Asset Allocaton for 71 y.o.

[starling]

My Mom's financial adviser proposed the following asset allocation. She is 71, retired, zero debt, and in below average health.

She has approximately $200,000 in savings that needs to generate $1,200 per month.

Equity................20%
Fixed Income.......69%
Cash.................11%

Specifically:
Cash Equivalents.............11%....T-Bill 3 month Yield
High Yield Bonds...............7%....Barclays US Corp High Yield Index
Intermediate Term Bonds....19%....Barclays US Aggregate Index
International Bond............8%.....Citigroup World Govt Bond-US$
Large Cap Foreign Stocks....5%.....MSCI EAFE Index
Large Cap Growth Stocks.....6%.....Russell 1000 Growth Index
Large Cap Value Stocks…......9%....Russell 1000 Value Index
Short Term Bonds.............35%....Barclays 1-3 Yr Govt Index

Is this an appropriate allocation for this goal?

(Note: we are also looking at an annuity as another option to generate the $1,200 per month)

Thank you!

[letsgobobby]

$14,400 = 7.2%. Firecalc says she has a 70% chance of making it 15 years and a 33% chance of making it 20 years. Is her health that bad that she can 'count on' not living that long? Those seem like terrible odds, especially given current bond and stock market valuations.

If she increased stocks to 60% Firecalc says she has better odds of success, but no guarantee.

This situation likely argues for annuitizing, which solves the equation for 'never running out of money.' It would be at the expense of a financial legacy, because being in poor health, the odds favor the insurer over the annuitant.

You and she might need to think about Medicaid planning, etc - I don't know how annuities factor into those kinds of issues.

[JW Nearly Retired]

My Mom's financial adviser proposed the following asset allocation. She is 71, retired, zero debt, and in below average health.

She has approximately $200,000 in savings that needs to generate $1,200 per month.

Equity................20%
Fixed Income.......69%
Cash.................11%

Specifically:
Cash Equivalents.............11%....T-Bill 3 month Yield
High Yield Bonds...............7%....Barclays US Corp High Yield Index
Intermediate Term Bonds....19%....Barclays US Aggregate Index
International Bond............8%.....Citigroup World Govt Bond-US$
Large Cap Foreign Stocks....5%.....MSCI EAFE Index
Large Cap Growth Stocks.....6%.....Russell 1000 Growth Index
Large Cap Value Stocks…......9%....Russell 1000 Value Index
Short Term Bonds.............35%....Barclays 1-3 Yr Govt Index

Is this an appropriate allocation for this goal?

(Note: we are also looking at an annuity as another option to generate the $1,200 per month)

I don't really know what would be appropriate. Depending on what below average health really means, it could be a reasonable hope and a prayer effort. IMO, you can't get to $1200/month with $200k. That is an initial drawdown rate of 7.2% which is much bigger than a safe amount for a normal life expectancy. You will likely need to kick in something extra to this.

Even if you annutize $200k it leaves you a little short of $1200/mo. see http://www.brkdirect.com/spia/EZQUOTE.ASP
Unless the below average health could be taken into account somehow in the annuity to get an increased amount?
JW

[Johm221122]

As mentioned SPIA want even get $1200 a month and inflation could really cause a problem down the road. I would not do an annuity.Can the budget be down sized?Maybe a house than can be sold?
john

[NYBoglehead]

I think 200k to provide 1200/month is plenty doable. At 1200/month, assuming NO GROWTH whatsoever, 200k will last for 166.66 months, or 13.88 years. That is without ANY growth. While it is by no means ideal and doesn't leave much room for error or allow for any increase in monthly income, I think the 200k just might be enough.

[letsgobobby]

I think 200k to provide 1200/month is plenty doable. At 1200/month, assuming NO GROWTH whatsoever, 200k will last for 166.66 months, or 13.88 years. That is without ANY growth. While it is by no means ideal and doesn't leave much room for error or allow for any increase in monthly income, I think the 200k just might be enough.

No inflation?

[NYBoglehead]

I think 200k to provide 1200/month is plenty doable. At 1200/month, assuming NO GROWTH whatsoever, 200k will last for 166.66 months, or 13.88 years. That is without ANY growth. While it is by no means ideal and doesn't leave much room for error or allow for any increase in monthly income, I think the 200k just might be enough.

No inflation?

I figured that leaving inflation out was reasonable given that I also assumed ZERO growth. If the portfolio grows 2-3% annually that should be able to maintain the purchasing power of the OP's mother. Not sure what her SS is but obviously that is inflation-adjusted so that is something to keep in mind as well.

[JW Nearly Retired]

I think 200k to provide 1200/month is plenty doable. At 1200/month, assuming NO GROWTH whatsoever, 200k will last for 166.66 months, or 13.88 years. That is without ANY growth. While it is by no means ideal and doesn't leave much room for error or allow for any increase in monthly income, I think the 200k just might be enough.

If we ever get a recovery and interest rates increase, then IMO it's quite possible this bond heavy portfolio will indeed show zero or negative growth.
JW

[starling]

Thank you all for your replies.

A little more background. Below average health means an autoimmune disease that affects balance and ability to walk (needs a cane or two). I'm not sure that the autoimmune disease will definitely reduce her life expectancy. A nursing home or assisted living is probably higher than average, however I don’t think $200k is enough to help much with that situation.

As far as cutting expenses, she already lives very frugally, so $1,200 per month is probably close to rock bottom. Maybe she could get it down to $1,000.

She owns her home, which is valued between $250k and $300k. So a reverse mortgage is always an option if she depletes her savings.

Letsgobobby mentioned 60% in order to have a chance of success, but that seems very high. What is the highest asset allocation in stocks that would be reasonably recommended for someone already in retirement? Vanguard target retirement has 30% stocks, 65% bonds and 5% cash – would this be considered a reasonable max?

Thanks again.

[NYBoglehead]

I think 200k to provide 1200/month is plenty doable. At 1200/month, assuming NO GROWTH whatsoever, 200k will last for 166.66 months, or 13.88 years. That is without ANY growth. While it is by no means ideal and doesn't leave much room for error or allow for any increase in monthly income, I think the 200k just might be enough.

If we ever get a recovery and interest rates increase, then IMO it's quite possible this bond heavy portfolio will indeed show zero or negative growth.
JW

JW,

I share your concerns about interest rates rising and the correlated NAV drop of bond funds. It will also mean a higher yield for the portfolio and perhaps the drawdown can come from the cash portion of the allocation during that period. A lot of different withdrawal methods.

OP,

I don't think 30% is unreasonable in order to provide for some added protection against inflation and while increasing the risk you're also adding a larger potential for growth. If your mom has 250-300k in home equity it might be wise to look at selling in the next few years in order to access that money before you find that you need it.

[starling]

If your mom has 250-300k in home equity it might be wise to look at selling in the next few years in order to access that money before you find that you need it.

I'm not sure what you mean. Where would she live?!?

[NYBoglehead]

If your mom has 250-300k in home equity it might be wise to look at selling in the next few years in order to access that money before you find that you need it.

I'm not sure what you mean. Where would she live?!?

A rented apartment!!

[starling]

What would be the advantage of selling her home now and investing the proceeds (and moving into a rented apartment) vs. a reverse mortgage in 15 years when/if her savings are depleted?

[BL]

I would think putting money directly into something like Vanguard Target Retirement Income with 30% equities might give her the best chance as it also has 0.19 Expense Ratio. It could be set up to pay the desired amount on a regular basis. I suspect using her "financial advisor" would cost at least 1% plus put her into funds that have ERs of over 1%, which would take a huge portion of her retirement income.

It might be worth checking a SPIA to see what you could get, but that would leave no extra funds, so probably not the best choice.

[NYBoglehead]

What would be the advantage of selling her home now and investing the proceeds (and moving into a rented apartment) vs. a reverse mortgage in 15 years when/if her savings are depleted?

I didn't mean to suggest that she should sell now, but that perhaps it would be better to sell when there only a few years worth of expenses rather than when the portfolio is depleted.

Reverse mortgages can be expensive (that doesn't mean that it won't make sense for your Mom) so it is just something to consider.

[Grt2bOutdoors]

First, given the proposed allocation suggestions of the financial advisor, your mother would be exposed to about 27% equity. You should view the exposure to high-yield as equity, because as has been previously stated performance is more correlated to the equity markets and economy than a normal plain-vanilla bond instrument. Remember, junk bonds are issued by distressed companies unable to access the investment grade bond market, hence they pay higher yields in the form of interest or PIK's or a combination of the two. If the economy tanks, an investment grade company will likely do just fine in being able to meet its obligations, would you make the same assumption of a distressed company? If you want to take risk, take it in the equity markets because at least there you have an even shot of being compensated for it, you aren't compensated in the junk bond market for the risk. - Thank you, Larry for drumming that into our heads.

Second, while you may be able to generate $1,200 in the near term that will require your mother to take out-sized risks, when the risk finally does show up it will be in the form of principal erosion and at that age, it will be very difficult for her to recover losses. It has been said "more money has been lost reaching for yield, than at the point of a gun". Something to keep in mind.

Third, while she may like to keep her paid up home, there are normal expenses associated with upkeep - are you in a position to provide assistance? A reverse mortgage may be an option, but down the line - for now, investigate what it will provide.

Fourth, what kind of financial advisor did you meet with? This is more of a curiousity question.

Finally, do not feel pressured to make any rash moves. Safety of that principal is paramount. It's likely the financial advisor doesn't share the same mutual feeling.

[retiredjg]

I don't have an opinion on the proposed asset allocation. But if you do look into a SPIA (which seems reasonable), there might be some medical underwriting with the autoimmune disease that would mean the monthly payments are higher.

You say she has an autoimmune disease that might not shorten her life expectancy. And maybe it won't do that directly. But there are indirect issues to consider. Medication can have side effects that can shorten lifespan. Balance problems can lead to a fall - often a life-changing or even fatal event for an older person. Just simple lack of mobility can affect lifespan.

I'm just saying be sure the autoimmune disease is brought into any discussion of a SPIA because the payments might be higher than for a person without the same condition.

[JW Nearly Retired]

Do you know what the financial advisor fees are? Many FAs would be charging an annual fee of something like 1.5% for a portfolio of this size. That would be 2.5 months worth of expenses before anything for your mother's needs. I think most here would say that your mother cannot afford a financial advisor of this sort.
JW

[Johm221122]

No social security?
Would it not be easier and cheaper in a small apartment?
if she sold house,she could get more income from larger portfolio
john

[Call_Me_Op]

Letsgobobby mentioned 60% in order to have a chance of success...

This is certainly an arbitrary statement. How much (if any) is required in equities depends entirely upon your assets, time-horizon, income, goals (and other factors).

[Padlin]

Does she need the 12k to meet minimum expenses? Might be a good first step to actually get a quote for a SPIA, maybe even one with inflation protection. As mentioned her health will probably play into the cost and the cost/benefit may be a deciding factor.
I'd leave selling the house or not to your mother to decide. My mom is in her mid 80's, in fair to poor health, but wouldn't sell her house for anything. We've suggested aprtartments and condos. even looked at some, but she likes it at home. She knows she can sell it if need be.
I don't see a problem with the portfolio although it could be simpler, like VTINX or some such.

[starling]

Thank you again for all of the replies. Here are my responses to the various questions in the thread and an update on the current status.

1. SPIA: A SPIA would require nearly all of her savings ($225,000). I looked into a medical rider or being “rated up” but have not gotten a definitive statement on whether her specific condition will merit increased payments. I don't want to rush into this very big decision so we will continue to carefully evaluate this as an option.

2. Reduce expenses? We revisited her expenses in detail and I think she can manage $1,000/month, which will help extend her savings. This represents income in addition to social security ($1,950).

3. Financial Advisor: Her financial advisor is a local certified financial planner. He is proposing to charge either $170/meeting @ 4 meetings a year or half a basis point. As high as these fees sound, this is much better than the previous situation in which he had her invested in 32 different funds with extremely high ER’s that were funding his services. My Mom would like to continue using him, so my approach is to work with him to set up her asset allocation and corresponding fund choice so that the $170 meetings will consist of simply confirming the AA and rebalancing. Over time we can shift to semi-annual, then annual, and then as-needed.

4. Sell home: As far as selling her house, it is a very nice condominium that is perfect for her right now. An important goal of this planning exercise is for her to be able to stay in her house as long as she is able to take care of herself.

5. Simplifying via VTINX: Seems logical except that I notice the fee (ER = 0.17%) is much higher than individual admiral index funds (blended ER = 0.10%). Would the more frequent re-balancing in VTINX offset the higher expense ratio?

6. Proposed AA (me vs. advisor):

My recommendation:

30% Equity:
--Vanguard Total Stock Market Index Fund ($67,500) ER = 0.06%

60% Bond:
--Total Bond Market Index Fund ($78,750) ER = 0.10%
-- Vanguard Inflation-Protected Securities Fund Admiral Shares ($56,250) ER = 0.11%

10% Cash:
--Local Savings Account ($22,500)

His recommendation:

27% Equity
--Power Shares Dyn Large Cap Value – 9% ($20,250) ER=0.61%
--SPDR Barclays High Yield Bond (treat as equity) – 7% ($15,750) ER=0.40%
--Schwab US Large Cap Growth – 6% ($13,500) ER=0.07%
--I-Shares S&P Emerging Markets Infrastructure – 5% ($11,250) ER=0.75%

62% Bond
--Vanguard Short-Term Bond – 35% ($78,750) ER=0.11%
--Vanguard Intermediate-Term Bond – 19% ($42,750) ER=0.11%
--PowerShares International Corporate Bond – 8% ($18,000) ER=0.50%

11% cash.
--Local Savings Account ($24,750)

So that is where we stand right now -- thanks again for your advice!!

P.S. Please ignore the cash being in a savings account. My Mom prefers it to be in a local bank and the difference in earnings is probably negligible.

[YDNAL]

My Mom's financial adviser proposed the following asset allocation. She is 71, retired, zero debt, and in below average health.

She has approximately $200,000 in savings that needs to generate $1,200 per month.

A little more background. Below average health means an autoimmune disease that affects balance and ability to walk (needs a cane or two). I'm not sure that the autoimmune disease will definitely reduce her life expectancy. A nursing home or assisted living is probably higher than average, however I don’t think $200k is enough to help much with that situation.

As far as cutting expenses, she already lives very frugally, so $1,200 per month is probably close to rock bottom. Maybe she could get it down to $1,000.

She owns her home, which is valued between $250k and $300k. So a reverse mortgage is always an option if she depletes her savings.

Two things, starling.

1. Longevity. This affects the cost/benefit analysis of a Single Premium Immediate Annuity (SPIA). Your mother's longevity may (may not) be affected by her ailment and it would be wise to shop for an SPIA.
http://www.brkdirect.com/spia/ezquote.asp

2. Budget. Your mother spends more than her assets can safely provide.

a) Her budget may be significantly impacted by housing costs. It is easy for some (than for others) to say... sell the house, live in apartment, etc. I suggest a comparison of current housing costs (real estate taxes, insurance, maintenance, repairs) to the cost of renting something else.
b) If she can reduce the amount needed to $12,000, it makes it a bit safer to withdraw from $200,000. All the calculators and projections in the World couldn't tell you what WILL happen with regards to Market returns and/or your mother's health and withdrawal period.

My suggestion is 2-fold:

• Your mother should NOT take unnecessary risk in search for return/growth. It is more effective to take $12,000 x 20 years with small projected growth, than it would be to realize a 20%, 30% or more loss in the Market.
• Invest in Vanguard Target Ret Income VTINX, a balanced Fund where she doesn't see IF/WHEN Total Stk Mkt or Total International go in the crapper, and it is self-rebalancing with nothing for her (you) to do. She can expect a current SEC yield a bit above 2% per year (not great, not 0%).

[Peter Foley]

I much prefer your strategy to the advisor's. If she wants to continue to use the advisor I would suggest that it be done on a fee only basis. Two meetings per year would be plenty; with your simplified approach, once a year would be enough.

You are in a situation where some relatively small amounts of money can make a meaningful difference. For her cash/bank account you might explore the opportunity to earn a little interest via an account that pays a higher rate of interest in exchange for how one uses the account. These type of accounts are available to individuals who will make a monthy automated deposit to the account and use their debit card for a minimum number of transactions each month. If you can find an account like this and keep a balance of about $20,000, she can probably earn a few hundred dollars per year instead of nothing. I think my daughter earns 3% interest on deposits up to $30,000.

Another safe vehicle would be to purchase a few IBonds over the next few years. Your could lower your proposed allocation to Total Bond Index accordingly.

[retiredjg]

So that is where we stand right now -- thanks again for your advice!!

It is difficult to say what will be the the best options, but I think you are looking at all this in a reasonable way - asking the right questions and doing the right research.

Obviously, your portfolio idea is better than the advisor's idea. But if paying him $680 a year and a little more in expenses gives her a lot of peace, so be it. Hopefully, she will soon realize that 4 times a year is completely unnecessary. And that your idea just fine.

5. Simplifying via VTINX: Seems logical except that I notice the fee (ER = 0.17%) is much higher than individual admiral index funds (blended ER = 0.10%). Would the more frequent re-balancing in VTINX offset the higher expense ratio?

I doubt that frequent rebalancing would do much, but I don't think .07% a year is "much higher" either (although I do have to agree it is higher). If she should happen to like the idea of a blended fund, it would be well worth paying (especially if she dropped the other higher ER funds).

Good luck!