route. Their planner is in his 80s and really is inactive as he just keeps the accounts for something to do. They'd likely keep the money with him, but I suggested moving the IRA money so it'd be easier to manage.

    Most other brief conversations they had with planners have wanted them to put money into managed accounts paying 1-1.5 points.

    Their portfolio is as follows:

    Stock index funds non qual: $100k
    Joint account "A" share mutual funds with a planner split around 60/40 bonds to stocks: $100k
    IRA's"A" share mutual funds with a planner split around 60/40 bonds to stocks: $300k
    401k rollover that never got invested: $200k

    They "don't want to risk their money"and they want to "have it in something safe". We talked to one of the "planners" at Vanguard and he suggested at least 30% stocks. I would suggest more, but I know they won't go for it.

    I am thinking the non qualified accounts will stay as is, so there's no tax consequences. The rest I was thinking ETF's, so something like

    1) 60% BND which I think yields 2.7%
    2) 10% XLU which is around 4% (I consider this more of a bond equivalent)
    3) 30% maybe something like SPY or DVY for 3.2% ish

    This should yield them enough money to live off the interest with some left over.

    My concern is interest rates and bonds being in somewhat of a bubble. Once they buy, they will stock with an investment.

    Any feedback or suggestions are appreciated.

  • #2
    Originally posted by silvor View Post
    My parents asked me for their help on investing their money.

    They are a Retired couple, aged 67
    They figure they will need to pull an additional $1000 a month fairly soon here.

    They do not want to go the planner route. Their planner is in his 80s and really is inactive as he just keeps the accounts for something to do. They'd likely keep the money with him, but I suggested moving the IRA money so it'd be easier to manage.

    Their portfolio is as follows:

    Stock index funds non qual: $100k
    Joint account "A" share mutual funds with a planner split around 60/40 bonds to stocks: $100k
    IRA's"A" share mutual funds with a planner split around 60/40 bonds to stocks: $300k
    401k rollover that never got invested: $200k

    They "don't want to risk their money"and they want to "have it in something safe". We talked to one of the "planners" at Vanguard and he suggested at least 30% stocks. I would suggest more, but I know they won't go for it.
    So they have 700K to work with and need it to generate 12K/year. That means they only need an after-tax yield of 1.7%. That is certainly very acheivable even in today's market and without taking undue risk. One thing that would likely help is dumping the financial planner. Is he actually doing anything for them at this point? If they own class A shares, they likely paid the front-end load long ago and there would be no complications to moving that money. Check into the expense ratios of their current holdings and compare them to something like comparable Vanguard funds. Also, be sure none of those holdings have a redemption fee or back-end load.

    What do you mean when you say a "401k rollover that never got invested"? Is it still tax-sheltered or did they pay taxes and penalties on that money already?

    I think a 30% stock allocation is probably reasonable for a couple nearing 70 years of age especially given that they don't need a high return to meet their needs.
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

    Comment


    • #3
      Originally posted by disneysteve View Post
      So they have 700K to work with and need it to generate 12K/year. That means they only need an after-tax yield of 1.7%. That is certainly very acheivable even in today's market and without taking undue risk. One thing that would likely help is dumping the financial planner. Is he actually doing anything for them at this point? If they own class A shares, they likely paid the front-end load long ago and there would be no complications to moving that money. Check into the expense ratios of their current holdings and compare them to something like comparable Vanguard funds. Also, be sure none of those holdings have a redemption fee or back-end load.

      What do you mean when you say a "401k rollover that never got invested"? Is it still tax-sheltered or did they pay taxes and penalties on that money already?

      I think a 30% stock allocation is probably reasonable for a couple nearing 70 years of age especially given that they don't need a high return to meet their needs.
      The planner is doing nothing for them. They are kind of non-confrontational , so I think they don't want the conversation with the planner.

      I thought leaving the non qual money in the A shares would be ok since they'd have to pay taxes on it if redeemed. Maybe taking the gains and divs out instead of reinvesting would be better as part of the 12k?

      The 401k is just sitting in cash, but in an IRA rollover at Vanguard.

      What about the risks of bonds at this point. Interest rates have to go up as the economy is picking up (at least a little).
      Last edited by silvor; 12-27-2012, 06:32 PM.

      Comment


      • #4
        your parents are investing for a reason. they are looking to fund their expenses. any discussion of asset allocation absent how it will impact their ability to pay expenses is no cogent. their expenses can be approximated with a series of TIPs. you need to start with a retirement analysis showing how their assets will perform as compared with their expenses and how that compares to 100% TIPs. there are a couple of free retirement calculators on the internet. you can try firecalc.com which is pretty simple. another one on propercuity.com shows TIPs, but a little more complicated. they don't segregte assets into retirement accounts or deal with your home, but they give some idea.

        there are 2 methods to evaluate the success or failure of a plan: historical scenarios and monte carlo simulation. firecalc.com only uses historical scenarios from 1870 to present. the other one does both and the monte carlo analysis is uses a more pregressive distribution which is necessary.

        going through this will different asset allocations will give you a good sense of how each decision will match against your parents' use for their funds. that is where you start...(esplanner is a better system for planning but there is a cost and you can start with the other ones first)

        Comment


        • #5
          Originally posted by silvor View Post
          The planner is doing nothing for them.
          Are they paying him anything to do nothing for them?

          What about the risks of bonds at this point. Interest rates have to go up as the economy is picking up (at least a little).
          I agree that rates can only go up since they are hovering near zero at this point. One thing to consider would be investing in individual bonds rather than funds. If you buy an individual bond and hold it to maturity, it doesn't matter what interest rates do. Your return is fixed. With funds, however, rates will have more of an impact, the longer the maturity, the greater the impact.
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

          Comment


          • #6
            Originally posted by disneysteve View Post
            Are they paying him anything to do nothing for them?


            I agree that rates can only go up since they are hovering near zero at this point. One thing to consider would be investing in individual bonds rather than funds. If you buy an individual bond and hold it to maturity, it doesn't matter what interest rates do. Your return is fixed. With funds, however, rates will have more of an impact, the longer the maturity, the greater the impact.
            The advisor got paid when they initially bought the funds. So they haven't paid him in years.

            Any suggestions on going the individual bond route? Find a new advisor? Is there a go it alone approach to individual bonds? I'm well versed on stocks and the market in general, but not really on bonds.

            Comment


            • #7
              Originally posted by silvor View Post
              My parents asked me for their help on investing their money.

              They figure they will need to pull an additional $1000 a month fairly soon here. They really don't spend money on much besides necessities.
              And so they don't expect any medical bills? Or rising costs in the economy?

              They do not want to go the planner route. Their planner is in his 80s and really is inactive as he just keeps the accounts for something to do. They'd likely keep the money with him, but I suggested moving the IRA money so it'd be easier to manage.
              So rather than pay a professional planner who does this for a living and has been educated and certified to help people just like them... they'd rather put their fate in your hands, who needs to go to an internet forum for advice, because you're not sure what to do?

              Most other brief conversations they had with planners have wanted them to put money into managed accounts paying 1-1.5 points.
              You asked them to consider taking responsibility for their financial future and handling all their investment decisions. What do you think they should charge for that?

              Financial planning (short of this forum) is not a charity.

              They "don't want to risk their money"and they want to "have it in something safe". We talked to one of the "planners" at Vanguard and he suggested at least 30% stocks. I would suggest more, but I know they won't go for it.
              This indicates to me that they are focusing more on the individual investments, than on the overall picture.

              A proper portfolio for someone their age should have 1 part conservatively invested (bonds and cash) and 1 part more aggressively invested (stocks).

              If you'd like a concept to help them conceptualize it, this is a good analogy. The overall portfolio can be viewed as a series of buckets. One bucket for shorter term money (what they'll need in the next year or two), one for mid term, and one for long term. Call this the 85+ bucket. I think that 30-40% stocks would be good for them, and should be considered as their 85+ money. Sure it will fluctuate around, sometimes wildly, but as they shouldn't be touching it for nearly 20 years, that's okay. The rest of their money is more secure and allows the 85+ money to do its thing.

              Originally posted by silvor View Post
              The planner is doing nothing for them. They are kind of non-confrontational , so I think they don't want the conversation with the planner.
              I view this more like a gym membership. If you pay 24 hour fitness, and never go work out, it won't benefit you at all. And if the 24 hour fitness is in an inconvenient location, you can switch to LA Fitness.

              If they're paying a planner, who is not managing their assets for them, it's hard to get any benefit if you don't go to him for assistance. And if they feel he's not as interested as they'd like, they should switch to a different planner.

              The 401k is just sitting in cash, but in an IRA rollover at Vanguard.
              This concerns me as it indicates that they'll never make ongoing changes to the portfolio. How long has it been sitting in cash?

              It's not enough to set up a portfolio once. Through market movement and withdrawals they'll find themselves out of balance relatively quickly. How do they see themselves monitoring the accounts going forward?

              What about the risks of bonds at this point. Interest rates have to go up as the economy is picking up (at least a little).
              Please read this article: http://www.vanguard.com/pdf/icrrol.pdf

              Comment


              • #8
                What are their current expenses? While it is good to look at income streams to fund expenses, the other half of the equation (decreasing expenses) should be examined as well.

                Some people downsize their home when they retire. This usually reduces taxes, reduces energy usage, and sometimes even reduces costs through simplification (fewer things to break).

                I'd suggest an actual financial planner who specializes in retirement.

                Comment


                • #9
                  Originally posted by silvor View Post
                  Any suggestions on going the individual bond route? Find a new advisor? Is there a go it alone approach to individual bonds? I'm well versed on stocks and the market in general, but not really on bonds.
                  i structured bond portfolios professionally for many years. basically you want to look at the liabilities they are needed to pay and structure the bonds to match them. your parent's expenses will be impacted by inflation so you want to consider inflation adjusted bonds as the best hedge. you want to look at the duration of their expenses versus the duration of the bonds. you also want to match convexity and position on the yield curve. in simple terms, the easiet way to accomplish this is building a laddered portfolio of inflation protected securities that match the expenses. you also want to avoid calls as they will cause convexity problems.

                  the next step is to consider where you have an edge in making decisions such that your decisions are likely to produce slightly better returns over long periods of time. if you don't have any particular expertise, building a laddered, duration matched (wikipedia explains the duration calculation if you need it and you can do it very easily on a spreadsheet) portfolio may be a good idea. then you can consider the administrative issues to determine whether you want funds or individual securities. funds charge expenses which will lower your return and it is harder to control the duration to match your expenses. but individual bonds take time to purchase and you might not be able to by or sell them at fair market prices. buying is generally easier than selling. you can also consider bank cd's as an alternative to bonds or funds. if the yields on the cd's are higher than the funds and you have fdic insurance, that speaks favorably for the cd's.

                  i understand some people may want to just go out and buy a fund more indiscriminantly without considering what the fund is used to pay for and just assume you can withdraw a certain percentage of the portfolio/year for living expenses. without looking at what you are doing, you don't necessarily have any reason to expect that would work or not.

                  there was an old story about some sufi mystic who was outside looking for the keys under a lamp post. his neighbor saw him and asked what he was looking for. then his neighbor asked him if he left his keys there. the sufi said he did not, but he left them in his bedroom. when asked why he was looking under the lamp post then and he said because there was more light there...this applies to the above...

                  Comment


                  • #10
                    jpg gave the information you seek. I suspect who ever took over their adviser's clientele is still collecting trailer fees from your parents investments. 70 only sounds old, it's the new 60! They will need to fund at least 18 retirement years and need knowledgeable help avoiding investment minefields.

                    Comment

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