Help with a new $5m portfolio for an old lady

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agingkid
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Help with a new $5m portfolio for an old lady

Post by agingkid »

Mom is 82 and in relatively good health. She's got all her marbles, but Dad did most of the money management.

She's now got a $5 million dollar portfolio to invest. She knows that she's no expert, and helpful family members keep recommending their advisors to her (for the usual fees, of course.) She has a an emergency fund, long term care insurance, and some other minor retirement accounts.

I'm looking for a very simple portfolio that accomplishes her goals:

1. She wants to preserve her principal.
2. She needs to live off the dividends.
3. She figures that she needs $100k/year to maintain her lifestyle.

I figure that a limited amount of volatility really is acceptable if that raises overall yield. I also figure that she might need a bit more than $100k/yr, but that this should not be a problem. She is soliciting my advice, but is predisposed to accept the recommendations of other more affluent relatives.

This (and social security) will be her only income, so she should be 25% federal tax bracket, about 7% more for state/local taxes.

Rather than a portfolio of bonds hand-picked by an investment advisor, what combination of Vanguard index funds might make sense for her? My first thought would be some combination of Intermediate Term Bond Fund + Short Term Bond Fund, with maybe 5-10% Total Stock... but my first thought isn't as good as the collective wisdom here. What say you?

I know I'll inherit some of these funds eventually. I'm in no hurry. I just want something simple and comfortable for her, and I'm much less worried about volatility than she is. And I'd love to avoid making some professional advisor overly happy.

Thanks!
edge
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Re: Help with a new $5m portfolio for an old lady

Post by edge »

Has she asked you to look into this for her?
whadyaknow
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Re: Help with a new $5m portfolio for an old lady

Post by whadyaknow »

With a portfolio that size, and given her inclination to hire an advisor, just have her call Vanguard to manage her funds. win-win!
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TareNeko
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Re: Help with a new $5m portfolio for an old lady

Post by TareNeko »

Vanguard LifeStrategy Income Fund (VASIX): 80% bonds, 20% stocks, or something similar to this.

There a lot more things that can be done, but honestly, with that much money and at that age, she should not worry about it at all.

One thing for sure, avoid the 1% adviser and 1% ER mutual fund. $100k from $5m is 2% withdrawal rate. If you add an expensive fund and an adviser, she'd have to withdraw 4%...
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Re: Help with a new $5m portfolio for an old lady

Post by livesoft »

Based on the info provided, I don't see a problem investing all $5million into a single fund such as Vanguard LifeStrategy Conservative Growth fund. It is a fund of index funds. Another possibility is a Vanguard Target Retirement fund which is also a fund of index funds. If she wanted an advisor, then paying 0.3% of assets under management (AUM) to Vanguard to build a portfolio of Vanguard index funds and manage it for her would be fine as well.

Note that 0.3% of $5million is just $15,000 a year. Add to that fund costs of about 0.15% a year, too. If she can find an advisor that will cost less than that and have funds with lower costs than 0.15% a year, then she should consider them.
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agingkid
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Re: Help with a new $5m portfolio for an old lady

Post by agingkid »

edge wrote:Has she asked you to look into this for her?
Yes. Thanks for asking.
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Re: Help with a new $5m portfolio for an old lady

Post by freebeer »

You indicate a goal of "preserve principal" which is clearly doable with 2% withdrawal. I would delete "live off the dividends' as the point is total returns sufficient for $100K of spending with principal not shrinking, whether total returns comes from dividends or capital gains is irrelevant.

But, stepping back... presumably the motivation for "preserve principal" is for bequest purposes? (at 82 she's clearly in no risk of outliving $5M of savings). If so then an ultra-conservative allocation may not be most appropriate since her heirs would benefit more from a higher-equity allocation, both from total returns being greater and from the step-up in basis from any unrealized capital gains. Of course there would be some risk to the heirs that if there's a serious bear market their inheritance could be smaller, but she clearly won't run out of money and expected returns would be significantly higher. I'm not suggesting 90% equities necessarily... something like a 50/50 or 60/40 allocation seems appropriate if investing mostly for heirs but partially to ensure survivability and have peace of mind.
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retiredjg
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Re: Help with a new $5m portfolio for an old lady

Post by retiredjg »

agingkid wrote:2. She needs to live off the dividends.
What does this mean?
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runner9
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Re: Help with a new $5m portfolio for an old lady

Post by runner9 »

Does she have no other income like social security? Are there RMD?
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agingkid
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Re: Help with a new $5m portfolio for an old lady

Post by agingkid »

freebeer wrote:You indicate a goal of "preserve principal" which is clearly doable with 2% withdrawal. I would delete "live off the dividends' as the point is total returns sufficient for $100K of spending with principal not shrinking, whether total returns comes from dividends or capital gains is irrelevant.
That's my view as well, but she's an older person. She's gambled on stocks in her time, but she's very attached to a savings bank model for conservative investing. She doesn't want to touch her principal at all, just live from the dividends. (I think this notion was reinforced by earlier years of redeeming dividends on individual bonds held to maturity.) A total return approach would clearly be better, but it's a tough sell.

None of her future heirs are concerned about fluctuations in her "principal". They just want her to be comfortable now, and are hoping for reasonable stewardship of her assets.
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agingkid
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Re: Help with a new $5m portfolio for an old lady

Post by agingkid »

runner9 wrote:Does she have no other income like social security? Are there RMD?
I believe there will be minor RMDs.
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retiredjg
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Re: Help with a new $5m portfolio for an old lady

Post by retiredjg »

So "needs" to live off of dividends is her stipulation. It's nuts, but it's her money. :D

I'd agree with using the Vanguard's advisors. She can choose to use or not use the assets under management approach. Using a CFP at Vanguard will give the well-meaning relatives some comfort that she has guidance and get their not so well-meaning advisors out of the picture.

Things to consider would be one of the Target Retirement Funds with her choice of stock to bond allocation, one of the LifeStrategy Funds with her choice of stock to bond allocation, and maybe something like Wellesley Income which may pay higher dividends than the other two.

If you do use the CFP at Vanguard, I'd be interested in hearing whether they suggest an all in one fund or a combination of individual funds.
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Re: Help with a new $5m portfolio for an old lady

Post by Toons »

I also vote for Vanguard LifeStrategy Income Fund (VASIX) :happy

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Re: Help with a new $5m portfolio for an old lady

Post by richard »

Is the portfolio all taxable? If so, you might consider munis rather than taxable bonds. If not, is it IRA or Roth?

Does the $100k in spending include taxes?
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Re: Help with a new $5m portfolio for an old lady

Post by Kevin M »

Given her age, spending needs, and portfolio size, I'd say she needs to take no risk. She could put it all into safe, fixed-income investments with yields of 2% or more. Two percent of $5M is $100K, so that more than meets her expenses.

I would put a big chunk of it into CDs purchased directly from banks and credit unions. Right now she can get a 5-year CD earning 2.3%. Not only does this provide higher yield than something like Total Bond Market index fund, but it is safer and fits better with her mindset as you've described it.

The issue will be staying within FDIC (or NCUA for credit unions) insurance limits. She can easily get up to $1.25M per institution by using Payable on Death ownership form, and naming five beneficiaries. If she doesn't have that many heirs, she can simply open a small account and name IRS-approved charities as beneficiaries of the small account, and all beneficiaries will be covered up to $250K, so that gets you to $1.25M.

So she needs four banks and/or credit unions to get full coverage for $5M. She can have all interest distributed, so there is no issue with having reinvested interest put her over the insurance limit. There currently are four or more banks and credit unions offering 5-year CDs at 2.25% to 2.3%.

I don't think unexpected inflation is a major concern given her age, but she has $5M of principal to cover that. She could invest 20% of her portfolio into a couple of stock index funds to boost expected return and get some longer-term inflation hedging, but it's not necessary if she's not comfortable with it.

I Bonds are great for inflation protection, but the annual purchase limit makes them irrelevant for this size portfolio. TIPS also give you inflation protection, but I don't think current yields justify them over a 5-year CD earning 2.25%.

I've written a lot here here and on my blog about why I like direct CDs. Here is a recent Boglehead post as an example: Bogleheads • View topic - GE Capital Retail Bank 5-Year 2.3% CD

Most forum participants lean toward bond funds, and there is something to be said for the simplicity of using a single fund (either all bond or mostly bond and some stock). Also, a tax-exempt bond fund may provide higher after-tax yield (I'm assuming this is a taxable account), but she'll have to take much more interest-rate risk, as well as some credit risk, to get that higher yield.

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Re: Help with a new $5m portfolio for an old lady

Post by 123 »

Perhaps in combination with something like a Vanguard Life Strategy Fund or a Vanguard Target Retirement Income fund that includes a stock allocation of around 20% she may just want to consider a bunch of 5 year CDs at Synchrony Bank, which have a current APY of up to 2.30%, other internet banks offer yields that are close. In order to insure more then $250,000 she would need multiple accounts, either jointly or POD with various expected heirs. Maybe up to $2.5 million in such CDs. That gives her a blend of solid insured deposits and income plus growth and dividend income from the mutual funds. I suspect she would resist a recommendation for 100% in a single mutual fund, regardless of what it is.
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Re: Help with a new $5m portfolio for an old lady

Post by Abe »

As other posters have recommended, I too think one of the conservative Lifestrategy funds would be ideal for your mother. It has built in asset allocation, less risk through broad diversification, automatic rebalancing and low cost. This is very simple, only one fund. She can withdraw 2% and have $100,000 per year to spend. With 5 million and at her age she should be okay.
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retiredjg
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Re: Help with a new $5m portfolio for an old lady

Post by retiredjg »

For a person in the 25% tax bracket, we often suggest using tax-exempt bonds (muni bonds). But using munis for a huge portion of a portfolio may not be wise because munis carry more risk than taxable bonds. Some muni bonds should be fine, but certainly not the entire allocation (in my opinion).

If she decides to use individual funds instead of an all in one fund, she could use CDs for a hefty portion of the bond allocation (watching the limits as already mentioned). She could also use some Total Bond Market or another intermediate bond fund and even some short term bonds if she wants.

I realize this flies in the face of simplicity, but I don't think one single bond fund is necessarily a good answer for this situation if individual funds are used instead of an all in one fund.
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Re: Help with a new $5m portfolio for an old lady

Post by Kevin M »

I forgot to mention in my post above that I put my money where my mouth is. I am 20 years younger than your Mom, yet I have only 30% of my portfolio in stock funds. Of the 70% that is in fixed income, 70% of that is in direct CDs (bought directly from banks and credit unions), and 5% is in cash (mostly FDIC-insured accounts yielding more than short-term treasuries).

The other 25% of fixed income is in bond funds--mostly intermediate-term investment-grade in IRA accounts, and intermediate-term tax-exempt bond funds in taxable accounts.

My Mom is about your age, but with a much smaller portfolio. We have her at 60% direct CDs, 10% cash, 10% bond funds and 20% stock funds (Total Stock and Total International).

The stock and bond funds are mostly unnecessary, but we include them to boost expected return a bit. The bond funds also provide somewhat better liquidity for rebalancing into stocks.

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Re: Help with a new $5m portfolio for an old lady

Post by john94549 »

Not surprisingly, I'd vote for CDs as well. With just about any other option, there's risk of loss of principal. As Dr. Bernstein might say, "she's won the game."
LFKB
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Re: Help with a new $5m portfolio for an old lady

Post by LFKB »

If she's really all about living off the dividends then maybe you consider something like 80% bonds and 20% Vanguard High Dividend Yield Index Fund Investor Shares (2.86% SEC yield). It's certainly not what I would do, but may be the best answer for her. The LifeStrategy Income Fund seems like a reasonable choice as well.

If I were you, I'd probably want her in something at least slightly more aggressive, like Wellesley, which is 1/3 stock and 2/3 bonds.
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Re: Help with a new $5m portfolio for an old lady

Post by Christine_NM »

I agree w/ lots of CD's and either LifeStrategy Income or Wellesley Income and maybe a muni fund to cushion the tax blow. I don't have a good feel for what she likes (other than dividends), so won't attempt an allocation. But for steadiness and low maintenance those are the Vanguard funds that you want to look at, rather than assembling a multi fund portfolio on your own that will need rebalancing next year.

How difficult will it be for her to stay in the 25% federal bracket? Will she have some healthy deductions to stay there? Is she making significant charitable contributions and are those in the $100k+ budget?
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john94549
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Re: Help with a new $5m portfolio for an old lady

Post by john94549 »

As an aside, having helped my Mom with similar issues before she died, recommending anything OTHER than the best available CD(s) is fraught with peril. If she wants to "spice up" her portfolio with stock funds, bond funds, or whatever, let that be her input. If she wants $100K, get as close as you can, explain that's pre-tax, then let her decide.
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Re: Help with a new $5m portfolio for an old lady

Post by Lafder »

Sorry if this is an obvious question or I missed the information in your post, but where is the 5 million dollars now?

Was it her estate with your dad who is now gone? IS it already invested in an age appropriate portfolio for her?

Are there issues with cost basis and sales generating taxes due if she moves it from where it is now?

If it is a new to her inheritance in cash, my answer would be very different than if it is in long held stocks with a very low cost basis.

I think the answers you are getting are great as far as simple one fund portfolios for her. I would recommend Vanguard Flagship plus the wisdom of this board and your help as all of the financial advice she needs : )

But my bigger question is to understand where it is now since that might greatly effect the suggestions you get.

Best wishes
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Re: Help with a new $5m portfolio for an old lady

Post by joe8d »

Lafder wrote:Sorry if this is an obvious question or I missed the information in your post, but where is the 5 million dollars now?

Was it her estate with your dad who is now gone? IS it already invested in an age appropriate portfolio for her?

Are there issues with cost basis and sales generating taxes due if she moves it from where it is now?

If it is a new to her inheritance in cash, my answer would be very different than if it is in long held stocks with a very low cost basis.

I think the answers you are getting are great as far as simple one fund portfolios for her. I would recommend Vanguard Flagship plus the wisdom of this board and your help as all of the financial advice she needs : )

But my bigger question is to understand where it is now since that might greatly effect the suggestions you get.

Best wishes
lafder
+1 Was going to ask same questions
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John3754
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Re: Help with a new $5m portfolio for an old lady

Post by John3754 »

Your mother is asking for a 2% return with no risk to principal yet most people in this thread are recommending that she take on significant stock and bond market risk...this advice is not consistent with the given stipulations. $5M in an 80% bond 20% stock portfolio can lose a significant amount of money, how would your mother feel if $500k of her principal evaporated? With the given goal of 2% yield with no risk to principal I think CDs are your best bet, and I think recommending that she take on any significant market risk is...well risky.
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Re: Help with a new $5m portfolio for an old lady

Post by stan1 »

2% return on $5M is $100K/year (not even counting SS). You can easily get this with FDIC insured CDs.

In addition she could earn 0% and withdraw $100K/year from her mattress for the next 50 years until she is 132.

Party on -- I hope I am healthy enough to live life large at age 82 on $100K/year!
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Re: Help with a new $5m portfolio for an old lady

Post by fsrph »

Your mom wants little or no risk - I will combine some suggestions already offered.
50% Vanguard LifeStrategy Income
50% Cd 's (2.2-2.3%)
Since your mother has 5M this will cover her monetary needs along with her desire for low risk.

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Re: Help with a new $5m portfolio for an old lady

Post by Calm Man »

The problem with CDs as I see it, even if one does the 5 CDs at one bank as Kevin suggests, is that she would need something like 20 of them. This is a fair amount of management especially if you do it directly with banks whether online or brick and mortar. They have to be bought and some action taken when they come do. I think you could do brokered CDs at Vanguard but you probably wouldn't get the best yields. Frankly I like the life strategy income fund for her.
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agingkid
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Re: Help with a new $5m portfolio for an old lady

Post by agingkid »

Sorry if this is an obvious question or I missed the information in your post, but where is the 5 million dollars now?
Was it her estate with your dad who is now gone? IS it already invested in an age appropriate portfolio for her?
Are there issues with cost basis and sales generating taxes due if she moves it from where it is now?
She sold some real estate and the biggest chunk is currently in cash. Most of the rest is in bonds that are gradually maturing.

I can't imagine her keeping track of all the CDs she'd need. Far too complicated.

Vanguard LifeStrategy Income Fund (VASIX) has been suggested by several folks here, and would seem reasonable if I could persuade her to accept that much volatility. Why is Morningstar so underwhelmed by it? I was frankly surprised when I checked it out. The lesser costs of simply investing in similar underlying funds through Admiral class shares is pretty appealing.
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Re: Help with a new $5m portfolio for an old lady

Post by Lafder »

Thank you for the answer of cash and bonds as current holdings.

Perhaps your mom would feel the security she needs if she puts a few years expenses (?250k) in her regular bank savings account. With a set amount transferring to her checking account monthly for ongoing bills. And dividends from investments being periodically added.

That will be under the FDIC limit so it will be insured. Basically a 100% guarantee not to go down in value. Yes almost no growth either, but it may help her feel secure which is priceless!

Then put the rest in Lifestrategy Income which is relatively conservative and has the stock:bond ratio most experts advise for her age. (if your mom can be persuaded by the power of experts). I would also support Wellesley as an alternative, it is a favorite of my parents and grandparents.

You can remind her that she has more than enough $ to live on comfortably the rest of her life, and the ups and downs of this portfolio will be minimal and will not effect her ability to comfortably live.

A bunch of CDs sounds like a hassle to manage. But if that is her true comfort level, you can help arrange and keep track of a bunch of laddered CDs.

Did your dad only have bonds and real estate? Or did he have some investments that could serve as an example for your mom that her beloved husband had felt comfortable with the more volatility , yet more return of stocks, bonds, mutual funds.

Bonds sound like as much of a hassle as CDs, unless it is bond mutual funds : )

Another factor is to look at how accounts are titled. This would be an opportunity to title accounts as POD/TOD and name beneficiaries so they can be inherited with less hassle out of probate when that stressful time comes. Morbid to think about. But worth making as simple as possible.

Perhaps mom would be willing to have some accounts as more aggressive then she would for herself if she thought of them more as accounts she is simply holding for her beneficiaries. Which is the reality with that amount of $$ unless she has an urge to start collecting yachts, castles, diamonds, or second husbands!

lafder
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Re: Help with a new $5m portfolio for an old lady

Post by joe8d »

OnLine Savings Accounts and CD's can have increased FDIC coverage of $250K X number of POD's on the account.
Also would consider using VG Short Term Investment Grade Bond Fund.
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Re: Help with a new $5m portfolio for an old lady

Post by Kevin M »

The CD solution is not nearly as complicated as apparently perceived. With five heirs, she could get by with four CDs at four banks. Each CD is designated as POD with the five heirs named as beneficiaries.

But let's say she has two heirs. She can name the two heirs as beneficiaries on the four CDs, and just open a small savings account at each of the banks, naming three IRS-approved charities as beneficiaries on the savings accounts. She can simply ignore these savings accounts.

Or she could set up a living trust, which perhaps she should have anyway, specifying the percentages to each heir and to the charities, and then just have the four CDs owned by the trust. That eliminates the need for the small savings accounts.

She can pretty much ignore the CDs too for the next five years. She can probably have them set up to automatically transfer the interest to her checking account that she uses to pay her bills. In five years you just help her decide on whether to let the CDs roll over to a new CD at the same bank, or transfer the cash to another bank that has a better deal. Maybe it'll take an hour or two every five years.

Any other solution involves some risk.

The next safest solution that will get her the 2% yield with less complexity would be to purchase brokered CDs (e.g., from Vanguard, Fidelity, etc.). This allows her to spread her money among enough banks to get the FDIC insurance coverage, but hold them at one financial institution. You can still get about 2% on a brokered CD, and you can even extend maturity a bit beyond five years and get more. As long as she holds to maturity, she'll continue to get her 2%+ interest, and she'll get her principal back at maturity (unless the bank fails, in which case she'll get it back sooner). The only risk here is that if interest rates go up much, she's stuck with the 2%, whereas with the direct CD she could pay a small penalty to do an early withdrawal, and reinvest at the higher rate. The simplicity of dealing with one financial institution may be worth this risk to her.

Next up the risk scale would be something like Total Bond Market index fund, which also gets her the required income. It's about 70% government bonds, so not a lot of credit risk, but there still is significant interest-rate risk--somewhat more than with the brokered CDs. The value of her holding will fluctuate. If interest rates increased quickly by 1%, the value would go down by 5%-6%. Larger rate increases would result in larger losses. And of course it works the other way too--falling interest rates increase the fund value.

As previously mentioned, she might get a higher after-tax yield with a tax-exempt bond fund, but the risk probably is somewhat higher than for Total Bond. Similar interest-rate risk, but somewhat more credit risk.

Although I don't think she needs to take any stock risk, another step up the risk ladder would be a 20%/80% stock/bond fund, like the LifeStrategy Income fund, which provides a reasonable amount of stock risk and mostly bonds in a simple package. The bonds are mostly Total Bond (with a bit of international bond thrown in). You're right--she could do basically the same thing by buying Total Stock, Total International, and Total Bond in the same ratios (I'd just skip international bond) at lower cost, and you could substitute a tax-exempt bond fund if it made sense, but then you're introducing more complexity.

I would ignore Morningstar ratings.

Kevin
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agingkid
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Re: Help with a new $5m portfolio for an old lady

Post by agingkid »

Update: Mom and I had another run through her math, and it turns out she'd really prefer to draw $180k-200k/yr. (I knew $100k was too low, but I thought it would be closer...)

She's now talking more like 3.5%/yr draw -- not nearly so easy, but not entirely outside the realm of reason from what I can see. That does nix the CD solution, at least in the near term.

LifeStrategy Income still seem like a strong contender? Or VBILX Intermediate-term bond fund with 10% or so of Total Stock Market?

I really appreciate all the insights!
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Re: Help with a new $5m portfolio for an old lady

Post by KyleAAA »

There's pretty much no reasonable portfolio that she'd have even a tiny chance of outliving in her situation. 100% CDs would work. 100% bonds would work. 100% stocks would probably even work if she could stomach the volatility. Personally, I'd probably just go with the Target Retirement Income fund and call it a day. The chances she'd end up with less money than when she started are tiny at best and even if she does, it will be by a small amount.
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Re: Help with a new $5m portfolio for an old lady

Post by Sheepdog »

Agingkid,
First, please don't call an 82 year old an old lady. I can't imagine your mother would like that. A bunch of us here are in our 80s and 90s. I am 81 and I would not want to be called an old man, because I am not. To me that is derogatory. You can change your title by substituting "my mother" for "an old lady", if you wish.

I agree with Francis' suggestion of a mix of Life Strategy Income and CDs for that 2+% withdrawal rate. However, you are now thinking of a 3.5% withdrawal rate? I have withdrawn an average of 4.5% a year for almost 16 years, as some are probably tired of reading, but my portfolio continues to grow with basically a mixture of Wellesley Admiral and Target Income which contains my stock allocation of 24% stocks plus short term investment grade bond fund. Also, 20% of my total investment is in I Bonds, but that amount of I Bonds is not practical or possible for her; however, that might be replaced with a municipal bond fund. Yes, this does have some risk, but not great. I have provided this not as a suggestion for her, but as information on a mix which is working for me.

Do consider talking with a Vanguard advisor before giving your advice. I did 16 years ago. I don't have that allocation now, but that was when I was younger. Now I am older so the investments changed.
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Re: Help with a new $5m portfolio for an old lady

Post by BogleBoogie »

Is she interested in adopting a 35 year old son?

On another note, I'm curious if this is real situation or just created to conjure up some conversation. Who refers to their own mother as "an old lady"??
LongerPrimer
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Re: Help with a new $5m portfolio for an old lady

Post by LongerPrimer »

Here is what I would do IF I was 80+ and had $5mill and needed 100k:

GLIW annuity in $1mill, 750k, 500K, $250k. each with 4%+ lifetime income withdrawals. Total is 2.5Mil. 4%+ withdrawals= +$100k.
If she should die before the actual account is depleted, the remainder goes to beneficiary. If actual account is depleted, income account continues (annuity's risk).

The other 2.5mil is buyers choice. Her immediate and future needs are satisfied in the GLIW annuity.
LongerPrimer
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Re: Help with a new $5m portfolio for an old lady

Post by LongerPrimer »

A thought:
IF your mother had $50,000,000... Would you hire an advisor or DIY? or combination thereof?
IF your mother had $500,000,000... Would you hire an advisor or DIY?
IF your mother had $5,000,000,000... How many advisors would you have or do you still want to DIY?
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runner9
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Re: Help with a new $5m portfolio for an old lady

Post by runner9 »

Why does an 82 year old need $180K to $200K a year? Does she have high medical costs? Does she travel around the world constantly? That just seems like a ton of money, most families with kids live off far less.
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retiredjg
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Re: Help with a new $5m portfolio for an old lady

Post by retiredjg »

agingkid wrote:Vanguard LifeStrategy Income Fund (VASIX) has been suggested by several folks here, and would seem reasonable if I could persuade her to accept that much volatility. Why is Morningstar so underwhelmed by it? I was frankly surprised when I checked it out.
Why do you say "underwhelmed"?

I can't read the entire analysis because I'm not a subscriber. But the part I could read didn't sound underwhelmed...."Conservative-minded investors will be well-served by Vanguard LifeStrategy Income. This fund's straightforward profile has appeal. Following a strategy adjustment in late 2011, the..."

On the other hand, your mom's new target of close to $200k is a problem. She can certainly afford it, but she is very unlikely to be able to take that much without touching the principal unless she is just lucky.
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Re: Help with a new $5m portfolio for an old lady

Post by Call_Me_Op »

retiredjg wrote:
agingkid wrote:2. She needs to live off the dividends.
What does this mean?
My question exactly. This is a common misconception/mistake.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Help with a new $5m portfolio for an old lady

Post by prudent »

I would go with the annuity option and never have to fear volatility. Forget the whole "live off the dividends" thing. I have encountered that personality type before - they love the idea of a higher withdrawal rate, but freak out the second any investment shows a dip in value. At age 82, she could put $2 million into an annuity and collect well over $200K a year for life. And still have $3 million.

She can't have it all - high withdrawal rate AND never touch principle AND no volatility AND no risk.
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retiredjg
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Re: Help with a new $5m portfolio for an old lady

Post by retiredjg »

LongerPrimer wrote:Here is what I would do IF I was 80+ and had $5mill and needed 100k:

GLIW annuity in $1mill, 750k, 500K, $250k.
A google search fails to teach me what "GLIW annuity" is. Maybe you could explain.
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Re: Help with a new $5m portfolio for an old lady

Post by dognose »

With a $5 million portfolio, many financial advisers would recommend a large allocation to municipal bonds combined with a smaller dollop of stocks. The exact asset allocation would depend on her risk tolerance. Since you've indicated that she doesn't like much volatility, she could go with a large percentage in a muni bond fund such as Vanguard Intermediate Term Tax Exempt, which is widely viewed as a relatively conservative fund (it has a large allocation of double A and triple A municipal bonds). The remainder of her portfolio could be split between the Total Stock Market Index Fund and Total International Index Fund to provide some growth and to help offset inflation. Or, if she doesn't care much about the tax consequences or periodic rebalancing needs, she could go simply with Vanguard Target Retirement Income Fund, Vanguard Wellesley, or one of the Vanguard conservative life strategy funds, all of which have large bond concentrations and also are regarded as relatively conservative investments. All of these would be simple to set up and would provide immediate "win-win" solutions for her and for future heirs.

It should be no problem for her to withdraw up to $200K per year, assuming she drops the notion of "living off the dividends," which is a frequent but easily fixable misconception. She just needs to understand the total return concept, and then she's good for the kind of withdrawals she wants to make. I would show her a chart of average 10-year returns for the various funds in consideration, which should help seal the deal. If she can't make the mental leap to total return versus a dividend income model, she will have a more difficult time.
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Re: Help with a new $5m portfolio for an old lady

Post by John3754 »

agingkid wrote:Update: Mom and I had another run through her math, and it turns out she'd really prefer to draw $180k-200k/yr. (I knew $100k was too low, but I thought it would be closer...)

She's now talking more like 3.5%/yr draw -- not nearly so easy, but not entirely outside the realm of reason from what I can see. That does nix the CD solution, at least in the near term.

LifeStrategy Income still seem like a strong contender? Or VBILX Intermediate-term bond fund with 10% or so of Total Stock Market?

I really appreciate all the insights!
Does your mother understand that she cannot drawdown 3.5-4% of her portfolio without drawing on principal or taking on market risk? There is no such investment currently that will yield 4% without taking on significant risk, if she really wants no risk to principal then she will need to lower her withdrawal rate.
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Re: Help with a new $5m portfolio for an old lady

Post by freebeer »

John3754 wrote:
agingkid wrote:Update: Mom and I had another run through her math, and it turns out she'd really prefer to draw $180k-200k/yr. (I knew $100k was too low, but I thought it would be closer...)

She's now talking more like 3.5%/yr draw ...
Does your mother understand that she cannot drawdown 3.5-4% of her portfolio without drawing on principal or taking on market risk? There is no such investment currently that will yield 4% without taking on significant risk...
There will be significant risk to diminishment of principal but, importantly, NOT a significant risk of running out of money. Her life expectancy is 9 years, 20 years is probably the 99% percentile and 3.5% is an extremely safe (> 99%) withdrawal rate for 20 year period over an extremely wide range of portfolio allocations (pretty much anything). So she'd be 99% sure of having money through a timeframe when she's 99% sure she won't be alive - basically a 0.01% chance of porfolio failur (one chance in 10,000).

If spending more is the choice your mother wants to make, I say all power to her for enjoying life while she still can. While I believe 50/50 would be best allocation if she wants to really play it safe she could go 80/20 (80% bonds), two funds would be enough - TBM + TSM. No need to pay an advisor. Or if she's really attracted to living off dividends, a dividend fund for 80% to 100%.
LongerPrimer
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Re: Help with a new $5m portfolio for an old lady

Post by LongerPrimer »

retiredjg wrote:
LongerPrimer wrote:Here is what I would do IF I was 80+ and had $5mill and needed 100k:

GLIW annuity in $1mill, 750k, 500K, $250k.
A google search fails to teach me what "GLIW annuity" is. Maybe you could explain.
my bad.

Guaranteed lifetime withdrawal (benefit/income)
https://personal.vanguard.com/us/whatwe ... al-benefit
This is not an endorsement for Vanguard Annuities. I have discovered that Annuities is a competitive product.
GL. Get some free chicken dinners. A lot of dinners. Annuities and specifically this type of annuity is very complicated.
GL again.
lhl12
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Re: Help with a new $5m portfolio for an old lady

Post by lhl12 »

Sheepdog wrote:First, please don't call an 82 year old an old lady. I can't imagine your mother would like that. A bunch of us here are in our 80s and 90s. I am 81 and I would not want to be called an old man, because I am not. To me that is derogatory. You can change your title by substituting "my mother" for "an old lady", if you wish.
I don't get this. To me, "old" is simply an adjective that is based in fact and isn't the least bit derogatory. How old does someone need to be before "old" is no longer derogatory? 90? 100? As I think of it, someone who is over 80 is clearly "old". I think I would say the same of someone over 70. Here is the definition of "old" from www.dictionary.com:

old [ohld]
adjective, old·er, old·est or eld·er, eld·est.
1.far advanced in the years of one's or its life: an old man; an old horse; an old tree.
2.of or pertaining to the latter part of the life or term of existence of a person or thing: old age.
3.as if or appearing to be far advanced in years: Worry had made him old.
4.having lived or existed for a specified time: a man 30 years old; a century-old organization.
5.having lived or existed as specified with relation to younger or newer persons or things: Jim is our oldest boy.

I believe an 81 year old man is incontrovertibly an "old man". I don't think that term is at all derogatory -- I certainly wouldn't intend it derogatorily by using it -- and to avoid it for someone of that age strikes me as inappropriate or smacking of political correctness.
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Re: Help with a new $5m portfolio for an old lady

Post by TimeRunner »

deleted - obsolete post
Last edited by TimeRunner on Wed Dec 12, 2018 12:15 pm, edited 1 time in total.
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