Investment Strategy at 55

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Iceberg6328
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Investment Strategy at 55

Post by Iceberg6328 » Fri May 25, 2018 8:49 pm

Hi all,

I'm a newcomer to this forum and have already learned so much - thanks to all who contribute their advice! I'm looking to take over my mother's retirement investments and felt it most appropriate to run my ideas by the kind folks on here and ask for advice in the areas where I'm clueless.

Just about a year ago I learned about the greatness of index fund investing when looking into my own retirement. However, things are more complicated when looking at the picture for my mother, as she is 55 and I am only 32. I'm the only person around to help out if her retirement can't last, so I'm very invested in getting her set up in the best way possible.

As I started asking into her situation, I found out that her entire IRA holdings are in a managed account through Merrill Lynch, and she is paying 1.5% annually (though in a call this week they said they will bump it down to 1%). That was the big red flag for me as I thought of all the re-investment returns she is missing out on. Second red flag is that she has a huge chunk of money just sitting in bank savings accounts doing nothing. Here are the details of her situation:

Emergency funds: About $300k spread between a few savings and checking accounts at the moment
Debt: Only one I'm aware of is the mortgage. I believe she owes over $200k with 23 yrs left on a 30 yr mortgage. About 5% interest, home value currently around $450k. She is not eligible to refinance at this time.
Tax Filing Status: Single
Tax Rate: 22% Federal, 0% State
State of Residence: NV
Age: 55
Desired Asset allocation: 60% stocks / 40% bonds *** my suggestion, open for discussion
Desired International allocation: 30% of stocks *** my suggestion, open for discussion

Current retirement assets: $425k total

Taxable Savings with Merrill Lynch
5.5% READY ASSET GOV LIQ FD (MLRAX)
5.5% Cash Balance
1% EXP WORLD HOLDINGS INC (EXPI)

Traditional IRA at Merrill Lynch (Actively Managed, 1.5% fee)
88% of total investments, currently split into 26 separate funds. Investment strategy is listed as "CIO MOD AGG ETF SECTOR" and the assets are split as such: 75% equities, 25% fixed income. Largest current holdings are (percent relative to entire retirement assets, not just this IRA)
- 16.8% ISHARES CORE MSCI EAFE ETF (IEFA) (0.08%)
- 7.4% VANGUARD INFO TECH ETF (VGT) (0.10%)
- 6.8% ISHARES CORE MSCI EMERGING MARKETS ETF (IEMG) (0.14%)
- 6.1% SPDR FD FINANCIAL (XLF) (0.13%)
- 5.9% VANGUARD INDUSTRIAL ETF (VIS) (0.10%)
- 4.8% VANGUARD INTERMED-TERM BOND (VIB) (0.07%)


New annual Contributions
The last two years she has added only $6500 per year to the IRA for tax purposes. A few years ago she switched careers into real estate and her earnings are now unsteady. Last year earned about $50k and is on a similar pace so far this year. Uncertain how much she will be able to contribute due to current living expenses.

We checked her expected social security earnings and at 70 she is slated to earn about $2500-3000/mo. Her goal is to have $4k per month in retirement, with retirement beginning at 70 (15 years from now).

Questions:

1. My initial thought is to move everything out of ML and into Vanguard, where I would manage a mix of funds with low overhead. I'm thinking we want to play things fairly conservative since I'm not sure how much she will be able to add to the accounts from income before retirement. As stated above, thinking a 60/40 equities to bond ratio, perhaps even more weighted toward the bonds. Using the resources available on the web (places like this), I feel like I can do a decent enough job of managing her portfolio and cutting out the ML middle man. Is that too much of an assumption? Am I jumping (with her money) into a world that's way out of my depth here?

2. The other big issue is what to do with her non-invested cash. I'm thinking about keeping around $50k in the accounts as emergency fund (that's about 6 months' worth of her expenses, plus a little extra on top). So that leaves about $250k to invest, somewhere. I suppose one option is to pay off the mortgage, and free up that monthly nut to invest toward retirement. That would sort of instantly secure her some net worth that has appreciated a bunch since she bought it. But even if that were to happen, she'd be left with about $1800/mo freed up to invest, and I'm not sure where she can put amounts that large. As far as I can tell, IRA's are out of the question with the annual contribution limits being too low to absorb the money. Open to any ideas, either to
a.) Invest a large sum of $250k more or less immediately.
b.) Invest roughly $1800/mo if she uses that bulk sum to pay off the house.

3. Is there any case to be made for letting ML continue to manage her funds at the 1% rate? That still seems like a rip-off to me, even though I believe that is around the industry standard. The funds they are actually invested in seem decent enough, and on the call I participated in this week the agent seemed to check the boxes OK (for someone who is taking 1% off the top). One other thing that is a big red flag to me was the ML site my mom has access to (as well as the statements) shows no way to assess the performance of the IRA as a whole over time - only each individual fund within it. So in my mind that means there is no effective top level way to gauge the value of the manager or strategy as a whole.

Thanks a bunch for reading/responding! This has felt like a huge task to take on as I dig in more on the research, but I feel like I can ultimately attain a high enough level of knowledge to be able to pull this off. Apologies in advance for any glaring omissions or incorrect explanations of the situation.

-Josh

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Watty
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Re: Investment Strategy at 55

Post by Watty » Fri May 25, 2018 11:59 pm

Iceberg6328 wrote:
Fri May 25, 2018 8:49 pm
...and she is paying 1.5% annually (though in a call this week they said they will bump it down to 1%).
Sadly that is likely just the tip of the iceberg and a lot of the funds they have her invested in likely also have high fees.

Since about 90% of here funds are in her IRA and the other 10% is basically her emergency fund(which is great) then a target date fund would be an easy choice for her for the money that is in the IRA.

https://investor.vanguard.com/mutual-fu ... etirement/#/

When I retired most of my funds were in retirement accounts so I moved almost all my funds into a target date fund. Some people assume that they are some sort of dumbed down "investing for dummies" choice that needs to be improved on but in the right situation they are an excellent choice. The main reasons not to use a target date fund are if you are in a mediocre 401k and it does not have a good target date fund, or if you also have a lot of retirement money in taxable accounts so taxes are an issue.

She can call Vanguard(or any other provider) and they will walk her through how to transfer the funds. She will need to look at the cost to sell the old investments. Most likely it will make sense to transfer the mutual funds and ETFs to Vanguard then sell them there since the commissions may be lower. This is called a "transfer in kind". Some things cannot be transferred to Vanguard because vanguard does not handle every specialty fund so she would need to sell them at Merrill Lynch.
Iceberg6328 wrote:
Fri May 25, 2018 8:49 pm
We checked her expected social security earnings and at 70 she is slated to earn about $2500-3000/mo. Her goal is to have $4k per month in retirement, with retirement beginning at 70 (15 years from now).
Just a reminder that if she was divorced after being married for ten years or ever widowed then she may have options to file using the spouses Social Security. There was a post a while back by someone who was helping their widowed mom and it turned out they did not realize that should could get additional Social Security based on her late husband's Social Security even though had died decades before when they were in their 20's. In her situation that made a significant difference.

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CyclingDuo
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Re: Investment Strategy at 55

Post by CyclingDuo » Sat May 26, 2018 4:50 am

Iceberg6328 wrote:
Fri May 25, 2018 8:49 pm
Just about a year ago I learned about the greatness of index fund investing when looking into my own retirement. However, things are more complicated when looking at the picture for my mother, as she is 55 and I am only 32. I'm the only person around to help out if her retirement can't last, so I'm very invested in getting her set up in the best way possible.

As I started asking into her situation, I found out that her entire IRA holdings are in a managed account through Merrill Lynch, and she is paying 1.5% annually (though in a call this week they said they will bump it down to 1%). That was the big red flag for me as I thought of all the re-investment returns she is missing out on. Second red flag is that she has a huge chunk of money just sitting in bank savings accounts doing nothing. Here are the details of her situation:
AUM fee aside, two questions for you:

1. Is this something your mother asked you to do - manage her assets?
2. What happens if something happens to you if you take over managing her accounts?
"Everywhere is within walking distance if you have the time." ~ Steven Wright

student
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Re: Investment Strategy at 55

Post by student » Sat May 26, 2018 6:07 am

I think your plan is reasonable. Of course, I am assuming that you were asked to be involved or at least she is open to the idea. I would do the following:

1) Move the money from ML immediately. (This is non-controversial, I cannot see anybody here would recommend against this.)

2) I would use the cash to pay off the mortgage. This may not be optimal financially but it gives a piece of mind. So this is the more conservative side of the plan.

3) Instead of traditional IRA, she should be eligible for Roth IRA, right?

4) To keep thing simple, I would invest with a target date retirement fund. For example, a 2030 fund. However, the asset allocation is usually more aggressive that your stated 60/40. Here is the more aggressive part of the plan to balance out the conservative side in 2). Of course, you could choose a more conservative 2025 fund.

5) I actually would not move it to Vanguard, I would move it to Schwab. They have target INDEX funds that are even cheaper than Vanguard, 0.08% vs 0.14%. Of course, the difference is sufficiently small that just go with Vanguard if you prefer it. Two other reasons that I would pick Schwab is the transfer bonus (probably at least $500) and they have better service in my experience since I have accounts with both.

OnTrack2020
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Re: Investment Strategy at 55

Post by OnTrack2020 » Sat May 26, 2018 9:24 am

Correct me if I'm wrong, but a $450,000 home in Nevada seems to be a lot of house for a single person. Any chance she would be willing to downsize?

Iceberg6328
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Re: Investment Strategy at 55

Post by Iceberg6328 » Sat May 26, 2018 3:44 pm

Thanks for the replies so far. Here are answers to things brought up in the previous responses.

1. I have also considered a target date fund, and I'm not against it. As stated, I can chose any year that matches the aggressiveness I/we want. I'm not firm on the 60/40 ratio, just a starting spot I had in mind.

2. I am a bit more knowledgeable about these sort of things than my mom is, and she tends to get overwhelmed at the prospect of trying to educate herself enough about this to get more engaged. I looked at what she had and demonstrated to her the amount she is potentially losing with the AMU, and told her I could manage the stuff and save her a lot of money in the long run. She is OK with this. I am also making sure to check with her every step of the way regarding risk, goals, etc. My plan is to do the leg work now just so we can get her out of ML as soon as possible. Then once we get settled somewhere else, I will walk her through everything to explain where she's invested, and why, and how it works roughly. Then I can be a little more in the background and just help her manage things year to year. Mostly I am trying to walk her toward being much more actively engaged with what happens to her money, but I can't lay a bunch on her at once or she will get overwhelmed and shut down.

3. That is a good question regarding the what if of my future availability. Given that, and based on some other stuff I've picked up on the board, it may be wiser to go to a more customer service oriented outfit like Schwab. If I can get her set up there, and explain to her what everything is (which is further simplified if we just stick to a target date fund), then hopefully that and customer service could get her through if something happened to me.
student wrote:
Sat May 26, 2018 6:07 am
3) Instead of traditional IRA, she should be eligible for Roth IRA, right?
4. Sorry, I'm not sure what you mean by this. Are you talking about opening a Roth IRA and begin funneling new contributions toward that?

5. If she pays off the house, and has the mortgage cost now available to invest, what's the best idea? We're talking maybe $22k per year. After maxing traditional and/or Roth contributions, should she just set up a regular investment account to use that money? Also my thought was that if she can get some return over the mortgage interest rate, then it's better to invest it rather than pay off the house. Is there a problem with that logic, or is it just a preference thing?

6. Her 'new' (current) career is as a realtor so she is keenly aware of the options to sell her house. A lot of the value is probably tied into the size of her plot more so than a huge house itself. Selling this house is currently viewed as a last resort because she really loves everything about it. Another option I've brought up in the past, maybe that could be pursued more seriously, is to utilize her house and lot for some income. Maybe rent a spot for someone to park a boat/RV, or get a roommate, or do Air BnB, etc.

Thanks again everyone.

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Watty
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Re: Investment Strategy at 55

Post by Watty » Sat May 26, 2018 4:41 pm

Iceberg6328 wrote:
Sat May 26, 2018 3:44 pm
I looked at what she had and demonstrated to her the amount she is potentially losing with the AMU, and told her I could manage the stuff and save her a lot of money in the long run.
One thing you might point out is that once she retires she will be able to start out with somewhere around a 4% safe withdrawal rate. If she pays the advisor 1% that is 25% of her income for the year. :shock: If there are other hidden fees, which is very likely, then that would be an even higher percentage of her income. Despite what the advisor might imply they will not be able to reliably pick superior stocks to make up for their fee.

https://www.bogleheads.org/wiki/Safe_withdrawal_rates
Iceberg6328 wrote:
Sat May 26, 2018 3:44 pm
3. That is a good question regarding the what if of my future availability. Given that, and based on some other stuff I've picked up on the board, it may be wiser to go to a more customer service oriented outfit like Schwab. If I can get her set up there, and explain to her what everything is (which is further simplified if we just stick to a target date fund), then hopefully that and customer service could get her through if something happened to me.
Vanguard will manage the portfolio for 0.3% and they will not put her in bad investments. She could use them for a few years there when the portfolio is more on automatic pilot she could stop paying for them to manage it. Later on if something happens to you she could start using them again. I'm not familiar with Schwab so you would need to look into what her options are there.

Mr.BB
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Re: Investment Strategy at 55

Post by Mr.BB » Sat May 26, 2018 5:00 pm

I would definitely move the money out of ML. A target date fund is always good, but you can also look at Wellesley and Wellington funds as options (Wellesley is a little more conservative). I am a big believer in having an emergency fund, and if your mom is working for herself her income can really bounce around year to year. Personally I would take a little more of a cash reserve and ramp up her EF to $75-80,000. As someone who is in their mid-fifties I can tell you that medical conditions can really come out of nowhere and depending on her health care benefits, can really cut into her savings. Nothing wrong with paying down that mortgage, but you and your mom should have a plan on how to invest the extra money she will have available if the mortgage is paid off.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

student
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Re: Investment Strategy at 55

Post by student » Sat May 26, 2018 6:26 pm

Iceberg6328 wrote:
Sat May 26, 2018 3:44 pm
student wrote:
Sat May 26, 2018 6:07 am
3) Instead of traditional IRA, she should be eligible for Roth IRA, right?
4. Sorry, I'm not sure what you mean by this. Are you talking about opening a Roth IRA and begin funneling new contributions toward that?
Yes. If traditional IRA is not available, she can consider contributing to Roth IRA going forward.

Kaktus
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Re: Investment Strategy at 55

Post by Kaktus » Sun Jun 03, 2018 11:16 am

Seems like a vanguard move could simplify things a lot. Something is off with your numbers? I think you say 50k is her living cost for six months, and that she makes 50k per year ?

multiham
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Re: Investment Strategy at 55

Post by multiham » Sun Jun 03, 2018 11:30 am

I would be extremely careful in making these changes for 2 main reasons:

1. You don't want to be "blamed" if your suggested moves do not work out and her overall investments decline. I know the investments would probably decline at ML also, but that was her choice to go with them.
2. Some people just feel more secure with a financial company they can talk to.

I know I may be the only one that feels this way, but I would focus on helping your mom find other ways to invest more. I fully understand it is not the BH way to pay fees, but as someone who was "blamed" by another family member for their investment losses in the late 2000's, I would not want to see you possibly go down the same path.

Iceberg6328
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Re: Investment Strategy at 55

Post by Iceberg6328 » Wed Jun 06, 2018 7:02 pm

Kaktus wrote:
Sun Jun 03, 2018 11:16 am
Seems like a vanguard move could simplify things a lot. Something is off with your numbers? I think you say 50k is her living cost for six months, and that she makes 50k per year ?
Sorry, the $50k for 6 months was a really rough and generous first order attempt. I believe her monthly expenses are somewhere around $4k, then I threw some cushion on it for business expenses and something big with the house that might come up.

I appreciate your concern, multiham. The stage we are currently at is letting the adviser draw up his reports/projections/recommendations then compare that to other options. On another call today I learned she is more risk averse than I previously thought. I gave her my two cents but affirmed that I won't push her to do anything she's not comfortable with.

We're still evaluating what to do with the $312k she currently has in savings accounts. For some reason we didn't disclose this to the adviser last time around so he is going to redo his numbers. But it seems likely we are headed toward something like this:
-$30k kept in regular bank accounts
-$12k for some needed fixes around the house
-$120k into some sort of money market account at 1.5% or more interest
-$150k into some sort of equity investment, likely matching the strategy we choose to employ in her IRA

I suggested keeping $70k in the money market and $200k in the equities, but she's just very, very concerned about her savings evaporating in the stock market. We agreed on protecting the extra $50k until she can see how everything works and feels comfortable with it.

I asked the adviser what his thoughts were on paying off the mortgage with that money vs investing, and he ran the numbers through an amortization table and came to the conclusion that we would be yielding only 2.8% return on that money based in interest saved, even though her mortgage interest rate is almost 5%. Does this sound right? I'm not very familiar with how the mortgage stuff works and have some research ahead of me to check that number. But it seems if the 2.8% holds up, then it tilts things much more towards investing rather than paying off the mortgage at this time.

Iceberg6328
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Re: Investment Strategy at 55

Post by Iceberg6328 » Wed Jun 06, 2018 7:16 pm

Additional info: She is approximately 90 months into a 30 year mortgage. After a bit of research, I didn't realize the amortization on a mortgage front loads the interest so much, so perhaps the 2.8% is a reasonable value.

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Peter Foley
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Re: Investment Strategy at 55

Post by Peter Foley » Wed Jun 06, 2018 7:45 pm

A goal and an alternative:

I think a good goal for many retired people is to have their mortgage paid off when they retire. A paid off mortgage offers a bit of diversification and is not unlike a bond - although it is much less liquid.

An alternative, therefore, is to use a portion of her cash to pay down the mortgage to the point where it is paid off in about 10 years. You can work out the numbers, but I'm thinking along the lines of $150K toward the mortgage, $50K in emergency funds and $100K that she can invest a little more aggressively.

For many people standard deductions rather than itemized deductions will be the norm for federal taxes moving forward. If that is the case then mortgage interest will not be deductible and represents an opportunity to compare mortgage interest rates to current bond rates with similar time horizons.

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Toons
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Re: Investment Strategy at 55

Post by Toons » Wed Jun 06, 2018 7:47 pm

Pay Off The Mortgage .
Vanguard Balanced Index Fund (Admiral)
😊
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Iceberg6328
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Re: Investment Strategy at 55

Post by Iceberg6328 » Wed Jun 06, 2018 7:55 pm

Peter Foley wrote:
Wed Jun 06, 2018 7:45 pm
I think a good goal for many retired people is to have their mortgage paid off when they retire. A paid off mortgage offers a bit of diversification and is not unlike a bond - although it is much less liquid.

An alternative, therefore, is to use a portion of her cash to pay down the mortgage to the point where it is paid off in about 10 years. You can work out the numbers, but I'm thinking along the lines of $150K toward the mortgage, $50K in emergency funds and $100K that she can invest a little more aggressively.
What about investing that money now through a brokerage account to capture the (hopefully) larger-than 2.8% return, then withdraw enough from that account at the time of retirement to pay off the remainder of the mortgage?

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Peter Foley
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Re: Investment Strategy at 55

Post by Peter Foley » Wed Jun 06, 2018 10:35 pm

Iceberg6328

The difference between the mortgage payoff and the brokerage account is risk. If I were looking at a 10 year strategy I would not put the entire amount at risk in the market. My alternative is about the equivalent of a 50/50 asset allocation. That would not be inappropriate for a 55 year old.

I suggest you read about the concept of a "Rising Equity Glide Path" by Wade Pfau. His takeaway is that those who are not wealthy and will begin drawing from their retirement savings upon retirement should be a little more conservative around the time they retire because that is when they will have the most assets at risk to a market downturn.

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