Investing in Retirement help

[BrandonBogle]

Need some advice on how to help my mother who has recently entered retirement. I tried for many years to get her to think about retirement, but she didn't until now that she is in it.

Taxes:
- Florida resident
- Single

Age: 62
Desired Allocation: 28% US stock/12% Intl Stock/60% bond
Withdrawal Rate: 4% annually

Debts/Spending:
- Auto Loan @ 1.5%
- 2.75% fixed (24 years remaining)
- Social Security covers the existing mortgage payment and her own savings for the property tax bill (no escrow). It does NOT provide enough to cover HOI
- Other Spending: $1,000 - $1,500/month (these will be investment draw downs)

Assets:
- Portfolio Size = Low-mid six figures
- Emergency Fund = Yes, Covers two-years of "other spending" above
- Traditional IRA = 10% (of Assets) Bank CDs @ 2.25% APY (average until 2020, can withdraw all but $1k penalty-free)
- Other Income = Social Security

She is rather risk-adverse, but also wanting to be able to do her best to live mostly off the interest/dividends. She would like to change homes (neighborhood went south around her) and would then use a good portion of these funds (60-70%) to purchase the house, but that could easily be a couple years away (she's already spent 9 years looking for "the perfect house"). I am trying to balance her desires, giving her some potential for appreciation during the next five years that she is using her Cash and CD funds, while not taking on too much risk.

We are looking at the following for her proposed investment allocation:
Taxable
- 6% I-Bond
- 11% Bank 5-year CD @ 1.85% APY (penalty-free withdrawals)
- 9% Vanguard Total Bond Market Index Fund Admiral (VBTLX)
- 11% Vanguard Intermediate-Term Investment-Grade Fund Admiral (VFIDX)
- 7% Vanguard Long-Term Tax-Exempt Fund Admiral (VWLUX)
- 25% Vanguard Total Stock Market Index Fund Admiral (VTSAX)
- 12% Vanguard Total International Stock Index Fund Admiral (VTIAX)

Traditional IRA (10% of assets)
- CDs with average paying ~2.25%
- Penalty-free to take out all but $1k of CD
- Rate locked till early 2020

Spending Account/Emergency Funds
- Total of 8% of assets

This gives her an AA of (without her "Spending Account") of:
60% Bond/CD
28% US Stock
12% Intl Stock

Had this been three years ago, I wouldn't have balked at her having this allocation. But now with the concerns around bond funds, I am not so sure. Using the I-Bonds and CDs, I'm trying to preserve her capital while the equities are our growth and inflation-hedge. Each year, unless rates make significant changes to reassess the plan, we will make out the I-Bonds each year from the funds in her TBM. Basically, I've got her next 5 years set up to be CDs with TBM, TSM, TISM basically covering everything after 5 years.

Any suggestions on how to proceed?

[Padlin]

Nothing wrong with the balanced funds but your just duplicating, it's simpler to go with the http://www.bogleheads.org/wiki/Three-fund_portfolio adjusted correctly for your mother, or put it all in either the appropriate Target or Life Strategy fund. Wellesley is a good fund too but I don't see what it buys you that you don't have with the above.

Hard to make a recommendation based on the info you posted, don't know age, how much she spends as compared to SS. How much she wants to spend on the house etc, but a guess would be 60-80% fixed. Shorter term bonds can be used if you wish to limit the down side potential, but you'll have to swap them once the news changes.

There is always something to scare folks in investing, yesterday it was the fiscal cliff, today its bonds.

[BrandonBogle]

Nothing wrong with the balanced funds but your just duplicating, it's simpler to go with the http://www.bogleheads.org/wiki/Three-fund_portfolio adjusted correctly for your mother, or put it all in either the appropriate Target or Life Strategy fund. Wellesley is a good fund too but I don't see what it buys you that you don't have with the above.

Hard to make a recommendation based on the info you posted, don't know age, how much she spends as compared to SS. How much she wants to spend on the house etc, but a guess would be 60-80% fixed. Shorter term bonds can be used if you wish to limit the down side potential, but you'll have to swap them once the news changes.

There is always something to scare folks in investing, yesterday it was the fiscal cliff, today its bonds.

Thanks for the follow up. I went ahead and updated the original post to include the info. But to directly answer your questions
- Duplication was because they are in different accounts, but really was just a human differentiator in the "overall portfolio" view so that the different accounts remain different. Doesn't really matter and I can easily not use the balanced funds
- Target Retirement Income has 20% TIPS, which was nice to have.
- She is 62
- Social Security will cover her mortgage and property taxes, but is not enough to also cover her HOI
- The HOI, car, utilities, essentials, etc., she needs another $1,000/month to cover living expenses, $1,500 if wants to go out that month or take a trip, etc (I'm encouraging her to enjoy her retirement after living very frugally all her life)

Also, thinking back on this last night, I think I put too much of my own comfort with stock holdings in this mix as I realized I have her as 50/50 (or 45/45/10 with Cash). I should probably have her closer to 60/40 or 70/30 tilting towards bonds? As for the house, she has been searching for "the perfect house" for 9 years now, so I personally do not feel she'll find it right away.

[Calm Man]

OP, it looks like she started SS at the earliest possible date and with that does not have sufficient cash flow without going into assets or am I missing something? Her portfolio is in the "low 6 figures". Let's say its 200K. The yields one is looking at are maybe 2-3%. How is she going to manage this without depleting her principal quickly at her spend rate regardless of whether you are 30/70, 45/55 or whatever?

[BrandonBogle]

OP, it looks like she started SS at the earliest possible date and with that does not have sufficient cash flow without going into assets or am I missing something? Her portfolio is in the "low 6 figures". Let's say its 200K. The yields one is looking at are maybe 2-3%. How is she going to manage this without depleting her principal quickly at her spend rate regardless of whether you are 30/70, 45/55 or whatever?

That is correct. She entered retirement not by choice and prior to this never wanted to take the time to plan/prepare for this. She is looking for new employment, but as of yet, has not found it. I fully expect her to dig into the principal some. My question is more around the risks of investment "all-in" this late in the game and the right allocation to balance the risks while providing a 2-3% return. For now, the plan is to dip into her emergency fund and each year, replenish it with withdrawals from her investments.

[Calm Man]

Brandon, she could be like a woman I know in a similar situation. She doesn't want any risk even though she acknowledges that being all in a money market ultimately destroys buying power. But psychologically, it still isn't loss of principal in her mind. I referred her to my Flagship CFP who did talk to her. He was able to get her to Life Strategy Income with is 80% bonds. She has about 200K and although I try to stay out of this, when pressed, told her that they way things are, it appears to me that in about 8-10 years she will be out of money at age 70. I hated to be so blunt but she's a nurse so I think she "heard" that maybe it is better to work full time than 2 days a week to build up something.

For your mother, if you could get her to 40/60 with Life Strategy Conservative Growth or 60/40 with Moderate Growth, I think that's about all you can really do. And tell her I said she needs to get a full time job for at least a few years and save what she earns !!!

[pkcrafter]

Please confirm - mom has 9% of assets in an IRA (wellesley) and all the rest is in taxable, now in savings and CDs?

You also mentioned an emergency fund. How much is that and is it separate from other assets?

She would like to change homes (neighborhood went south around her) and would then use a good portion of these funds (60-70%) to purchase the house,

What funds, her accumulated assets in taxable?

If mom needs $1,000/mo ($12,000/year) she would need around $300,000 is assets to maintain the withdrawal. Does she have that much?

Paul

[BrandonBogle]

Please confirm - mom has 9% of assets in an IRA (wellesley) and all the rest is in taxable, now in savings and CDs?

You also mentioned an emergency fund. How much is that and is it separate from other assets?

She would like to change homes (neighborhood went south around her) and would then use a good portion of these funds (60-70%) to purchase the house,

What funds, her accumulated assets in taxable?

If mom needs $1,000/mo ($12,000/year) she would need around $300,000 is assets to maintain the withdrawal. Does she have that much?

Paul

Mom's 9% in the IRA are Bank CDs averaging 4%. They were averaging 6% until recently. Everything else is taxable. As the CDs mature, I plan to move the funds to vanguard in their tax-deferred state and use those funds for part of her Bond AA.

The emergency fund is enough to cover two years worth of expenses. I will edit the original post to make that more clear.

As far as total assets, she isn't quite that far, but is close. I am also prepared to help her out when the time comes.

[pkcrafter]

Mom's 9% in the IRA are Bank CDs averaging 4%. They were averaging 6% until recently. Everything else is taxable. As the CDs mature, I plan to move the funds to vanguard in their tax-deferred state and use those funds for part of her Bond AA.

The emergency fund is enough to cover two years worth of expenses. I will edit the original post to make that more clear.

As far as total assets, she isn't quite that far, but is close. I am also prepared to help her out when the time comes.

It's great that you will back up mom if needed, and even a part-time job doing something she enjoys can make a big difference.

Emergency funds are used to cover loss of income so retirement assets don't have to be tapped, but when the person retires the emergency fund just becomes part of cash/fixed income assets, so add it to that.

Good plan for the tax-deferred account.

You are wise to be concerned about risk and asset allocation and it's a tough decision in this case. The portfolio you listed is a duplication of the TR fund and the individual funds, so you don't need both.

Wellesley and TR Income aren't tax efficient, but in your mom's tax bracket it won't matter. Considering everything, including you as a back up, she could use an AA of around 40% stock, and if when there is a market fall, you may need to help out until she's stabilized again. Too much more equity would increase drawdown and make it tougher on everyone. Much less and she won't have a chance of being self-sustaining.

If you agree, you can turn your attention to developing a workable portfolio. I'll save that for a later post.

Paul

[BrandonBogle]

Mom's 9% in the IRA are Bank CDs averaging 4%. They were averaging 6% until recently. Everything else is taxable. As the CDs mature, I plan to move the funds to vanguard in their tax-deferred state and use those funds for part of her Bond AA.

The emergency fund is enough to cover two years worth of expenses. I will edit the original post to make that more clear.

As far as total assets, she isn't quite that far, but is close. I am also prepared to help her out when the time comes.

It's great that you will back up mom if needed, and even a part-time job doing something she enjoys can make a big difference.

Emergency funds are used to cover loss of income so retirement assets don't have to be tapped, but when the person retires the emergency fund just becomes part of cash/fixed income assets, so add it to that.

Good plan for the tax-deferred account.

You are wise to be concerned about risk and asset allocation and it's a tough decision in this case. The portfolio you listed is a duplication of the TR fund and the individual funds, so you don't need both.

Wellesley and TR Income aren't tax efficient, but in your mom's tax bracket it won't matter. Considering everything, including you as a back up, she could use an AA of around 40% stock, and if when there is a market fall, you may need to help out until she's stabilized again. Too much more equity would increase drawdown and make it tougher on everyone. Much less and she won't have a chance of being self-sustaining.

If you agree, you can turn your attention to developing a workable portfolio. I'll save that for a later post.

Paul

I can definitely convince her to stay the course at 40% stock. She's finally accepted that she will have to follow what I bring to her regardless of what she sees in the balances of the account. To that effect, she even wants me to turn on electronic statements and I watch over her stuff so she won't see the value change. So it sounds like you are saying pick one vs the other with Wellesley and TR? Let me update the first with how the accounts line up so it's clear. If that's the better advice, I'd be fine with going that route.

[pkcrafter]

Let's look at the portfoio--

So far, the best thoughts I have for her proposed investment allocation are:
Taxable Account #1 (42% of assets)
- This is the first account she will draw down from
- 18% (of total assets) Vanguard Target Retirement Income Fund (VTINX)
- 24% Vanguard Total Bond Market Index Fund Admiral (VBTLX)

Taxable Account #2 (42% of assets)
- She is trying to put equities in here so there is step-up basis to pass onto the next generation
- Ideally, would not tap into this account unless she makes the house purchase
- 18% (of total assets) Vanguard Wellesley Income Fund Admiral (VWIAX)
- 20% Vanguard Total Stock Market Index Fund Admiral (VTSAX)
- 4% Vanguard Total International Stock Index Fund Admiral (VTIAX)

<--You make this portfolio 2 sound like it's not part of the retirement portfolio. If all assets are ~300,000k, then you need to view everything as an integrated portfolio, don't look at the two taxable portfolios in isolation. If mom is planning to withdraw 12k/year, that is 4%, which may or may not be too high depending on the withdrawal strategy. What this means is there is no flexibility to take a large withdrawal for a home or to save for the next generation. Things may change, but for now she has to focus carefully on spending and asset preservation.

Traditional IRA (9% of assets)
- Currently CD paying ~4%
- Then becomes VBTLX and Account #1 VBTLX goes down to 19% and to buy Int'l and Total Stock

Spending Account/Emergency Funds
- Total of 7% of assets

There are several ways to construct a 40/60 portfolio, so here's a few ideas. This includes the 7% in emergency assets (taxable)

9% IRA
LifeStrategy conservative growth or Wellesley

91% Taxable
20% high dividend yield index
71% Target Retirement Income
-or-
just LS convervative
-or-
80% Tax Managed Balanced (50/50)
20% bonds/TIPs
-or-
total stock market
total international
total bond and/or short term bond
TIPS

There are lots of ways to build the portfolio, but try to keep it rather simple. I used a balanced fund in tax deferred because this won't be tapped for as long as possible and it takes advantage of some growth potential. I also suggested some balanced funds in taxable because overall they appear to moderate stock loss--good for risk averse investors.


Paul

[BrandonBogle]

There are several ways to construct a 40/60 portfolio, so here's a few ideas. This includes the 7% in emergency assets (taxable)

9% IRA
LifeStrategy conservative growth or Wellesley

91% Taxable
total stock market
total international
total bond and/or short term bond
TIPS

There are lots of ways to build the portfolio, but try to keep it rather simple. I used a balanced fund in tax deferred because this won't be tapped for as long as possible and it takes advantage of some growth potential. I also suggested some balanced funds in taxable because overall they appear to moderate stock loss--good for risk averse investors.


Paul

For the most part, this will work for her. The only thing is I know she will not be on board for doing anything with that emergency fund. She withdraws out of it every month and looks at that as "how I put food on the table". I'm sure thought I can get to go with the following if the setup is not too much folly (lol).

7% Spending Account/Emergency Funds
Cash or Money Markets with CDs as well (no-penalty 1% CD)

9% IRA
Vanguard Wellesley Income Fund Admiral (VWIAX)

84% Taxable
Vanguard Total Stock Market Index Fund Admiral (VTSAX)
Vanguard Total International Stock Index Fund Admiral (VTIAX)
Vanguard Total Bond Market Index Fund Admiral (VBTLX)
TIPS

As a side node, I just realized that TIPS is NOT an acronym for Vanguard Inflation-Protected Securities Fund (VIPSX). I'll have to read up on TIPS if there is not a handy fund to use in it's place.

If losing that 7% doesn't sound crazy so that she can sleep well at night (and thus, not micromanage me so I sleep well at night), then I guess the big question is really how to divvy up the investments in the taxable. Not knowing enough about TIPS, I do not have an idea how much to focus on there. And I would presume the TIPS and Cash would be part of the Bond allotment? I'm going to have some reading to do tonight!

[JW Nearly Retired]

Sorry but I see no good outcome here if Mom keeps burning her meager savings at the rate she needs to. She could live another 30 years and the portfolio will be all vaporized in 10 or 15. IMO, no amount of adroit portfolio management is going to make all that much difference.

My best advice for Mom is to (1) ditch buying a new house...... sell your current house and rent or live with your caring son. (2) find a job and work a little longer. It's going to be a long retirement.
JW

[pkcrafter]

Brandon wrote:

For the most part, this will work for her. The only thing is I know she will not be on board for doing anything with that emergency fund. She withdraws out of it every month and looks at that as "how I put food on the table". I'm sure thought I can get to go with the following if the setup is not too much folly (lol).

I understand, so the emergency fund ( which isn't an emergency fund because she draws from it regularly ) becomes mental accounting. You can consider it one of the buckets if you wish. This EF holds two years of spending needs, so what happens when it's exhausted? You have to refill from other assets, but if you don't do anything for two years, the equity portion is likely to rise due to withdrawals from non-equity and equity growth, hopefully. The correct way to do it is to check the AA at least once a year and rebalance back to target to maintain the risk profile, or if stock allocation has grown above 45%, then take the withdrawals from equity.

Another way to show this (mental accounting again) is 60% bonds and cash contain 15 year of withdrawals of 4%, so there is 15 years in emergency funds. Anyway, I do understand, and if she must have that padding for comfort, then leave it, but be sure to watch overall AA and refill EF annually.

7% Spending Account/Emergency Funds
Cash or Money Markets with CDs as well (no-penalty 1% CD)

OK.

9% IRA
Vanguard Wellesley Income Fund Admiral (VWIAX)

84% Taxable
Vanguard Total Stock Market Index Fund Admiral (VTSAX)
Vanguard Total International Stock Index Fund Admiral (VTIAX)
Vanguard Total Bond Market Index Fund Admiral (VBTLX)<--you might consider 33% total bond, 33% short-term corporate, and 33% TIPS fund. Yes, VIPSX or VTAPX (short-term TIPS).

TIPS

As a side node, I just realized that TIPS is NOT an acronym for Vanguard Inflation-Protected Securities Fund (VIPSX). I'll have to read up on TIPS if there is not a handy fund to use in it's place.

TIPS refers to VIPSX, VTAPX or individual TIP bonds.

If losing that 7% doesn't sound crazy so that she can sleep well at night (and thus, not micromanage me so I sleep well at night), then I guess the big question is really how to divvy up the investments in the taxable. Not knowing enough about TIPS, I do not have an idea how much to focus on there. And I would presume the TIPS and Cash would be part of the Bond allotment? I'm going to have some reading to do tonight!

You can have cash, bonds, including TIPS, and stocks. The major split is between stock and non-stock = 40/60. You don't have to lose the 7% solution!

Paul
[/quote]

[BrandonBogle]

Thanks Paul!

So I spoke with her some night after reading some about TIPS (though I didn't go over TIPS much with her since I'm still wrapping my head around them myself). Had an "aha" moment that may help her out a bit.

Since she doesn't want to invest the the "Spending/Emergency Fund" and has enough for two years expenses in it, she is open to reinvesting any payouts for the next two years. That should help provide her a (mental) buffer should anything take a slight downturn and absent that, let her push out withdrawals for two years to hopefully get SLIGHT (unlikely to keep up with inflation) growth. This can help her budget long-term.

So for the stock portion, does 66% TSM and 33% TIS sound good?
As for the bond portion, since we have a little less short term concern, how does this sound to give her a little bit more yield and pushing more towards the intermediate timeframe?:
- 55% Vanguard Total Bond Market Index Fund Admiral (VBTLX)
- 25% Vanguard Short-Term Investment-Grade Fund Investor (VFSTX)
- 20% Vanguard Inflation-Protected Securities Fund Investor (VIPSX)

Specifically about VIPSX, I'm still reading up on how to "read" the numbers. The SEC Yield on that is currently negative. She asked me (and I told her I don't know) if any yield/appreciation of this holding would be a better return than the the 1.85% CD we have access to? The CD carries a 6-month interest penalty on it and we can get a multi-year term on it. I don't know enough to tell her NOT to go with the CD, but I think based on what I read so far that the TIPS are the better choice. With the CD, we are guaranteed not to keep up with inflation and isn't that exactly what TIPS are trying to accomplish?

[FinancialDave]

Copied from previous thread:

I AGREE, don't take her CD money and put it in bonds, except I-bonds, she will not be happy!

At least until you see what happens over the next 4-5 years.

If you want to prove it to yourself, just take a small position like maybe $5,000 into what ever bond fund you plan to buy and watch it's total return over the next few years. Some longer term bond funds are already down 3% in Jan. --- not saying they can't go up short term, but the volatility is starting to pick up, which is not a good sign.

fd

[BrandonBogle]

Copied from previous thread:

I AGREE, don't take her CD money and put it in bonds, except I-bonds, she will not be happy!

At least until you see what happens over the next 4-5 years.

If you want to prove it to yourself, just take a small position like maybe $5,000 into what ever bond fund you plan to buy and watch it's total return over the next few years. Some longer term bond funds are already down 3% in Jan. --- not saying they can't go up short term, but the volatility is starting to pick up, which is not a good sign.

fd

I spoke with her today. She liked my idea of CD laddering funds for the next 5 years. She has two years of expenses down ad then would need to refine. So I thought we'd put $15k per CD in 2-year, 3-year, and 4-year. As for 5-year and later needed funds, still on the fence about getting close to 2% and eat 6 months inter if we find something better before then (i.e., bond funds stabilize a bit - Jan was very volatile). These CDs as well as IRA CDs would cover 28% of overall holdings. So what to do about the other 32% of what should be in bonds?

Meanwhile, she is on board the equity holdings to stay the course no matter what, except an emergency. That way long-term, we'd have stocks trying to fight inflation erosion.

[FinancialDave]

The hard question is when will she run out of money, because you haven't thrown a number out there it is hard to know, but here is the issue.

If you are drawing down this portfolio at more than 3-4% you most likely will run out of money for her -- I am guessing you are drawing it down much more than this.

Some hard choices may need to be made to trim expenses. I don't know about her health but it could be quite easy for her to live another 25 years. Have you put together a spreadsheet to reflect the drawdown on this account?

As far as the bond allocation goes, there is no easy answer here except to shorten up the duration where ever possible. I am not your bond expert, as even though I am retired I don't use bonds for any of my income "bucket" it all comes from about 20 dividend stocks, but this is not something I would recommend in this particular case. Have you researched the Vanguard Payout Funds. This is a potential way to somewhat insulate you from the volatility of a bond fund as it basically just sends you a check every month, much like an annuity, but much more control.

fd

[MathWizard]

This is small potatoes, but every little bit helps.

Is she paying anything in income tax, or do you epxect her to later?

If she worked and earned more than $6K last year, she can put money in a ROTH IRA for the 2012 tax year
if she does it by Apr 15. She can then keep the money in the ROTH for as long as possible.


She would then avoid taxes on the earnings on that $6K in the ROTH.

[BrandonBogle]

The hard question is when will she run out of money, because you haven't thrown a number out there it is hard to know, but here is the issue.

If you are drawing down this portfolio at more than 3-4% you most likely will run out of money for her -- I am guessing you are drawing it down much more than this.

Some hard choices may need to be made to trim expenses. I don't know about her health but it could be quite easy for her to live another 25 years. Have you put together a spreadsheet to reflect the drawdown on this account?

As far as the bond allocation goes, there is no easy answer here except to shorten up the duration where ever possible. I am not your bond expert, as even though I am retired I don't use bonds for any of my income "bucket" it all comes from about 20 dividend stocks, but this is not something I would recommend in this particular case. Have you researched the Vanguard Payout Funds. This is a potential way to somewhat insulate you from the volatility of a bond fund as it basically just sends you a check every month, much like an annuity, but much more control.

fd

Not taking into account inflation and not taking into account any potential growth (nor any losses) from her 40% equities nor any interest from CDs, she would have 17-23 years of withdrawals. Actually, the car would long be paid off before that, so she'd actually have 20-30 years of withdrawals before she used up her entire balance.

[BrandonBogle]

I updated the original post with the simplified portfolio. We are considering CDs as part of her bond allocation and using them for short-term savings. Also maxing out I-Bonds as an inflation hedge. That leaves her with 24% of assets in TBM to not be touched for the next 4 years. Trying to not "time" the market, but lowering the risk profile of her more immediate needs by not putting so much into TBM. This should put her right around the 33% of Bonds Paul (pkcrafter) mentioned a couple posts back.

[BrandonBogle]

Paul/pkcrafter and FinancialDave,

Thank you for all your help. I'm beginning to pull the triggers. Her account is set up at Vanguard and I've been set up to have full authority on it for her. Funds are currently moving from her checking account to Vanguard into the Prime Money Market and then I'll submit the exchanges from there. Got her 2012 Traditional IRA Contribution in and her 2013 I-Bonds purchased. Filling out the paperwork to get her CDs set up for the coming years and then she will be all settled for the next 5 years. She actually had a larger balance than I originally expected, so I'm tweaking the original post to reflect that.

[Saving$]

I don't mean to be blunt, but it seems to me this is a case of rearranging the proverbial Titanic deck chairs...

At 62, withdrawing an average of $1,250 (your $1-1.5k) monthly on a principal of about $250k is just not going to cut it. In VERY simplified terms, assume you can manage the portfolio to keep up with inflation. So although the value of the portfolio will increase, that increase is equal to the increased withdrawals over the years to account for inflation.

So $250k supports a $1250 withdrawal for 200 months. So if she plans to live for more than 16.6 more years, she is going to run out of money. Lets say you do really well and the money lasts 20% longer (ie your return beats inflation by 20%). So she has enough about 20 years. She is only 62. At the very best this takes her to 82. Many live much longer than that.

She needs to stop withdrawing, go back to work and stop SS. And the selling the house thing only works if she can find a less expensive place.

Don't get me wrong - I don't think there is anything inherently wrong with your investment plan, but there is simply not enough there. The other concern is her desire to not look at the statements - you know her better than us, but this is a red flag. Some people turn everything over to others assuming there will be a miracle. The ensuing discord when the inevitable happens (she runs out of money) is tragic. Don't set yourself up for this.

[BrandonBogle]

I don't mean to be blunt, but it seems to me this is a case of rearranging the proverbial Titanic deck chairs...

At 62, withdrawing an average of $1,250 (your $1-1.5k) monthly on a principal of about $250k is just not going to cut it. In VERY simplified terms, assume you can manage the portfolio to keep up with inflation. So although the value of the portfolio will increase, that increase is equal to the increased withdrawals over the years to account for inflation.

So $250k supports a $1250 withdrawal for 200 months. So if she plans to live for more than 16.6 more years, she is going to run out of money. Lets say you do really well and the money lasts 20% longer (ie your return beats inflation by 20%). So she has enough about 20 years. She is only 62. At the very best this takes her to 82. Many live much longer than that.

She needs to stop withdrawing, go back to work and stop SS. And the selling the house thing only works if she can find a less expensive place.

Oh, we are trying to find her gainful employment. It's just hard in this market to find something for her outside of working in a restaurant or something to that effect. Mom was in a major car accident two years ago and has permanent spinal damage. She cannot stand on her feet for extended periods of time. Thus, prospects haven't been good. We are basing the plans on trying to do mostly asset preservation and maybe a little bit of growth. With the social security annual increases, she should be able to continue to keep a roof over her head, so then it's just utilities, food, incidentals, medication (no insurance anymore). I've got most her bills cut down as low as I can get them. No home phone, her cell is a family line on my account, I shop around for her home and auto insurance, etc. Moving to a smaller property is likely not an option. She is severely underwater in her property (mortgage is about 3x property value at this point). I need to look to see if Florida offers any assistance to property taxes or anything else I can eek out for her.

I recently got a promotion and managed to pay off my student loans. I was being aggressive in those payments and I am now redirecting those funds into the Long-Term Tax Exempt Bond Fund in my own taxable account. I'm basically earmarking this for the future "support mom" fund. If she can get 15-20 years out of her assets, I should be in a good position to support her from there on out.

Our plan is to remain at a 30/10/60 (US/Intl/Bond-CD) allocation till the end, hoping we can eek out some gains on the equity side to help plan for the long-term.

My next step is to also investigate life insurance for her. Not that I like thinking about it, but I can delay my own savings plans to help augment her income and use a life insurance policy to return the funds I donated to her keep. I also need to investigate if I can claim her as a dependent parent and what the ramifications of that would be.

[BrandonBogle]

Don't get me wrong - I don't think there is anything inherently wrong with your investment plan, but there is simply not enough there. The other concern is her desire to not look at the statements - you know her better than us, but this is a red flag. Some people turn everything over to others assuming there will be a miracle. The ensuing discord when the inevitable happens (she runs out of money) is tragic. Don't set yourself up for this.

Thank you for the kind words and the warning. In her case, her accepting the fact of not looking at the statements and just balancing her checkbook with $x coming in every month is a blessing. She has FAR too much time on her hands after job hunting during the business day that she would totally nitpick and freak out by checking her balance daily. That is the kind of person she is, so I was totally surprised she was willing to turn over full control to me.

[RobInCT]

If she is severely underwater in the mortgage, would she consider a walkaway? Unless I've missed it, I do not think you have said how much her mortgage is. If she owes $30k on a house worth $10k, that's one thing. If she owes $300k on a house worth $100k, that's quite another. In the later circumstance, she could walk away from her mortgage, buy something equally as nice using $100k of her cash savings, redirect social security to pay for living expenses instead of mortgage payments and significantly reduce her asset drawdown rate even taking into account even taking into account the decline in portfolio size from, e.g., $275k to $175k. I believe Florida is a non-recourse state, meaning that in the event of default, the bank cannot come after any of her other assets in the event they are unable to recoup the value of the mortgage through sale of the home.

Your idea of buying insurance on your mother to protect your own assets is unfortunately not a good one. Insurance exists to protect against low-probability events with catastrophic consequences--for example, a healthy adult getting hit by a car while crossing the street. You "win" the bet (and the insurance company loses money) if the unlikely event comes to pass. The insurance company makes money if the low-probability event does not occur. In your case, the financial event you want to insure your assets against is actually the very happy situation in which your mother lives a very long and healthy life in which her assets are gradually depleted over the course of 30+ years and she is forced to rely on you for financial support. But no insurance company is going to bet against the death of a 90+ year old woman such that the payout upon death exceeds the cost of the policy over the 30+ years. The only way you can break even financially or come out ahead (i.e. receive a benefit greater than the payments you have made to the insurer over the years) is if the sad event happens sooner rather than later than would be predicted by actuarial tables. That situation is not the one you seek to protect yourself against in this situation.

[BrandonBogle]

Thank you Rob. I had not researched life insurance for her and I appreciate the guidance. I was worried that might be the outcome, but now I can focus my time on other avenues.

As for walking from the house, I've spoken with her about it long ago. The concern would be that they pursue against her assets since a payoff off the mortgage would take about 35-40% of her assets. I have to research Florida's rules about that. It is her primary residence and Florida has homestead protections, so she could probably remain in the house if she wanted to. The concern is that the mortgage is NOT a purchase mortgage, but a cash-out refi.

As a last resort, if she does not find employment and we cannot identify a long-term solution, I may need to talk with a bankruptcy lawyer to see if declaring bankruptcy would be an option. But again, I have not pursued that solely because of the worry that her unshielded assets would be taken in the process.

[RobInCT]

As for walking from the house, I've spoken with her about it long ago. The concern would be that they pursue against her assets since a payoff off the mortgage would take about 35-40% of her assets. I have to research Florida's rules about that. It is her primary residence and Florida has homestead protections, so she could probably remain in the house if she wanted to. The concern is that the mortgage is NOT a purchase mortgage, but a cash-out refi.

Check the loan documents. I believe they have to state whether it is a recourse (i.e. can take other assets to satisfy debt) or non-recourse loan. Not sure about Florida, but in many states it doesn't make a difference whether it was an original loan or a cash-out refinance loan. The IRS might care, though--they may consider the portion of debt forgiven after a foreclosure taxable income. It would really be worth your time and money to spend a couple of hours gathering and reading the loan documents and then speaking with a lawyer.