Helping Parents Prepare For Retirement

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ImSpartacus
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Joined: Sun Mar 20, 2016 11:22 am

Helping Parents Prepare For Retirement

Post by ImSpartacus »

I've been trying to help my parents (50+) safely & smartly prepare for retirement.

Currently, they have three major sources of savings:
  • A traditional 401k from a current employer (currently funding at max by a high earner)
  • A traditional 401k from a past employer
  • A basic savings account
I'm aware of several flaws and inefficiencies of those current methods (e.g. abysmal savings account interest rates, actively managed 401k investments, etc), but I'd like to start with some baby steps.

As they have money sitting idly in their savings account, I think it would be a good idea to utilize at least a portion of it more efficiently with the following introductory plan:
  1. Contribute $6,500 per parent to a non-deductible traditional IRA (likely through Vanguard or similar) for both 2015 and 2016 (A total of $26,000).
  2. Instantly convert that $26,000 non-deductible IRA balance to a Roth IRA (they currently have no IRAs of any kind, so they could convert the entire thing).
  3. Use the Roth IRA as "play money" to demonstrate that investing in simple, boring index funds isn't scary.
  4. Roll over the past employer's 401k into a traditional IRA (now empty after the backdoor conversion) so it can be invested in boring index funds rather than the existing actively managed fund.
  5. Wait for confidence in investing to increase and then reassess future strategies, potentially with a taxable investment account (undecided).
Any obvious flaws in there? Feedback is welcome.

The exact investment choices haven't been made. I used the term "index fund" in the above list as a placeholder. It could very well be some kind of boring targeted retirement fund or something.
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Watty
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Re: Helping Parents Prepare For Retirement

Post by Watty »

If they are a high earning couple then doing the back door Roth might be right in theory but it is likely such a small part of their portfolio that it might distract them from "the elephant in the room" which is the the poor funds that their money is currently invested in.

They might want to just read one of the Boglehead books to start learning more about investing.

http://www.amazon.com/s/?search-alias=a ... Bogleheads
wickywack
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Re: Helping Parents Prepare For Retirement

Post by wickywack »

What are the options in the current 401k? Are there good, low cost index fund choices? If so and if it is allowed, they may want to consider rolling the old 401k over into the current 401k instead of an IRA. That would allow ongoing backdoor Roth contributions in future years - if they have the cash flow to do that.
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Duckie
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Re: Helping Parents Prepare For Retirement

Post by Duckie »

ImSpartacus wrote:Roll over the past employer's 401k into a traditional IRA (now empty after the backdoor conversion) so it can be invested in boring index funds rather than the existing actively managed fund.
Rolling the old 401k into a TIRA will mess up the "Backdoor Roth IRA" method because of the pro-rata rule. Any assets in any non-Roth IRAs (Traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA) as of December 31st in the year of a conversion will cause part of the conversion to be taxable. It doesn't matter that the conversion happened first. It matters what the IRA balance is at year's end.
derosa
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Re: Helping Parents Prepare For Retirement

Post by derosa »

They came to you and specifically asked for your advice?
BahamaMan
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Re: Helping Parents Prepare For Retirement

Post by BahamaMan »

derosa wrote:They came to you and specifically asked for your advice?
+1 .....
joebh
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Re: Helping Parents Prepare For Retirement

Post by joebh »

Are you their financial advisor? What credentials do you hold? Do you adhere to a fiduciary standard?

Whoever is advising them needs to take a more holistic approach and consider insurance, tax situation, emergency funds, any debt, social security, pensions, planned retirement dates, and - most importantly - your parents goals.

Just fooling around with their life savings without having their specific goals foremost in mind is just playing with other people's money.
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FiveK
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Re: Helping Parents Prepare For Retirement

Post by FiveK »

ImSpartacus wrote: As they have money sitting idly in their savings account, I think it would be a good idea to utilize at least a portion of it more efficiently with the following introductory plan:
  1. Contribute $6,500 per parent to a non-deductible traditional IRA (likely through Vanguard or similar) for both 2015 and 2016 (A total of $26,000).
  2. Instantly convert that $26,000 non-deductible IRA balance to a Roth IRA (they currently have no IRAs of any kind, so they could convert the entire thing).
  3. Use the Roth IRA as "play money" to demonstrate that investing in simple, boring index funds isn't scary.
  4. ...
  5. Wait for confidence in investing to increase and then reassess future strategies, potentially with a taxable investment account (undecided).
Any obvious flaws in there? Feedback is welcome.
Others have already commented on various items, e.g., pro-rata rule, 401k fund choices, etc., that you and your parents should consider.

Because you aren't talking about a wholesale revision of your parents investing strategy or tactics, the other 4 baby steps quoted here seem very defensible.
pennywise
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Re: Helping Parents Prepare For Retirement

Post by pennywise »

BahamaMan wrote:
derosa wrote:They came to you and specifically asked for your advice?
+1 .....
If your parents are '50+', does that mean you are '20+'? Because unless they did ask you, it sounds like you are still at the Mark Twain stage of life with just a few years added to the ages:

“When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much the old man had learned in seven years.” :D
Levett
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Location: upper Midwest

Re: Helping Parents Prepare For Retirement

Post by Levett »

So glad to see that some have followed up on derosa's wise basic query.g.,

"They came to you and specifically asked for your advice?"

Some of the best retirement advice I ever received was from my much older, experienced in-laws. 8-)

Lev
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