Help Me Help My Parents - Age 50, low current balances

[JerLon]

I know that this won't be the normal format but I am trying to help my parents out and many of you have far more knowledge about the moves to make for someone who is a bit older than I am.

So, that being said, I am going to post the basics based on my knowledge of my parents situations and then ask some questions:

Emergency funds: Three to six months of expenses
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 15% Federal, 6% State
State of Residence: New York
Age: 50 (give or take a year or two)
Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 33% of stocks (or so)

Current Retirement:

Approximately $50,000 in Roth IRA's in American Funds with their bank. Looking to roll this over to Vanguard soon.

Here is the situation:

1) My father's employer has recently created a 403(b) option and he has the opportunity to max it out this year due to some extra income (max out up to $22,500, not the extra $5000 service based catch up. However he may do this as well).

2) In years going forward, he will be able to contribute between $15,000-$20,000/year to the 403(b).

3) In addition to this, my parents will be funding two Roth IRA's to the tune of about $10,000 total.

4) My father is at least 15 years from retirement, probably 20 years.

5) Neither of my parents has a ton of knowledge on this topic although I have pointed them in the right direction and they are learning quickly.

Here are my questions:

1) Is a 60/40 asset allocation okay at their age or should it be 50/50? They are comfortable with either.

2) Given their lack of wanting to deal with this at all, are they better off picking a Target Date or Life Strategy fund? If so, which?

3) One thought they had was to put it into VTWNX (Target Retirement 2020) with a small portion (6% increasing up to around 10%) into TIPS.

4) Should they transfer their Roth to Vanguard?

5) Is there any logic to which funds should be in Roth vs 403(b)? There is a chance that in retirement they will be looking to take a chunk from the Roth to buy a house if this matters.

6) The Vanguard 403b enrollment form only gives space to select 4 funds, is this a limitation of Vanguard or just the paperwork?


Thanks for any advice you can give me to pass along.

[Laura]

JerLon,

If your parents are not experienced investors then they might be better off starting with an asset allocation of 50/50 which should have smaller swings. On the other hand, they really don't have much time to make progress on retirement so perhaps 60/40 would be better. None of us can make this decision for them but if they are nervous investors go with 50/50 in my view.

On the question of which funds, if the 403b is with Vanguard I would make this easy for them and select a Vanguard Target Retirement fund for all of their investing. Make that the selection in the 403b and the roths. Vanguard will maintain the asset allocation for them and it will automatically become more conservative as they age. I wouldn't bother with adding TIPS to the Target Retirement fund since Vanguard has these structure the way they think best. Just use the Target Retirement 2020 in all of their accounts.

I strongly recommend moving their current roth away from the Bank and to Vanguard. Their expenses will drop significantly leaving more of their money to grow for their benefit. Fill out the application with Vanguard and they will do the work to make this happen. Warn your parents they are likely to hear from the salesperson at the bank that was receiving a commission from all of their investments so they are not talked out of making this change. Show them the benefit of the guaranteed lower costs.

I don't know why the form only allows four funds in the 403b but that might be due to some company rule but it doesn't matter. You only need one fund to get them a simple to manage, low cost, broadly diversified portfolio. They can then focus on saving as much as possible rather than worrying about which fund to use.

Laura

[zebrafish]

I think your parents need to start saving ASAP and put themselves on a budget while they learn more about investing.

I think it is very honorable to help your parents out. In doing so, I would wonder:

1) Why they have so little saved at this point (bad habits?)
2) Did they ask for your advice?
3) Are they going to take your advice if given?

A lot of parents, despite our best intentions (and perhaps being right, too!), are not so willing to follow their children's advice. I'm in my 40s and successful, and my mother has taken almost none of mine or my siblings' advice (or her financial advisor's...), despite it being quite sound. Some parents find it very hard to ever see their children as anything but children.

Good luck!

Trevor

[JerLon]

I think your parents need to start saving ASAP and put themselves on a budget while they learn more about investing.

I think it is very honorable to help your parents out. In doing so, I would wonder:

1) Why they have so little saved at this point (bad habits?)
2) Did they ask for your advice?
3) Are they going to take your advice if given?

A lot of parents, despite our best intentions (and perhaps being right, too!), are not so willing to follow their children's advice. I'm in my 40s and successful, and my mother has taken almost none of mine or my siblings' advice (or her financial advisor's...), despite it being quite sound. Some parents find it very hard to ever see their children as anything but children.

Good luck!

Trevor

1) Not habits at all. Has been a pastor for 30 years and was often making below the poverty level. They are on a strict budget and only in the last 5-10 years have earned enough to contribute to the Roth. They took some hits with bad investment advice from a Charles Schwab guy a few years back.

2) Yes they have asked for advice.

3) Yes they will take my advice. No doubts at all.

[momar]

The TR funds already add TIPS starting 5 years before retirement and increasing to a max of 20% 7 or 8 years into retirement.

[JerLon]

The TR funds already add TIPS starting 5 years before retirement and increasing to a max of 20% 7 or 8 years into retirement.

I had missed that fact. That exposure seems reasonable. It does seem that for someone who isn't as interested, picking the proper asset allocation and finding a target date fund that is close to that is convenient. Even if it requires shifting from one target date fund to another (if the asset allocation changes too slowly or quickly), it is easier for the hands off type than selecting funds and rebalancing each year.

[zebrafish]

1) Not habits at all. Has been a pastor for 30 years and was often making below the poverty level. They are on a strict budget and only in the last 5-10 years have earned enough to contribute to the Roth. They took some hits with bad investment advice from a Charles Schwab guy a few years back.

2) Yes they have asked for advice.

3) Yes they will take my advice. No doubts at all.

That sounds very promising, certainly. It seems like you should definitely encourage them to learn as much as they can as you point them in the right direction, as it would seem that they put a lot of "faith" in the advice of others. My mother is the opposite-- she trusts no one but really has done little to educate herself-- and this has cost her a couple million and counting. I wish you the best of luck.

[RyeWhiskey]

1) Is a 60/40 asset allocation okay at their age or should it be 50/50? They are comfortable with either.

With a 15 to 20 year time horizon, either would be fine but I'd probably lean to the 60/40.

2) Given their lack of wanting to deal with this at all, are they better off picking a Target Date or Life Strategy fund? If so, which?

Target Date changes allocation with time, bringing in TIPS towards the end. LifeStrategy is fixed allocation and I would suggest that you use this. My reasoning is that Vanguard has their Target Retirement 2035 (for retiring in about 23 years) at a current 86/14 stock/bond allocation. I consider that to be far too risky and over-weighted in equities. Sure, you could choose the Target Retirement 2010 which is more in line with your desired allocation, but then in ten years you'd need to choose a new fund as you'd be in a whole new allocation. So to remove potential future headaches for both you and your parents, I'd stick with a Life Strategy fund.

3) One thought they had was to put it into VTWNX (Target Retirement 2020) with a small portion (6% increasing up to around 10%) into TIPS.

That's unnecessary as that fund will begin incorporating TIPS in 4 years.

4) Should they transfer their Roth to Vanguard?

I think it's simpler to have all your assets in one place.

5) Is there any logic to which funds should be in Roth vs 403(b)? There is a chance that in retirement they will be looking to take a chunk from the Roth to buy a house if this matters.

Given that you're using balanced funds, no, as you will automatically rebalance.

6) The Vanguard 403b enrollment form only gives space to select 4 funds, is this a limitation of Vanguard or just the paperwork?

I have no idea, probably best to call Vanguard.

Thanks for any advice you can give me to pass along.

Good luck to you, sir. Helping parents can be very rewarding and I'm happy that they have someone like you to look out for their best interest.

[JerLon]

LifeStrategy is fixed allocation and I would suggest that you use this. My reasoning is that Vanguard has their Target Retirement 2035 (for retiring in about 23 years) at a current 86/14 stock/bond allocation. I consider that to be far too risky and over-weighted in equities. Sure, you could choose the Target Retirement 2010 which is more in line with your desired allocation, but then in ten years you'd need to choose a new fund as you'd be in a whole new allocation. So to remove potential future headaches for both you and your parents, I'd stick with a Life Strategy fund.

So, if they want 50/50, would there be some logic in going the 60/40 life strategy fund and adding some TIPS?

[ruralavalon]

1. A 60/40 asset allocation is reasonable.

2, 3 & 5. Look at Vanguard LifeStrategy Moderate Growth Fund (VSMGX); er = 0.16%; 60% equities, 40% bonds, with 30% of equities in international. https://personal.vanguard.com/us/funds/ ... IntExt=INT .

4. Yes, transfer the Roth IRA to Vanguard. Its easier to have everything in one place.

[JerLon]

Given the amount he is putting in this year and increasing fairly rapidly, would he be better off to do this:

Total Stock Market - 40
Total International Stock Market - 20
Total Bond Market - 40

That way, his fees would be at the admiral level? Is the added hassle worth the fee savings?

[donall]

LerLon:
Is your dad in the Social Security system?

[travellight]

Just wanted to say that I am the age of your parents and it amazes me to think my kid could be researching my finances for me. They should be very proud of you. My kid is only 15, a sophomore in high school. He has learned some frugal ways from me but has a ways to go.

[JerLon]

JerLon:
Is your dad in the Social Security system?

Yes. Thankfully they made that decision 30 years ago (or so) and have paid their 15.3% each year.

[JerLon]

Just wanted to say that I am the age of your parents and it amazes me to think my kid could be researching my finances for me. They should be very proud of you. My kid is only 15, a sophomore in high school. He has learned some frugal ways from me but has a ways to go.

Thanks.

[YDNAL]

LifeStrategy is fixed allocation and I would suggest that you use this. My reasoning is that Vanguard has their Target Retirement 2035 (for retiring in about 23 years) at a current 86/14 stock/bond allocation. I consider that to be far too risky and over-weighted in equities. Sure, you could choose the Target Retirement 2010 which is more in line with your desired allocation, but then in ten years you'd need to choose a new fund as you'd be in a whole new allocation. So to remove potential future headaches for both you and your parents, I'd stick with a Life Strategy fund.

So, if they want 50/50, would there be some logic in going the 60/40 life strategy fund and adding some TIPS?

JerLon,

I'm not going to engage in a discussion of "too this, too that" because these are personal opinions and everyone is entitled to their opinion. Since TR 2035 was brought-up, look at down the road at TR 2025 and TR 2015 (13 and 3 years to retirement). You then see a 70/30 that turns to 55/45 allocation.
https://personal.vanguard.com/us/funds/ ... =INT#tab=2
https://personal.vanguard.com/us/funds/ ... =INT#tab=2

With plenty of ground to make (age 50) and low savings, your parents appear to me to be the right candidates for higher Equity risk (higher expected reward).

• This, so long as they understand this is a 15-year plan and the road is not guaranteed to be a smooth one.
• IF they don't understand this, IMO it doesn't matter whether they use 50/50, 60/40 or something else.

If faced with this situation, I would use TR 2025.

Good luck to them.

[Jerilynn]

4) Should they transfer their Roth to Vanguard?

As opposed to keeping it with the bank in American Funds? Hell, yes!

[BL]

I think your parents need to start saving ASAP and put themselves on a budget while they learn more about investing.

I think it is very honorable to help your parents out. In doing so, I would wonder:

1) Why they have so little saved at this point (bad habits?)
2) Did they ask for your advice?
3) Are they going to take your advice if given?

A lot of parents, despite our best intentions (and perhaps being right, too!), are not so willing to follow their children's advice. I'm in my 40s and successful, and my mother has taken almost none of mine or my siblings' advice (or her financial advisor's...), despite it being quite sound. Some parents find it very hard to ever see their children as anything but children.

Good luck!

Trevor

1) Not habits at all. Has been a pastor for 30 years and was often making below the poverty level. They are on a strict budget and only in the last 5-10 years have earned enough to contribute to the Roth. They took some hits with bad investment advice from a Charles Schwab guy a few years back.

2) Yes they have asked for advice.

3) Yes they will take my advice. No doubts at all.

Sorry, I can't help but wonder if they also financed part or all of your education expenses. That would also slow down their investments.

[joe8d]

1. A 60/40 asset allocation is reasonable.

2, 3 & 5. Look at Vanguard LifeStrategy Moderate Growth Fund (VSMGX); er = 0.16%; 60% equities, 40% bonds, with 30% of equities in international. https://personal.vanguard.com/us/funds/ ... IntExt=INT .

4. Yes, transfer the Roth IRA to Vanguard. Its easier to have everything in one place.

Good advice. That would be my recommendation also.

[Watty]

I might have missed it but are they renting now or do they own a home?


New York has a wide range of house prices and property taxes. If they live in an expensive area with high taxes then they might consider relocating to a lower cost area when they retire. There are a lot of nice areas in the country, like some college towns, where you can get a nice modest house for the low hundreds or even less.


http://www.realtor.org/sites/default/fi ... -11-07.pdf

[Easy Rhino]

Relatively new to investing serious amounts of money, and disinterested in result. All funds in IRA or 403b.

I'd vote for target retirement funds, and a fairly conservative one (pick a date where the current allocation is closer to 50/50).

They may not really be as ready to handle market fluctuation as they think, since they haven't really be tested before. (although if they're lucky, they'll be too indifferent to panic)

[JerLon]

Sorry, I can't help but wonder if they also financed part or all of your education expenses. That would also slow down their investments.

Yes, that would slow down their investments had I not funded my own BA, MS, MS, and a portion of a PhD (about a year left).

They did not finance any of my education or any of my siblings.

[JerLon]

I might have missed it but are they renting now or do they own a home?


New York has a wide range of house prices and property taxes. If they live in an expensive area with high taxes then they might consider relocating to a lower cost area when they retire. There are a lot of nice areas in the country, like some college towns, where you can get a nice modest house for the low hundreds or even less.


http://www.realtor.org/sites/default/fi ... -11-07.pdf

Neither, currently live in a church provided parsonage. Housing in retirement is the next issue the church is looking to develop a plan for.

Worst case scenario would involve taking a lump sum from the Roth (in retirement) to purchase a small house.

[BL]

Sorry, I can't help but wonder if they also financed part or all of your education expenses. That would also slow down their investments.

Yes, that would slow down their investments had I not funded my own BA, MS, MS, and a portion of a PhD (about a year left).

They did not finance any of my education or any of my siblings.

Good for you! I know that occupation often has the challenge of being paid very little. Good for you to see what is possible here. They are lucky to have you looking out for them.

[YDNAL]

JerLon,

I don't see an update and noticed that a great number of posters suggested a more conservative AA - potentially the best course of action - but I wanted to touch a little bit more on this.

• Posters contend that your parents are not "tested" in a bad market and thus their suggestions as posted.
• I believe that unless your parents understand market behavior, and unless they establish a 15-20 year strategy until retirement, then it doesn't matter the allocation.
  

  4) My father is at least 15 years from retirement, probably 20 years.

• If you have time, look back to 2008 threads and see the number of people reacting to the market drops - it didn't matter if invested 70/30 or 30/70 Stocks/Bonds.

So, the second bullet-point is the area I suggest for your parents to focus in order to deal with the psychological behavior during market volatility; and to understand that the strategy is longer-term and the road not necessarily a smooth ride.

1. Once understood (no guarantees to stay the course), then personal circumstances dictate a more aggressive strategy (more expected growth) given the ground to be made by a couple of 50 year olds with minimal savings for their age.
2. As I posted earlier, the folks at Vanguard offer Target Retirement 2025 (link), that holds a 70/30 Stock/Bond allocation which turns to 55/45 in 10 years (look at TR 2015) then to 43/57 in 15 years (look at TR 2010) and eventually 30/70 by 2032 if we use Target 2005 as guideline (no longer exists).