Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

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zondar
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Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by zondar » Wed Jun 14, 2017 7:36 pm

Dear Bogleheads,

I'm assisting a single parent with investment choices, specifically in helping to transition away from a typical wrap account (1% asset management fee), what feels like a very high exposure to stocks (85%; mostly individual stocks), and unnecessarily-high bond fund expenses (~0.85%).

The person is mid-40's with one young child. The individual has about $1.6M with which to live on, does not work and has poor employment potential. A home is owned debt-free, but the parent's living expenses are high and will likely include college expenses about a decade from now.

The parent knows little about investing or budgeting, and mostly depends on the dividend income. For now, the parent's income and expenses seem roughly balanced, but no net savings are made and it would be difficult to reduce expenses. The person has not experienced a steep market downturn and cannot be expected to weather one without a lot of emotional distress.

During a transition to Vanguard, the 1% wrap fee will be dropped, everything in the IRA will be sold, all bond funds will be sold, all stocks with losses will be harvested, and further stocks with smaller gains will be sold to offset the losses. At the end of this transition, the parent will be about 50:50 remaining individual stocks plus cash. The cost of selling the remaining stocks would be about $30k.

To summarize:

* Mid 40's, "retired," homeowner with no debt but high expenses, one child with college tuition coming about a decade from now.
* About $350k U.S. in an IRA, now converted all to cash.
* About $1,250k in taxable, now 50:50 cash and individual stocks (the cost of selling the latter may be $30k in taxes).
* Present income required (~2.5% prior to the transition), and the portfolio must hope to last indefinitely (e.g. 40-50 years).

Your thoughts on investment options?

Thank you very much.

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G12
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by G12 » Wed Jun 14, 2017 8:09 pm

I would have to understand how the person aggregated $1.6M with perhaps extremely limited investment knowledge and a debt free home in the first place, and then find where it is chiseled in stone that future college costs must be borne by this person. The probable fallback is a suitable TRD date fund, but if the person has little knowledge of personal finance/investing then a low cost advisor may be a safer path to travel.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by AZAttorney11 » Wed Jun 14, 2017 8:11 pm

G12 wrote:I would have to understand how the person aggregated $1.6M with perhaps extremely limited investment knowledge and a debt free home in the first place
I'm guessing divorce.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by jebmke » Wed Jun 14, 2017 8:18 pm

If so, would possibly have spousal SS at some point. Could be a factor.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by delamer » Wed Jun 14, 2017 8:19 pm

You said "living expenses are high" but that really doesn't give us much to go on.

How much is bring drawn from the account now to pay expenses? If it is mostly dividends, that would indicate somewhere in around $35,000 (assuming 2.5% dividends on the stocks). But that doesn't jive with high expenses.

EDIT: I just saw your comment that parent needs 2.5% of assets for income. I am not sure why that is "high." That seems pretty sustainable, unless too much is spent on college. Assets of 40 times expenses should be OK at mid-40's.

A standard 60/40 portfolio using the three-fund allocation would work and be easy to maintain. But you can't guarantee him/her that the nest egg will never decline.
Last edited by delamer on Wed Jun 14, 2017 8:31 pm, edited 3 times in total.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by rob » Wed Jun 14, 2017 8:23 pm

zondar wrote:but the parent's living expenses are high and will likely include college expenses about a decade from now.
As other replies, depends how high.... Figure 3-4% off the nest egg and compare to burning costs. The one thing I had to comment on - sometimes you have to accept that the kid might not get their college costs paid for. It's easy to borrow money for education, not so much for retirement.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by onthecusp » Wed Jun 14, 2017 8:51 pm

I'll assume OP is acting as the low cost advisor for now.
Good job so far. Getting rid of the 1% and higher cost funds will save 'parent' over $16000/yr in fees. I guess saving that will pay for most of college in a decade.

Lets assume 4% safe withdrawal, some here would consider that living on the edge for 40 years but it is a round number. For the next few years until the college fund is 'saved up' using the 1%, that leaves 3% for living expenses or 1.6MM x 0.03 = 48,000/yr from investments.

If " Present income required (~2.5% prior to the transition)" means 'parent' is living on 1.6MM x .025 = 40,000/yr it all looks good, then a raise after college is paid up, holding to 3.5% rather than 4% should mean a nice long retirement. That does not sound like high expenses to me so maybe I've missed something.

If I'm right, I'm thinking a target date fund, withdrawing $40,000/yr for living expenses (increased each year for inflation).
When college comes around an extra $40,000/yr (16,000 x 10 years / 4 year college) could be donated by 'parent' maybe a bit more say, 50,000 if markets were nice. Not Ivy league but with the right expectations, scholarship, savings from high school job, loans, working at school, etc. no different from the typical middle class experience. After college reassess and live on 3.5 - 4% a year (probably about $60000/yr increased for inflation). Maybe spousal social security eventually too.

If I missed something and expenses are much higher, then selling a house, lowering expenses, getting a job, not paying for college, maybe an immediate annuity are all on the table in some combination as potential good paths forward.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by obafgkm » Thu Jun 15, 2017 4:40 am

G12 wrote:I would have to understand how the person aggregated $1.6M with perhaps extremely limited investment knowledge and a debt free home in the first place
AZAttorney11 wrote: I'm guessing divorce.
Possibly being widowed and receiving life insurance and inheriting retirement accounts.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by itstoomuch » Thu Jun 15, 2017 6:36 am

Based on the original portfolio, it would appear that the client was in a growth model with a tolerance for a recession.
Thus, OP based on this, why would you change that model? Has the client voiced otherwise?
If the client is "retired" then of course the logical choice is a retirement portfolio with a lot of insurance because the the retirement period could be very long. So the client will buy insurance in the form of high bonds-low equity with the expectation to take variations of bond pricing in favor of bond returns (interest).

IMO, the situation is bleak for a "retirement" model at client's current age, expectation to fund college, and a normal lifespan. SS & medicare is assumed at age 67, but that is an assumption and client may not have enough credits.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by Grt2bOutdoors » Thu Jun 15, 2017 6:46 am

The IRA should be invested in a low cost Target Retirement fund that matches desired asset allocation plan. IMO, do not be aggressive with this portfolio, I would go no higher than 60/40, 50/50 might be even better, balancing each other. College?, don't think about it, that means think of portfolio as one, money is fungible but primary overriding concern is living expenses - if portfolio performs there is some money for college, if not, one needs to live. The child has some time to focus on academics.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by livesoft » Thu Jun 15, 2017 6:56 am

I'm trying to figure out the $30K noted as the cost in taxes to revamp this portfolio. That suggests a $200,000 in long-term capital gains, a 15% LTCG tax, and a 25% marginal income tax bracket.

If the IRA is a non-spousal inherited IRA, then there would be RMDs, but I will assume it is not such an IRA.

Although the parent has expenses, at this age, they probably cannot withdraw more than 3% to 3.5% a year from their portfolio as an "early retiree" and expect it to last, so that suggests expenses cannot be more than about $50K a year.

What does a tax return look like for such a household? I suspect that they would pay 0% LTCG tax if they arrange the selling of shares with gains in a tax-efficient way. In other words, they should be able to save the $30K cost mentioned. Also their qualified dividends should be taxed at 0% as well.

Anyways, if they unwind this portfolio tax efficiently, the saved taxes could more than make up for the higher expense ratios over the several years used to do the unwinding.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by itstoomuch » Thu Jun 15, 2017 7:01 am

btw, The house is a non accessible asset.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by renue74 » Thu Jun 15, 2017 7:04 am

I find it difficult to believe anybody in their 40s could have a possible "difficult" time securing employment in some shape or form, unless there's a disability involved. The drive to search out employment may not be there, but I can only make assumptions.

My mother, who worked in textiles in the south, and probably never made more than $35K/year "retired" about 4 years ago and now is high sought after to "sit with old people," as a house companion. She prepares breakfast, lunch, light cleans, and transports clients to doctor appointments. I think she makes $15/hour. No skills involved, other than being friendly, punctual and trustworthy. She get's calls weekly from desperate sons and daughters in the town she lives in asking her to help.

With a paid off house and $1.6M, sure they could survive. Healthcare is the issue as it always is. That would be a major concern. This person should look at the ACA credits and see where he/she falls in that spectrum....then plan accordingly for part time or full time employment.

Another unknown factor is elder care of this person's parents and/or possible inheritance. Yes, I know...you can't bank on that, but perhaps this person has it in their mind as a possibility. My wife has friends who are basically banking on inheritance of some wealthy landowning parents/grandparents. Bad stuff, but I guess it happens.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by cantos » Thu Jun 15, 2017 9:57 am

zondar wrote:Dear Bogleheads,

I'm assisting a single parent ...
I guess I'll be a grouch on this one. While you may be helping out of the goodness of your heart, I'd steer clear here. Someone who is wholly depending on investment income and incompetent to work (at 40? really?) will blame you if things head south. High expenses (again - really?) tells me this parent is also unable to live within means. Also will be unlikely to weather a storm in the markets.

This is a train wreck waiting to happen.

I'd refer this parent to a few advisors and stay far out of the way.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by aristotelian » Thu Jun 15, 2017 11:38 am

I would encourage her strongly to supplement her portfolio with a job of some kind (I am assuming "her" just because a non-working widow or divorcee is more commonly female). Does she have health care? Has she ever paid into SS? Working will give her the double benefit of income now and increasing her SS check in "retirement" and perhaps getting her health care as well. She may think that $1.6M makes her independently wealthy but if she sits down and runs the numbers, I think she is really going to have to stretch to make it work.

I would not sell all the stocks immediately. Providing that they are sufficiently diversified, say >30 stocks, it is possible that she could liquidate gradually without having to pay any capital gains taxes and without taking on much more risk than the Dow, for example. That would save her $30K which would give her almost another years worth of expenses.

Beyond that, I would not micromanage her portfolio. Either let her get her own professional, or better yet, give her the Bogleheads Guide and teach her to do it herself. Taking charge of her finances could be the first step toward taking charge in other areas of her life. She learns nothing if you do it for her.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by Afty » Thu Jun 15, 2017 1:33 pm

renue74 wrote:I find it difficult to believe anybody in their 40s could have a possible "difficult" time securing employment in some shape or form, unless there's a disability involved. The drive to search out employment may not be there, but I can only make assumptions.
As a single parent of a young child, it may not make financial sense for them to to take a (low-paying) job but then have to pay for child care. Depending on area and type of care, they could be looking at $20-40k/yr of child care expenses.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by aristotelian » Thu Jun 15, 2017 1:40 pm

Afty wrote:
renue74 wrote:I find it difficult to believe anybody in their 40s could have a possible "difficult" time securing employment in some shape or form, unless there's a disability involved. The drive to search out employment may not be there, but I can only make assumptions.
As a single parent of a young child, it may not make financial sense for them to to take a (low-paying) job but then have to pay for child care. Depending on area and type of care, they could be looking at $20-40k/yr of child care expenses.
If the child is due for college a decade from now, that would imply a child that is school age. Parent could work during the day or, worst case scenario, would only be looking at after-school care which would be a small price to pay for a full time job.

Also, even if parent only breaks even with salary, working would increase social security payout as well as possibly provide health care.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by Good Listener » Thu Jun 15, 2017 1:46 pm

I would refer her to Vanguard, maybe use PAS there, and move on. Unless you are a financial advisor working pro Bono or for a fee, a person with a friend as an advisor is in a bad spot without recourse.
Last edited by Good Listener on Mon Jun 19, 2017 2:58 pm, edited 1 time in total.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by zondar » Thu Jun 15, 2017 2:01 pm

Hello Bogleheads,

Thank you for the responses so far.

I'd prefer to keep the focus on portfolio optimization and away from discussion about the past or lifestyle choices, or my own sanity for trying to help as a good friend. The ball is in motion and I'm not backing-out now. I am teaching her the basics of investing, etc., as things go along, too.

A few additional facts including answers to some questions:

Let's say it's a "her." The funds were from life insurance and savings from a late spouse. Working is possible but not a very good value proposition at this time (approximately minimum wage vs. childcare expenses, less parental availability, etc.).

She receives some temporary benefits for her child, which helps but is contingent on spending directly on the child, so in a way it cannot be "saved." Any Social Security for herself would be via her ex-spouse's employment, as her employment history is minimal. I don't know the details about any of this and hence would like to discount it from consideration for now in favor of a potential bonus down the road.

She has high fixed costs, including high health care expenses, shockingly-high real-estate taxes and fees, home insurance, life insurance for her child, etc. She also spends a lot on child-enrichment classes (math, reading, etc.), and all the other expenses that come with a moderately-high standard of living. It would be difficult to convince her to reduce "optional" expenses, especially when it comes to her child, and she won't be down-sizing her home at least until her child is on its own. Of course a parent is not required to pay for college, but this one likely would.

All of the taxable portfolio's remaining stock (50%) is in 30+ individual stocks. I haven't looked at every one in detail, but they seem to be tilted towards dividend stocks (hence the 2.5% dividends even after the 1% wrap fee - that seems high these days, but it's what the math says).

There are capital gains of roughly $200,000 in the taxable account. She paid virtually no tax last year, and it's likely that the individual stocks could be unwound with little or no tax costs, at least if spread out over a few years.

She has not converted capital to cash for day-to-day expenses, but all dividends are being spent. Yes, I'd agree that 2.5% could be expected to be sustained indefinitely if anything could.

What I am a little more concerned with in the short term is what to do with the remaining cash (about $350k in an IRA and about $500k in taxable).

The first and most important question in my mind is what sort of asset allocation is best for an individual retired at a relatively young age. The old-school "age in bonds" approach would dictate that all of the stock should be kept (in some form) and that almost all of the cash that was liberated should be put into bonds. This (say 55:45 vs. the current 50:50) would reduce her risk vs. the 85:15 she had before.

I haven't seen the point of a "target retirement" fund if she's effectively already retired, and at her age a fund with a target of let's say 20 years out would increase her risk almost back to where it was before, but perhaps that should be reconsidered.

I showed her the options at Vanguard and discussed the risk vs. potential reward scenarios. She (like many retirees) was disappointed at current interest and dividend rates. She was attracted to the Managed Payout fund. To a degree, that does feel like it has some applicability, but many here (and myself) are wary of that, and I haven't encouraged her to consider it.

My own thoughts were along the lines of "age in bonds," with the IRA put into something like the Short-Term Investment-Grade fund. In taxable, I'm a little more conflicted at the moment, especially as she does currently depend on somewhat higher dividends than that could provide.

So, asset allocation? Appropriate fund choices?

Thank you again.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by livesoft » Thu Jun 15, 2017 2:04 pm

Here is a long series on sustained withdrawal rates for the early retired, with discussion of asset allocations that have worked in the past:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/ As of today, there are 16 parts to this series with more in the works.

I would make this required reading for anybody and everybody dealing with not working past ages 35 to 60.

The child is getting SS benefits because of death of a parent, right?

Unfortunately, "managed payout" is a nice attractive name for a fund, but I don't see how it solves any issues without costing one extra taxes.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by Meg77 » Thu Jun 15, 2017 2:08 pm

It doesn't sound like her current/former portfolio was inappropriate, and if she was happy with her advisor and getting good advice, I wouldn't overhaul everything just for the sake of reducing fees. This type of investor is exactly the kind who may well benefit from a paid financial advisor; 1% a year is a small price to pay for someone to hold your hand through your first downturn, talk you into staying the course, help you figure out all the things you're now trying to help her figure out, manage an income stream in a tax efficient manner, etc.

In any event, she has enough money to qualify for whatever the top tier level of Vanguard's service capabilities are. A representative can and will happily help her select the appropriate mutual funds if/when she does roll her investments over to Vanguard. Most Bogleheads of course will recommend some variation on the 3 fund portfolio (total stock market, total bond market and total international index funds) for minimum cost and maximum efficiency.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by itstoomuch » Thu Jun 15, 2017 2:24 pm

You, not her, need to look at all alternatives and avenues, since you now assuming the role of Fiduciary Advisor.
Since much of the funds is from LI, I assume that she took part of LI to kill mortgage-which was not a good idea. Unusual to find someone of this age to have a paid off home.

In a nutshell, it doesn't look promising and even less so without enough SS credits.
Have You thought about approaching downsize home and save the difference? Rent out a room?
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by aristotelian » Thu Jun 15, 2017 2:26 pm

Given low risk tolerance and need for income, I would agree that a Target Date fund for her age would be overly aggressive because they assume she is still in accumulation phase. I would consider either Total Bond Market or Lifestrategy Conservative Growth (40/60) in the IRA, while keeping the taxable as is except for gradually liquidating stocks.

I disagree that working is not a good value proposition. The child is presumably in school and after school care would be minimal while enabling her to work full time and build up her own social security. She has plenty of money to get a useful degree if she needs one. (If she likes kids, she could potentially earn some cash by doing an in-home day care and kill two birds with one stone). I understand it is not your role to push her into something she does not want to do. However, you can make clear that she is looking at no more than about $40K/year if this money is to last her in perpetuity. That money is going to have to include a new car when her current one dies, major health event (no insurance), etc. I don't think so.

Also, I would advise her NOT to cash flow the child's college if this is her plan. Rather, have the child take out loans and offer to reimburse the loans later in life assuming her investment plan works out. Too much uncertainty with no back-up plan to exceed a conservative withdrawal rate while in her 40's and 50's.
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by adam1712 » Thu Jun 15, 2017 2:37 pm

zondar wrote:...

So, asset allocation? Appropriate fund choices?

Thank you again.
I think this is almost impossible to answer without considering the person's views on risk and potentially returning to work. Many early retiree's are retired after selling a business or other big initial income. They often can be more aggressive with their investments and if the worst happens they will return to work after their kids go to college. It often doesn't have to be high paying but just gives 5-10 years of not withdrawing and letting investments grow.

Also, if the parent is not going to return to work and the child lost one parent, it seems financial aid should be a possibility. Finally, at some point, the parent should also probably consider the benefit of at least a little part-time earned income to move more taxable to retirement accounts and improve SS record.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by RAchip » Thu Jun 15, 2017 4:54 pm

"All of the taxable portfolio's remaining stock (50%) is in 30+ individual stocks. I haven't looked at every one in detail, but they seem to be tilted towards dividend stocks (hence the 2.5% dividends"

What are the 30 stocks? If she has 30 stocks like AAPL, MCD, KO, etc, I would not want to sell that just to move that $ to an index fund. Can't this portfolio just be transferred to a simple set-it-and-forget-it brokerage account in her name? If so, it could be similar to owning a DJIA index fund at zero cost.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by obafgkm » Thu Jun 15, 2017 5:18 pm

zondar wrote: She receives some temporary benefits for her child, which helps but is contingent on spending directly on the child, so in a way it cannot be "saved." Any Social Security for herself would be via her ex-spouse's employment, as her employment history is minimal. I don't know the details about any of this and hence would like to discount it from consideration for now in favor of a potential bonus down the road.
The child should receive Social Security survivor benefits, and the widowed can receive Social Security survivor's benefits if "she" takes care of the under-16 child (though the widowed's benefits are dependent on the widowed's income).

The benefits are to help support the child. This could mean helping pay residential-related bills such as a mortgage (not a concern in this case), but utilities or real estate taxes -- if the taxes aren't paid, the house will be lost, and the child will be homeless. Groceries for the child could be paid out of the child's survivor benefits. Schooling can be paid out of the benefits as well.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by indexonlyplease » Thu Jun 15, 2017 5:53 pm

You have a friend that has no interest in investment and may never learn. You are helping her but some day you may not be there to help her.

Since she will be moving all of her investment over to Vanguard, I would suggest have her do a one time free consultation with a Financial Advisor at Vanguard. After the free call if she decides to work with the Vanguard Financial Advisor they only charge .3% of investments. No one likes to pay but for her, in the next 40 years she could save lots of money by not making lots of mistakes.

Vanguard will even email you the financial plan before the second phone call. All free before you decide.

If one day she dicides to learn she can cancel the Vanguard service. She could also have them set up everything and then cancel the Financial Advsor service after a year.

She has lots of money for many years if she does it correctly without mistakes. Something many of us have done here many times.

For her child, she should start making payment to a state college fund (if they have one). I live in Florida and they have Florida Prepaid. My son now uses the money to pay for college.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by zondar » Thu Jun 15, 2017 6:29 pm

Again, I'd like to keep the focus on her portfolio, but here are a few responses to recent queries:

The advisor's fee of 1% of assets put it at about $16,000 per year, amounting to roughly 1/3 of her dividend income. Paying this to be in the market was (recently) far better than being in a bank account, but going forward I felt she could do better. Indeed, she could pay Vanguard 0.3% to do the same, saving roughly $11,000 per year. That money isn't hypothetical, it's real cash that she's not getting to keep and use. This was my primary motivation in helping her.

I'd rate her risk tolerance (emotionally) to be very low. It's also a little irrelevant, since she's never experienced anything much other than constant new highs. However, I've been coaching her on the topic of risk, etc., and she's starting to understand some concepts. I've also made my opinion known to her that she must either consider working or pay more attention to her spending (she currently does not track expenses, though she knows where her fixed costs are going). However, these conversations have been difficult for her to engage in, and her child's education is not a safe topic for now either.

One can debate whether 30 or 50 typical stocks provides sufficient diversity (they seemed to mostly be the usual large-caps, likely tilted towards dividend paying stocks). But restructuring the portfolio wasn't about exchanging for mutual funds, it was about lowering risk from her 85% stock position, reducing expense ratios, and reducing the expenses of any further trades at Vanguard by getting past $500,000 in Vanguard funds (if only a money market to begin with).

At this point, the preliminaries are complete: All higher ER funds are gone, she's now at 50:50 stock:cash to lower her risk (for now, at least), the order to transfer her accounts is in, and she's set to be a >$500k client at Vanguard (lower expenses going forward, though not yet Flagship-level: remember, only Vanguard funds count towards status).

I could now say "go ahead and pay Vanguard their 0.3% and save $11,000 per year" and she'll probably be happy - as long as she keeps getting at least as much in dividends as before!

But I'm still interested in opinions about asset allocation and fund choices. :-)

Thank you.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by livesoft » Thu Jun 15, 2017 6:47 pm

I don't have an asset allocation as conservative as 50:50, so I think a 50:50 asset allocation would be too conservative for this person.

I think Vanguard only does investment management and the 0.3% to Vanguard PAS would not help this person at all. It reads like she needs someone to help her with financial planning and not just investment management. That is, answer questions like "What's my budget? How much can I spend? How can I save on taxes? Where can I get help for my child and myself?" and on and on.

I myself would use index funds (3-fund, LifeStrategy, Target, whatever), but not right away. I would consciously and deliberately unwind the stock positions over time so as not to pay any taxes.

And did you read the earlyretirementnow series which explicitly discusses asset allocation in several places?
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by rob65 » Thu Jun 15, 2017 6:52 pm

I'm not a fan of advisors, but this might be a case where an advisor or Vanguard PAS makes sense.

If the 30+ stocks are quality companies and there are substantial capital gains, don't be too quick to sell; it might not be worth the taxes and the potential loss of ACA subsidies.

Does she have health insurance?? If not that needs to be a priority. Speculation about pending legislation is not allowed here, but I hope it's okay to simply say that having continuous coverage seems very prudent.
Last edited by rob65 on Thu Jun 15, 2017 8:27 pm, edited 1 time in total.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by MindBogler » Thu Jun 15, 2017 7:40 pm

livesoft wrote:Here is a long series on sustained withdrawal rates for the early retired, with discussion of asset allocations that have worked in the past:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/ As of today, there are 16 parts to this series with more in the works.

I would make this required reading for anybody and everybody dealing with not working past ages 35 to 60.

The child is getting SS benefits because of death of a parent, right?

Unfortunately, "managed payout" is a nice attractive name for a fund, but I don't see how it solves any issues without costing one extra taxes.
What a gem of a link. Thanks Livesoft!

:sharebeer

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by mnnice » Thu Jun 15, 2017 7:54 pm

Is this household collecting $4k a month in SS or $1K?
How big of a hole in the budget is there going to be when it ends?

If she is spending 40k from her portfolio and getting 50k in survivor benefits her situation is not very sustainable. If she is only getting 10k from SS she is doing a very good job of living within her means.

My understanding of FAFSA is if her income is under 50k they would qualify for the simplified means test and their assets would not count against them too badly. He or she would probably be eligible for more aid than if both parents were living.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by itstoomuch » Thu Jun 15, 2017 9:33 pm

I am beginning to realize that 1mill of LI, for a single parent is not enough, even with work credits and a paid off house :| . A parent with 2 children would be a disaster with 1mill LI :( :(
If Client can take a boarder, every $100/MN (1200/yr) rent income represents ~$24,000 to $30,000 :idea:
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by billfromct » Thu Jun 15, 2017 10:42 pm

You say that she receives money for the child & it must be spent on the child (or similar wording) and it can't be "saved".

I imagine that you are talking about SS survivor benefits for the child. If you are talking about SS child survivor benefits, you are wrong. That money can be saved in the child's name. I "saved" my children's SS benefits in their name or their benefit in a 529 plan for college, a UGMA account in their name & a Roth IRA in their name, once they got their first after school job @ age 16. I kept very accurate records with each SS payment.

I was audited twice & just sent SS my spreadsheet of where the money was deposited, in an account in their name or for their benefit.

When they turned 18, SS said I needed to send them (SS) the money so SS could send a check back to the kids. That sounded pretty stupid.

I told SS the money was in accounts titled in their name & I would not send the money to SS just so SS could send a check back to the 18 year old kids.

Could you imagine if I sent a check for $50k, or whatever it was, for each kid to a Federal buracracy as large as SS? The kids would not see the money for years, if ever. Well maybe for a college graduation present.

I didn't hear back from SS.

bill

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by halfnine » Fri Jun 16, 2017 5:41 am

I quickly skimmed but not sure if I saw it mentioned already. If done correctly she should be paying close to zero in taxes and be eligible for lower health insurance premiums. Each tax year she would need to balance her capital gains and likely also perform IRA conversions to a Roth keeping both in check to see how this effects ACA.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by bottlecap » Fri Jun 16, 2017 5:58 am

I would think something like the Vanguard Retirement Income fund would be fine for most people in the situation.

Whether college expenses could be paid will depend on what the market does.

My one concern with removing the person from an advisor would be the low risk tolerance. You are taking on a large responsibility here.

JT

P.S. I would imagine money that "has to be spent" is child support.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by indexonlyplease » Fri Jun 16, 2017 7:25 am

livesoft wrote:I don't have an asset allocation as conservative as 50:50, so I think a 50:50 asset allocation would be too conservative for this person.

I think Vanguard only does investment management and the 0.3% to Vanguard PAS would not help this person at all. It reads like she needs someone to help her with financial planning and not just investment management. That is, answer questions like "What's my budget? How much can I spend? How can I save on taxes? Where can I get help for my child and myself?" and on and on.

I myself would use index funds (3-fund, LifeStrategy, Target, whatever), but not right away. I would consciously and deliberately unwind the stock positions over time so as not to pay any taxes.

And did you read the earlyretirementnow series which explicitly discusses asset allocation in several places?
where do you find the earlyretirmentnow series???????

livesoft
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by livesoft » Fri Jun 16, 2017 7:33 am

indexonlyplease wrote:where do you find the earlyretirmentnow series???????
viewtopic.php?t=219423
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by rob65 » Fri Jun 16, 2017 8:55 am

bottlecap wrote:I would think something like the Vanguard Retirement Income fund would be fine for most people in the situation.
Vanguard Retirement Income is a good fund. Vanguard Wellesley Income Fund is also worth considering, but it can throw off significant capital gains distributions. The Life Strategy funds are also worth looking at.

Balanced funds can be simpler for people who don't know much about investing, but you do lose tax efficiency and it is harder to manipulate income for ACA subsidies or to sell off individual stocks in the 15% tax bracket.

It's a difficult situation. Most of the early retirement sites suggest more aggressive allocations since you have to keep up with inflation for 40+ years, but, in this case, the person is very risk averse.

This is something he/she probably has to realize for themselves, but cutting expenses and/or working (even part-time) might become necessary.

I'm not a big fan of "buckets", but in this case maybe thinking about 3 stages (child up to age 18, child out of house, normal retirement age) would help?

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by G12 » Fri Jun 16, 2017 11:12 am

zondar wrote:Again, I'd like to keep the focus on her portfolio, but here are a few responses to recent queries:

I'd rate her risk tolerance (emotionally) to be very low. It's also a little irrelevant, since she's never experienced anything much other than constant new highs. However, I've been coaching her on the topic of risk, etc., and she's starting to understand some concepts. I've also made my opinion known to her that she must either consider working or pay more attention to her spending (she currently does not track expenses, though she knows where her fixed costs are going). However, these conversations have been difficult for her to engage in, and her child's education is not a safe topic for now either.

One can debate whether 30 or 50 typical stocks provides sufficient diversity (they seemed to mostly be the usual large-caps, likely tilted towards dividend paying stocks). But restructuring the portfolio wasn't about exchanging for mutual funds, it was about lowering risk from her 85% stock position, reducing expense ratios, and reducing the expenses of any further trades at Vanguard by getting past $500,000 in Vanguard funds (if only a money market to begin with).

At this point, the preliminaries are complete: All higher ER funds are gone, she's now at 50:50 stock:cash to lower her risk (for now, at least), the order to transfer her accounts is in, and she's set to be a >$500k client at Vanguard (lower expenses going forward, though not yet Flagship-level: remember, only Vanguard funds count towards status).

I could now say "go ahead and pay Vanguard their 0.3% and save $11,000 per year" and she'll probably be happy - as long as she keeps getting at least as much in dividends as before!

But I'm still interested in opinions about asset allocation and fund choices. :-)

Thank you.
If the husband owned the assets in his name you should check to see if she gets a step-up basis on the securities, ie her tax basis would start on the date her husband passed which would likely result in very minimal tax costs to sell. If she is going to handle the assets without an advisor she should probably liquidate the individual stocks as she won't be able to handle future research, etc to maintain those holdings longer term in a prudent manner. Reading about the desire to keep the house will be one of her biggest financial challenges and hopefully she can understand the risk that entails to her and her child.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by psteinx » Fri Jun 16, 2017 3:26 pm

There are a lot of responses and I've read some, but not all of them. My own response may or may not be novel.

I don't like the situation, on several grounds:

* You're essentially taking on the role of financial advisor, but for free. But it doesn't seem like you're especially trained for the role, hence you're coming here for advice. I see a lot of ways this could go badly for the friend, and for friend's relationship with you.

* I think your goal should be either to get friend to educate herself to the point where she is prepared to take on responsibility for portfolio management herself (and in a competent way), or to help steer her to a relationship with a good professional advisor. I am a bit skeptical that the former will occur, at least in a timely manner. So I would encourage the latter. An advisor doesn't have to charge 1% AUM. There are many cheaper options available, either on an ongoing basis, or perhaps with an initial consultation/plan, for a more or less fixed fee, and with perhaps occasional follow-ons.

===

OK, so I think the above two points are the BIG points. Smaller points:

- $1.6M is, frankly, not a lot for a woman in her mid-40s to retire on, given somewhat profligate spending habits, living in a seemingly HCOL area (implied anyways by "shockingly-high real-estate taxes and fees"), and with a college to pay for in the future. Moreso given that about half the portfolio is now in cash, which currently has a negative real return. It probably COULD work for the rest of her life, with appropriate lifestyle and portfolio changes, but it's not clear that this is a likely scenario.

- It was not clear from what I read how recently she is widowed. If recent, then perhaps some stability before bigger life changes are made. But at some point, especially if she isn't going to work, then a change of location may be in order. Reduce the property taxes and fees, and probably roll at least a portion of the home equity into the portfolio, while downsizing the house and perhaps moving to a more LCOL or at least MCOL area. If re-marriage is not likely, then perhaps she might find it easier and more comforting to be close to any family she might have (parents, siblings).

- She should keep inflation in mind. If she's living on interest/dividends, and especially if her portfolio tilts towards bonds, then over time its quite possible that inflation will eat at her purchasing power. If inflation drifts up just a bit to 2.5%, then that means that 20 years from now, if her portfolio were to stay flat in dollar terms, it's purchasing power will only be about (1/(1.025^20))=61% of what it is today, ignoring the college issue.

- Given the apparent HCOL and relatively high living lifestyle, there may be pressure in a decade from peers of her, peers of her kid, or otherwise, for the kid to attend a relatively high cost (i.e. private) college. At *today's* prices, 4 years could easily exceed a quarter-million. In 10 years, it might be more. I'd be doubtful about much, if any, need-based financial aid, given the portfolio. While it's perhaps early to think TOO hard about, the friend should perhaps be getting into the mindset of low to moderate cost college options - in-state public, community college and/or other cheap-ish options. Basically, a high-expense college could wipe out a significant portion of her retirement nest egg, and she doesn't really have a way to replenish it. And expecting the kid to borrow a quarter-million or so on his own to attend college is entirely unrealistic...

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by cantos » Fri Jun 16, 2017 9:28 pm

Consensus boglehead advice here seems to be that it's a lost cause. This isn't a question of what's the right asset allocation. There is no such thing as proper asset allocation when expenses are more than investment income.

She seems to not know what her monthly expenses are. She is unwilling to be flexible with her monthly spend. This is a waste of time for you.

Investment advice is useless when personal finance (keeping track of expenses, spending below means) is not taken care of. The best asset allocation in the world won't save her when there's a downturn in the market and she has to spend less. And if she's on a conservative AA, she can't bring down her standard of living to match the lower income. And a conservative AA won't last 50 years in her situation, no way.

As has been said on this board many times, controlling your expenses is the first step, without which there are no further steps to take. Time to get out of dodge...

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by zondar » Mon Jun 19, 2017 1:56 pm

To wrap this up:

I don't see her (or her finances) as a lost cause, and I'm surprised at how harsh some of the responses have been (with one exception that I'll get to).

She's surprisingly resilient and capable. She has pretty much everything in her life set up very well (living will, insurance, paid-off house and car, quite substantial savings that places her in the top few percent of the U.S. population, particularly among single female parents, etc.). She may not budget (neither do I!), but she's far from a spendthrift. Even if all she does is continue to live on her income, that's ~2.5%, which most here would say is sustainable pretty nearly indefinitely. Of course that doesn't mean she's guaranteed be secure for 50 years, but perfect security is not truly possible to achieve anyway. Worst case, she can down-size, get a job, etc., but that's not likely to be an imperative for a decade or three.

The exception? In retrospect, I probably should not have encouraged her to switch to Vanguard. There are limits to Boglehead-ism, I suppose, even here. Her paying $16,000 per year in advisory fees might have been preferred vs. something going wrong due to my advice and it ruining our friendship, etc. My out, such as it is, could still be to say "OK, now pay Vanguard 0.3% and save the other $11,000 per year in expenses," and perhaps that's what she'll do.

Anyway, for better or worse, my task is about complete. I'll continue to educate her as I can, and I think she'll be fine: and maybe even the better for it after all. I hope so.

Thank you.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by rob65 » Mon Jun 19, 2017 2:25 pm

zondar wrote:To wrap this up:

I don't see her (or her finances) as a lost cause, and I'm surprised at how harsh some of the responses have been (with one exception that I'll get to).

She's surprisingly resilient and capable. She has pretty much everything in her life set up very well (living will, insurance, paid-off house and car, quite substantial savings that places her in the top few percent of the U.S. population, particularly among single female parents, etc.). She may not budget (neither do I!), but she's far from a spendthrift. Even if all she does is continue to live on her income, that's ~2.5%, which most here would say is sustainable pretty nearly indefinitely. Of course that doesn't mean she's guaranteed be secure for 50 years, but perfect security is not truly possible to achieve anyway. Worst case, she can down-size, get a job, etc., but that's not likely to be an imperative for a decade or three.

The exception? In retrospect, I probably should not have encouraged her to switch to Vanguard. There are limits to Boglehead-ism, I suppose, even here. Her paying $16,000 per year in advisory fees might have been preferred vs. something going wrong due to my advice and it ruining our friendship, etc. My out, such as it is, could still be to say "OK, now pay Vanguard 0.3% and save the other $11,000 per year in expenses," and perhaps that's what she'll do.

Anyway, for better or worse, my task is about complete. I'll continue to educate her as I can, and I think she'll be fine: and maybe even the better for it after all. I hope so.

Thank you.
The nice thing about the Vanguard advisory service is that she can drop that in the future if she feels more comfortable managing things herself.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by Da5id » Mon Jun 19, 2017 2:39 pm

billfromct wrote:You say that she receives money for the child & it must be spent on the child (or similar wording) and it can't be "saved".

I imagine that you are talking about SS survivor benefits for the child. If you are talking about SS child survivor benefits, you are wrong. That money can be saved in the child's name. I "saved" my children's SS benefits in their name or their benefit in a 529 plan for college, a UGMA account in their name & a Roth IRA in their name, once they got their first after school job @ age 16. I kept very accurate records with each SS payment.
Yep, it can indeed be saved. But note that if there is any prayer of financial aid, money in the child's name is the worst option - even with her assets there may be a chance at some aid. You can however spend all the money on legitimate expenses for the benefit of the minor and then later gift them back whatever you see fit if you feel that is where the Social Security benefits should end up. But the benefits are intended for the support of the dependent, and particularly for a widow without a job doesn't feel wrong to spend them on such.

Also, the widow can also collect social security herself as the parent of a child who is under 16. But that is income dependent, not sure exact rules.
Last edited by Da5id on Mon Jun 19, 2017 2:45 pm, edited 3 times in total.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by Da5id » Mon Jun 19, 2017 2:44 pm

zondar wrote: The exception? In retrospect, I probably should not have encouraged her to switch to Vanguard. There are limits to Boglehead-ism, I suppose, even here. Her paying $16,000 per year in advisory fees might have been preferred vs. something going wrong due to my advice and it ruining our friendship, etc. My out, such as it is, could still be to say "OK, now pay Vanguard 0.3% and save the other $11,000 per year in expenses," and perhaps that's what she'll do.
I"d consider the PAS myself. It is rather along the lines of not doing business with people you know socially. It can be great, but if it breaks down for some reason in addition to the financial issues you may have lost a friend and have an awkward social situation to boot. Each to their own. I think as long as she doesn't get extravagant tastes she has a good shot at making it even if she doesn't choose to work (she may want to once the child gets more independent). I think cost of health insurance is one of the biggest risks she has to success. Future of ACA, and future medical costs for individuals are very much in flux.
Last edited by Da5id on Mon Jun 19, 2017 4:48 pm, edited 1 time in total.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by runner540 » Mon Jun 19, 2017 4:24 pm

It's not a lost cause yet. Here's a summary of why I am concerned:
1. There is not enough cushion in this plan. Period. Over a 50 year time frame, there will be some negative surprises (health issues, ACA premiums going up, prop taxes going up, flat and bear markets, etc.). Add the fact that you are assuming little to no SS as a floor for inflation adjusted income.
2. The time to build cushion, by lowering housing costs and increasing human capital, is now, not in a "decade or three". I've seen women who really struggle with this situation. It's a lot more fixable in your 40s than 60s.
3. If she doesn't understand budgeting now, how will she stick to $40k/year, including budgeting for large irregular expenses?? (Home maintenance, replace a car, college, etc.)

If you and she were absolutely positive that the 2.5% withdrawal ($40k annually) will cover all expenses, including " high health care expenses, shockingly-high real-estate taxes and fees, home insurance, life insurance for her child, etc. She also spends a lot on child-enrichment classes (math, reading, etc.), and all the other expenses that come with a moderately-high standard of living. It would be difficult to convince her to reduce "optional" expenses, especially when it comes to her child, and she won't be down-sizing her home at least until her child is on its own." she **may** be ok as long as her AA does not result in a decline in real value (possible if her AA reflects her risk aversion).

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by renue74 » Mon Jun 19, 2017 4:35 pm

Da5id wrote:
zondar wrote: The exception? In retrospect, I probably should not have encouraged her to switch to Vanguard. There are limits to Boglehead-ism, I suppose, even here. Her paying $16,000 per year in advisory fees might have been preferred vs. something going wrong due to my advice and it ruining our friendship, etc. My out, such as it is, could still be to say "OK, now pay Vanguard 0.3% and save the other $11,000 per year in expenses," and perhaps that's what she'll do.
I"d consider the PAS myself. It is rather along the lines of not doing business with people you now socially. It can be great, but if it breaks down for some reason in addition to the financial issues you may have lost a friend and have an awkward social situation to boot. Each to their own. I think as long as she doesn't get extravagant tastes she has a good shot at making it even if she doesn't choose to work (she may want to once the child gets more independent). I think cost of health insurance is one of the biggest risks she has to success. Future of ACA, and future medical costs for individuals are very much in flux.
Agree here. I helped my aunt with a $125K IRA rollover to Vanguard last year and set her up with a Target fund. Then told her its up to her and that I couldn't help any more. I don't want to be the scape goat for a myriad of potential issues and poor decision making. You know...that's why people reach out to financial advisors....because if all goes south, they can assign blame not to themselves, but to the advisor.

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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by KnowNth » Mon Jun 19, 2017 5:48 pm

I must have missed something.

Even with 1% investment management fee, FireCalc gives 95% success rate on $51K withdrawal, 100% success rate with $46K withdraw. And this result does not even consider SS benefits.

If OP mentioned 40K expense, why all the worry and doom?

runner540
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Re: Mid-40's, single parent, "retired", $1.6M portfolio, investment advice sought.

Post by runner540 » Mon Jun 19, 2017 5:57 pm

KnowNth wrote:I must have missed something.

Even with 1% investment management fee, FireCalc gives 95% success rate on $51K withdrawal, 100% success rate with $46K withdraw. And this result does not even consider SS benefits.

If OP mentioned 40K expense, why all the worry and doom?
Two reasons:
Firecalc assumes 75/25 stocks/bonds, which sounds aggressive for the "client" based on OP's comments
OP's comments about expenses and lifestyle do not jive with a $40-50k budget; more clarification from OP would be helpful.

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