Investing parents nest egg -- any final thoughts?

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DC3509
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Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 9:22 am

Thank you very much for this Board and the great advice here.

I have posted about my situation before --

viewtopic.php?f=1&t=223671

viewtopic.php?f=1&t=224967

Long story short -- parents are both retired, relatively modest assets with about $348K to invest in an IRA. Their original plan was to use a financial advisor in their small town who was going to charge them an arm and a leg in fees and put them into a complicated, poorly diversified actively managed fund run by the financial advisor's company. I talked them out of that -- got them set up with a Vanguard IRA -- and helped them with all of the logistics in rolling over the money, etc. We have talked extensively about withdrawal rates and what they will need and settled on 4.5% -- I understand the pros and cons to that number, but the reality is that there is not great longevity on either side of the family, and no need for money for heirs. My parents are also willing to cut back if necessary -- we agreed on using 4.5% as a starting point.

We have also agreed to use a modified cash reserve strategy -- about 18 months will be kept in a money market and we will draw down that first.
As for the remaining asset allocation, I was looking at around 65/35 stocks to bonds, recognizing that when you add in the cash reserve and their emergency savings it will take that number down to about 60/40 total asset allocation. That seems reasonable. After much review, I think we should go with a simple three fund portfolio -- 50% Vanguard Total Stock Market, 15% Vanguard International, and 35% Total Bond.

So my final question is really just a gut check -- is there anything else I am missing? Anything else I should consider now before we pull the trigger and buy everything? I am a cautious person generally speaking, and even more so now because this involves my parents life savings and I do not want to mess this up. I am just trying to help them through this transition and protect their assets from the financial advisor industry. But it feels like an emotional moment or something given the ramifications.

Thanks again everyone.

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Re: Investing parents nest egg -- any final thoughts?

Post by RadAudit » Tue Sep 12, 2017 9:46 am

Didn't read the other posts. Did you check on RMDs and taxes or is that too far away? Rest looks OK to me.
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dbr
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Re: Investing parents nest egg -- any final thoughts?

Post by dbr » Tue Sep 12, 2017 9:54 am

I would say in general that the area most overlooked is estimating expenses, more specifically leaving a reasonable margin for contingency. The financial plan seems reasonable.

chevca
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Re: Investing parents nest egg -- any final thoughts?

Post by chevca » Tue Sep 12, 2017 10:03 am

Why invest it? If there's no need to pass it on to heirs, how about an annuity to give them a set income instead?

TheAncientOne
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Re: Investing parents nest egg -- any final thoughts?

Post by TheAncientOne » Tue Sep 12, 2017 10:16 am

Sounds to me like you've put together a thoughtful plan for them. Since the withdrawals will only be providing $15K/yr, do either of your parents have an interest in working at least part time in a low stress job? It shouldn't be hard to make an amount that would be a significant boost to their SS plus IRA withdrawal incomes.

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 10:18 am

We looked at annuities, but it didn't seem to make sense. First, if one or both of them do live longer than expected, I was concerned that inflation would kill the annuity over time. Buying an inflation protected annuity wasn't an option because the payments are so much less now. Moreover, we needed to buy an annuity with full survivor benefit. The reality is that Mom is more of a spender. If something happens to Dad first, she will still want the same income. The same is not true for dad, but it is of course impossible to predict the sequence of events. Buying an inflation protected joint survivor annuity will not get them anywhere near a 4.5% withdrawal rate.

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 10:19 am

TheAncientOne wrote:
Tue Sep 12, 2017 10:16 am
Sounds to me like you've put together a thoughtful plan for them. Since the withdrawals will only be providing $15K/yr, do either of your parents have an interest in working at least part time in a low stress job? It shouldn't be hard to make an amount that would be a significant boost to their SS plus IRA withdrawal incomes.
Mom has a part-time job and yes that is going to help a lot. Dad is not necessarily adverse to working, but was just part of a RIF in an industry where jobs are scarce. He is just taking some time for himself now, but if the right opportunity came along, I think he would work again. They also live in a very low COL area -- rural.

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Re: Investing parents nest egg -- any final thoughts?

Post by Dandy » Tue Sep 12, 2017 12:42 pm

I know the 3 fund portfolio has a lot going for it. But do you and your parents want to fuss with rebalancing? I would look into a simple balanced, Life Strategy or Target Date fund. I favor Balanced Index fund but that is "only" 60/40 and has no International equities. The TD and LS funds do allocate to international equities and international bonds. If you go the TD or LS route just remember to keep a eye on the funds included and the allocation as they have changed quite a bit in the past.

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 1:20 pm

Dandy wrote:
Tue Sep 12, 2017 12:42 pm
I know the 3 fund portfolio has a lot going for it. But do you and your parents want to fuss with rebalancing? I would look into a simple balanced, Life Strategy or Target Date fund. I favor Balanced Index fund but that is "only" 60/40 and has no International equities. The TD and LS funds do allocate to international equities and international bonds. If you go the TD or LS route just remember to keep a eye on the funds included and the allocation as they have changed quite a bit in the past.
I've considered those as well. I actually do not view rebalancing as a bad thing as it gives us an opportunity to "replenish" the money market fund, if necessary, depending on where the assets have moved. I understand that using a target date or balanced fund can get you to the same place, but for some reason it feels psychologically safer to me to say X is clearly bonds, Y is clearly stocks, and both just track the markets rather than managers picking the right bonds/stocks like the Balanced fund. For my parents who are not savvy investors, there was great appeal to them that X years of living expenses are in pretty safe bonds and that they do not even need to follow the markets or worry about it.

That said, I agree these are viable approaches too!

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Re: Investing parents nest egg -- any final thoughts?

Post by onthecusp » Tue Sep 12, 2017 1:32 pm

Overall it looks like a well thought out plan, just a question to think about.
I don't necessarily disagree with the 18 month money market "bucket", but how will that transition? Empty it then decide? Go for 12 months and top off if the market did well? The trouble with buckets is that it become another rebalance requirement. That said 18 months is not all that different from pulling 12 months at a time and putting it in the bank.

Time to relax!

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 1:39 pm

onthecusp wrote:
Tue Sep 12, 2017 1:32 pm
Overall it looks like a well thought out plan, just a question to think about.
I don't necessarily disagree with the 18 month money market "bucket", but how will that transition? Empty it then decide? Go for 12 months and top off if the market did well? The trouble with buckets is that it become another rebalance requirement. That said 18 months is not all that different from pulling 12 months at a time and putting it in the bank.

Time to relax!
Good question -- what would you suggest? I have been thinking that once we got down to 3-6 months, we would reassess where things stood, which should be about the time anyway to raise the withdrawal rate with inflation. But open to other ideas.

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Re: Investing parents nest egg -- any final thoughts?

Post by dbr » Tue Sep 12, 2017 1:42 pm

DC3509 wrote:
Tue Sep 12, 2017 1:39 pm
onthecusp wrote:
Tue Sep 12, 2017 1:32 pm
Overall it looks like a well thought out plan, just a question to think about.
I don't necessarily disagree with the 18 month money market "bucket", but how will that transition? Empty it then decide? Go for 12 months and top off if the market did well? The trouble with buckets is that it become another rebalance requirement. That said 18 months is not all that different from pulling 12 months at a time and putting it in the bank.

Time to relax!
Good question -- what would you suggest? I have been thinking that once we got down to 3-6 months, we would reassess where things stood, which should be about the time anyway to raise the withdrawal rate with inflation. But open to other ideas.
Exactly. Just withdraw enough money at the end of each year to more or less fund the next year. That can be the RMD in part or in whole. Buckets are unneeded mental accounting.

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sergeant
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Re: Investing parents nest egg -- any final thoughts?

Post by sergeant » Tue Sep 12, 2017 1:52 pm

I'm confused! In one of your other posts longevity was a concern as your grandfather lived into his late eighties? Either way, your parents SS covers all expenses so your plan is fine. Pull the trigger already. I would probably have stuck with a pension but they want to lump sum and invest it. Good luck.
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onthecusp
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Re: Investing parents nest egg -- any final thoughts?

Post by onthecusp » Tue Sep 12, 2017 3:06 pm

dbr wrote:
Tue Sep 12, 2017 1:42 pm
DC3509 wrote:
Tue Sep 12, 2017 1:39 pm
onthecusp wrote:
Tue Sep 12, 2017 1:32 pm
Overall it looks like a well thought out plan, just a question to think about.
I don't necessarily disagree with the 18 month money market "bucket", but how will that transition? Empty it then decide? Go for 12 months and top off if the market did well? The trouble with buckets is that it become another rebalance requirement. That said 18 months is not all that different from pulling 12 months at a time and putting it in the bank.

Time to relax!
Good question -- what would you suggest? I have been thinking that once we got down to 3-6 months, we would reassess where things stood, which should be about the time anyway to raise the withdrawal rate with inflation. But open to other ideas.
Exactly. Just withdraw enough money at the end of each year to more or less fund the next year. That can be the RMD in part or in whole. Buckets are unneeded mental accounting.
Agree. 18 months from now gets you past the end of 2018, so at the end of 2018 pull another 12 months out. I'm assuming that there are no more RMD's needed this year.

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 3:36 pm

sergeant wrote:
Tue Sep 12, 2017 1:52 pm
I'm confused! In one of your other posts longevity was a concern as your grandfather lived into his late eighties? Either way, your parents SS covers all expenses so your plan is fine. Pull the trigger already. I would probably have stuck with a pension but they want to lump sum and invest it. Good luck.
My dad's dad lived into his late 80s, but none of the others reached 77. Both of my parents are in their late 60s. So the chances of making the full 30 years, while not entirely out of the question, are probably slim and thus the reason for moving to 4.5% (but not above that).

I don't see how the pension was a better deal -- no inflation protection and the survivor benefit dropped the income down to only about $1,000 per month.

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 3:37 pm

dbr wrote:
Tue Sep 12, 2017 1:42 pm
DC3509 wrote:
Tue Sep 12, 2017 1:39 pm
onthecusp wrote:
Tue Sep 12, 2017 1:32 pm
Overall it looks like a well thought out plan, just a question to think about.
I don't necessarily disagree with the 18 month money market "bucket", but how will that transition? Empty it then decide? Go for 12 months and top off if the market did well? The trouble with buckets is that it become another rebalance requirement. That said 18 months is not all that different from pulling 12 months at a time and putting it in the bank.

Time to relax!
Good question -- what would you suggest? I have been thinking that once we got down to 3-6 months, we would reassess where things stood, which should be about the time anyway to raise the withdrawal rate with inflation. But open to other ideas.
Exactly. Just withdraw enough money at the end of each year to more or less fund the next year. That can be the RMD in part or in whole. Buckets are unneeded mental accounting.
I agree most of this is mental accounting; for people who never had a taxable account and are very suspicious of the stock market, I felt like we needed to add this extra mental layer.

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Re: Investing parents nest egg -- any final thoughts?

Post by JW-Retired » Tue Sep 12, 2017 4:29 pm

DC3509 wrote:
Tue Sep 12, 2017 10:18 am
We looked at annuities, but it didn't seem to make sense. First, if one or both of them do live longer than expected, I was concerned that inflation would kill the annuity over time. Buying an inflation protected annuity wasn't an option because the payments are so much less now. Moreover, we needed to buy an annuity with full survivor benefit. The reality is that Mom is more of a spender. If something happens to Dad first, she will still want the same income. The same is not true for dad, but it is of course impossible to predict the sequence of events. Buying an inflation protected joint survivor annuity will not get them anywhere near a 4.5% withdrawal rate.
Annuities usually do make sense if the investor might need to draw heavily from their portfolio. IMO, a 4.5% inflation increased draw is pretty heavy.

You said they are both in their late 60's
If that is 68, then a full J&S (non-indexed) immediate annuity costing $348k would pay them $1720/month.
see https://www.immediateannuities.com/

You plan your 4.5% withdrawal rate to be indexed with inflation, but it only starts at $1305/month.
0.045x$348k = 15.66k/yr= $1305/month.

So you need 32% inflation before their monthly draw even catches up to the fixed annuity. That wil be many years from now, and then you still need years after that to get back to even with the annuity in terms of total income received over the years. IMO, they would like the annuity better.
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DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 4:54 pm

JW-Retired wrote:
Tue Sep 12, 2017 4:29 pm
DC3509 wrote:
Tue Sep 12, 2017 10:18 am
We looked at annuities, but it didn't seem to make sense. First, if one or both of them do live longer than expected, I was concerned that inflation would kill the annuity over time. Buying an inflation protected annuity wasn't an option because the payments are so much less now. Moreover, we needed to buy an annuity with full survivor benefit. The reality is that Mom is more of a spender. If something happens to Dad first, she will still want the same income. The same is not true for dad, but it is of course impossible to predict the sequence of events. Buying an inflation protected joint survivor annuity will not get them anywhere near a 4.5% withdrawal rate.
Annuities usually do make sense if the investor might need to draw heavily from their portfolio. IMO, a 4.5% inflation increased draw is pretty heavy.

You said they are both in their late 60's
If that is 68, then a full J&S (non-indexed) immediate annuity costing $348k would pay them $1720/month.
see https://www.immediateannuities.com/

You plan your 4.5% withdrawal rate to be indexed with inflation, but it only starts at $1305/month.
0.045x$348k = 15.66k/yr= $1305/month.

So you need 32% inflation before their monthly draw even catches up to the fixed annuity. That wil be many years from now, and then you still need years after that to get back to even with the annuity in terms of total income received over the years. IMO, they would like the annuity better.
JW
I just ran the numbers again. The estimate is $1,605 based on ages and states. I should add -- there were two buckets of money here. First was a lump sum pension for $210K -- the remainder was a $401K for $138. To get the $1,600 you would need to invest everything. My parents do not have significant cash savings or emergency funds or a taxable account, so if unexpected things would come up with an annuity, you either need to save for it from the $1,600, or dip into savings and when it's gone, it's gone. Even if they wanted an annuity, I would have recommended that they keep some of it back as an extra cash cushion. So the annuity payment would likely be closer to $1550 or maybe even a tad less. At that point, if you are debating $1300 versus $1550 -- inflation will cross over around year 7 or 8. That doesn't seem that far away, even with a shorter life span. If one or both of them beats the odds and live a long time, they will only have the decreased annuity plus SS. At least with the investment route, if we get lucky, perhaps there will still be money left to draw from in the latter years.

These are reasonable points though; things I considered and are still considering. No black and white answer in my view.

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Tue Sep 12, 2017 4:59 pm

BTW, I only picked the 4.5% number after reading Bengen's book "Conserving Client Portfolio's During Retirement." He has a lot of heavy duty charts and math and arrives at the conclusion that 4.5% is still very safe.

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Re: Investing parents nest egg -- any final thoughts?

Post by sergeant » Tue Sep 12, 2017 5:22 pm

DC3509 wrote:
Tue Sep 12, 2017 3:36 pm
sergeant wrote:
Tue Sep 12, 2017 1:52 pm
I'm confused! In one of your other posts longevity was a concern as your grandfather lived into his late eighties? Either way, your parents SS covers all expenses so your plan is fine. Pull the trigger already. I would probably have stuck with a pension but they want to lump sum and invest it. Good luck.
My dad's dad lived into his late 80s, but none of the others reached 77. Both of my parents are in their late 60s. So the chances of making the full 30 years, while not entirely out of the question, are probably slim and thus the reason for moving to 4.5% (but not above that).

I don't see how the pension was a better deal -- no inflation protection and the survivor benefit dropped the income down to only about $1,000 per month.
I suggested the pension based on the numbers. Your parents expenses are about $2500 a month but will lower slightly soon due to having their car paid off. Let's say they stay at $2500. Your dad's SS will be $2100, mom's $1100, pension $1100, that is $4300 a month with expenses at $2500! That looks like a win to me. No need to keep playing. They still have the 138k in the 401k as a plan B.
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sergeant
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Re: Investing parents nest egg -- any final thoughts?

Post by sergeant » Tue Sep 12, 2017 5:26 pm

Some of the other reasons to take the pension instead of investing the lump sum are mentioned in the other thread. Market downturns, sequence of return risk, mental decline, scams, and especially damage to your relationship should your plan not be as beneficial as the pension.
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Re: Investing parents nest egg -- any final thoughts?

Post by JW-Retired » Tue Sep 12, 2017 6:34 pm

DC3509 wrote:
Tue Sep 12, 2017 4:59 pm
BTW, I only picked the 4.5% number after reading Bengen's book "Conserving Client Portfolio's During Retirement." He has a lot of heavy duty charts and math and arrives at the conclusion that 4.5% is still very safe.
Bengen's "4% rule" paper was in 1994. Has his more recent 2006 book extended that analysis closer to the present day? That book is priced too high on Amazon for me to be interested.

Retiring now with a very high stock market and very low bond yields, I think many Bogleheads would want more like a 3.5% draw to feel "very safe".

Last I saw a William Bernstein guesstimate, it was something like bonds will no more than break even with inflation and maybe we might hope for 2% real from equities. That was from a while back and just from my very hazy memory.
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DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Wed Sep 13, 2017 6:53 am

JW-Retired wrote:
Tue Sep 12, 2017 6:34 pm
DC3509 wrote:
Tue Sep 12, 2017 4:59 pm
BTW, I only picked the 4.5% number after reading Bengen's book "Conserving Client Portfolio's During Retirement." He has a lot of heavy duty charts and math and arrives at the conclusion that 4.5% is still very safe.
Bengen's "4% rule" paper was in 1994. Has his more recent 2006 book extended that analysis closer to the present day? That book is priced too high on Amazon for me to be interested.

Retiring now with a very high stock market and very low bond yields, I think many Bogleheads would want more like a 3.5% draw to feel "very safe".

Last I saw a William Bernstein guesstimate, it was something like bonds will no more than break even with inflation and maybe we might hope for 2% real from equities. That was from a while back and just from my very hazy memory.
JW
Bengen's 2006 book definitely comes to a safe withdrawal rate of 4.42% -- pg. 60. What actually surprised me is how up to 5.25%, you still have a 90% chance of the portfolio lasting 30 years. While there is of course a risk in retirement of outliving your assets, there is a contrary risk of scrimping too much and dying with a lot of money in the bank.

What I liked about Bengen's book is that it takes the real life economic events of the last 80 years (up until 2006) in reaching its conclusions -- so the Great Depression, the economic downturn and high inflation of the 70s, and dot com boom and bust are all factored into the 4.42%. Are today's low yield and high values worse than those issues? It is hard to say, but probably not. Reminds me of marriage a bit -- no marriage is perfect, and no economic time period is perfect either. The question is whether today's circumstances are so fundamentally sour that there will be some black swan event which eclipses the Great Depression and throws out the normal rules, and then how much do we want to insure against such an event by taking a smaller withdrawal. I can say that my parents are not that concerned about this circumstance (truth be told, they would probably be fine with a 90% or even 80% success rate and just play the odds, but I have advocated for a safer approach).

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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Wed Sep 13, 2017 7:08 am

sergeant wrote:
Tue Sep 12, 2017 5:22 pm
DC3509 wrote:
Tue Sep 12, 2017 3:36 pm
sergeant wrote:
Tue Sep 12, 2017 1:52 pm
I'm confused! In one of your other posts longevity was a concern as your grandfather lived into his late eighties? Either way, your parents SS covers all expenses so your plan is fine. Pull the trigger already. I would probably have stuck with a pension but they want to lump sum and invest it. Good luck.
My dad's dad lived into his late 80s, but none of the others reached 77. Both of my parents are in their late 60s. So the chances of making the full 30 years, while not entirely out of the question, are probably slim and thus the reason for moving to 4.5% (but not above that).

I don't see how the pension was a better deal -- no inflation protection and the survivor benefit dropped the income down to only about $1,000 per month.
I suggested the pension based on the numbers. Your parents expenses are about $2500 a month but will lower slightly soon due to having their car paid off. Let's say they stay at $2500. Your dad's SS will be $2100, mom's $1100, pension $1100, that is $4300 a month with expenses at $2500! That looks like a win to me. No need to keep playing. They still have the 138k in the 401k as a plan B.
The SS and pension amounts are pre-tax, and after more budgeting with them over the past few months, the expenses are somewhat more than $2500, though not dramatically so.

The more I studied the annuity, the more I did not feel like it was a winner either way. The pension payout for joint survivor was $1,071. So you would need 16 years of payments in order to equal the lump sum. There is at least a chance that they might not live that long, in which case they do not even see the full return of the lump sum. But even if they do live that long -- inflation will drastically cut back on the $1,071 in the future. My inflation calculations found that you would need $1,371 to equal that in 10 years, $1,755 for the same in 20 years.

I feel like the biggest risk with taking the lump sum is behavioral -- you do not invest it correctly, you do stupid things with the money, you blow it in Vegas or through another bad financial moves, the financial advisor industry swoops down and takes it share of it, etc. By coming up with a specific plan and investing the money in low cost index funds, we would avoid those bad outcomes. The sequence of return risk is also very real, but that's why I have set aside 18 months at the start in a money market, and then about another 7 years in bonds -- they should be able to live for 8-9 years off this plan without having to sell stocks in a bear market. If we have a 9 year bear market, the world is probably coming to an end and all of this will likely be the least of our worries.

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Re: Investing parents nest egg -- any final thoughts?

Post by Watty » Wed Sep 13, 2017 7:44 am

I didn't read the other threads but a couple of things;

1) If you are taking an ongoing roll in managing their finances then there needs to be a clear backup plan in case you get run over by the proverbial Mack truck tomorrow.

2) The X% safe withdrawal rate is a good reality check to make sure that there budget is in the right ballpark but it is really not all that usable in practice since their spending will vary in different phases of their life. I have seen relatives that naturally slowed down by the time they were in their mid 70 even though their health was still relatively good. They went for a number of years with very low expenses until their health started to decline.

3) I don't have a link handy but unless there is some specific genetic problem family history is not as large a factor in their life expectancy as you might think. Having a lot of long lived relatives might be more significant than them having had relatives that died relatively young. This is because many things like heart disease and cancer are much more survivable now than with the medical care that was available several decades ago. As I recall family history is less than a 20% factor in determine life expectancy which means that a 65 year old with a 20 year life expectancy would at most get a 4 year adjustment (20% of 20 years is 4 years) to their life expectancy. There is still a very reasonable chance that at least one of them will live into their 90's.

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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Wed Sep 13, 2017 7:51 am

Watty wrote:
Wed Sep 13, 2017 7:44 am
I didn't read the other threads but a couple of things;

1) If you are taking an ongoing roll in managing their finances then there needs to be a clear backup plan in case you get run over by the proverbial Mack truck tomorrow.

2) The X% safe withdrawal rate is a good reality check to make sure that there budget is in the right ballpark but it is really not all that usable in practice since their spending will vary in different phases of their life. I have seen relatives that naturally slowed down by the time they were in their mid 70 even though their health was still relatively good. They went for a number of years with very low expenses until their health started to decline.

3) I don't have a link handy but unless there is some specific genetic problem family history is not as large a factor in their life expectancy as you might think. Having a lot of long lived relatives might be more significant than them having had relatives that died relatively young. This is because many things like heart disease and cancer are much more survivable now than with the medical care that was available several decades ago. As I recall family history is less than a 20% factor in determine life expectancy which means that a 65 year old with a 20 year life expectancy would at most get a 4 year adjustment (20% of 20 years is 4 years) to their life expectancy. There is still a very reasonable chance that at least one of them will live into their 90's.
On your last point -- I hope you are right!!! Without getting into too much detail -- the three grandparents that died relatively young all had rather random events -- not hit by trucks random, but no heart disease, cancer, etc., either. Your point is well-taken.

Agreed that the withdrawal rate is just a reality check -- it can be hard to predict how the expenses will actually play out over time.

And good point about my own involvement here. Presumably my significant other could take over these duties, but good thing to discuss. At least initially, I am going to manually transfer the money from the money market to the checking account to keep a check on spending.

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Re: Investing parents nest egg -- any final thoughts?

Post by ThrustVectoring » Wed Sep 13, 2017 10:41 am

chevca wrote:
Tue Sep 12, 2017 10:03 am
Why invest it? If there's no need to pass it on to heirs, how about an annuity to give them a set income instead?
The OP's parents are in poor health and their grandparents died fairly young. If you expect to die before actuarial tables predict, annuities are poor choices.

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Re: Investing parents nest egg -- any final thoughts?

Post by chevca » Wed Sep 13, 2017 10:55 am

ThrustVectoring wrote:
Wed Sep 13, 2017 10:41 am
chevca wrote:
Tue Sep 12, 2017 10:03 am
Why invest it? If there's no need to pass it on to heirs, how about an annuity to give them a set income instead?
The OP's parents are in poor health and their grandparents died fairly young. If you expect to die before actuarial tables predict, annuities are poor choices.
If it is a sure way to cover expenses and no need to pass it on to heirs, how is it a "poor choice". Optimal? Maybe, maybe not. But, poor... no.

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Wed Sep 13, 2017 11:04 am

chevca wrote:
Wed Sep 13, 2017 10:55 am
ThrustVectoring wrote:
Wed Sep 13, 2017 10:41 am
chevca wrote:
Tue Sep 12, 2017 10:03 am
Why invest it? If there's no need to pass it on to heirs, how about an annuity to give them a set income instead?
The OP's parents are in poor health and their grandparents died fairly young. If you expect to die before actuarial tables predict, annuities are poor choices.
If it is a sure way to cover expenses and no need to pass it on to heirs, how is it a "poor choice". Optimal? Maybe, maybe not. But, poor... no.
I think it's a poor choice if you are not going to get back what you paid for it. It's a good choice if despite that you would make poor behavioral choices and exhaust the money quickly, so you have nothing if you do outlive the tables.

chevca
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Re: Investing parents nest egg -- any final thoughts?

Post by chevca » Wed Sep 13, 2017 11:07 am

DC3509 wrote:
Wed Sep 13, 2017 11:04 am
chevca wrote:
Wed Sep 13, 2017 10:55 am
ThrustVectoring wrote:
Wed Sep 13, 2017 10:41 am
chevca wrote:
Tue Sep 12, 2017 10:03 am
Why invest it? If there's no need to pass it on to heirs, how about an annuity to give them a set income instead?
The OP's parents are in poor health and their grandparents died fairly young. If you expect to die before actuarial tables predict, annuities are poor choices.
If it is a sure way to cover expenses and no need to pass it on to heirs, how is it a "poor choice". Optimal? Maybe, maybe not. But, poor... no.
I think it's a poor choice if you are not going to get back what you paid for it. It's a good choice if despite that you would make poor behavioral choices and exhaust the money quickly, so you have nothing if you do outlive the tables.
One is and unknown (life expectancy) and one is a known (mom's a spender) in this case, so....

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bigROI
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Re: Investing parents nest egg -- any final thoughts?

Post by bigROI » Thu Sep 14, 2017 1:25 pm

I would carve it out:

50% total stock
15% international
25% total bond
10% total international bond

Try to start with 4% and see how far they can run with it for the year. Better to keep as much as you can working for them while it can be earning.

You might want to run this simulation below and show them for thoughts - looks like with 4.5% withdrawal they have about 80% chance of the money lasting 35 years, at 4% it has about a 90% chance

https://retirementplans.vanguard.com/VG ... ggCalc.jsf

Its important to be clear that they could lose 10-20-50k on a correction but if you stick with the plan it should recover in time vs selling low.
A penny saved is much more then a penny earned when you consider the tax/SS/medicare cut.

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Re: Investing parents nest egg -- any final thoughts?

Post by Dottie57 » Thu Sep 14, 2017 7:39 pm

DC3509 wrote:
Tue Sep 12, 2017 4:54 pm
JW-Retired wrote:
Tue Sep 12, 2017 4:29 pm
DC3509 wrote:
Tue Sep 12, 2017 10:18 am
We looked at annuities, but it didn't seem to make sense. First, if one or both of them do live longer than expected, I was concerned that inflation would kill the annuity over time. Buying an inflation protected annuity wasn't an option because the payments are so much less now. Moreover, we needed to buy an annuity with full survivor benefit. The reality is that Mom is more of a spender. If something happens to Dad first, she will still want the same income. The same is not true for dad, but it is of course impossible to predict the sequence of events. Buying an inflation protected joint survivor annuity will not get them anywhere near a 4.5% withdrawal rate.
Annuities usually do make sense if the investor might need to draw heavily from their portfolio. IMO, a 4.5% inflation increased draw is pretty heavy.

You said they are both in their late 60's
If that is 68, then a full J&S (non-indexed) immediate annuity costing $348k would pay them $1720/month.
see https://www.immediateannuities.com/

You plan your 4.5% withdrawal rate to be indexed with inflation, but it only starts at $1305/month.
0.045x$348k = 15.66k/yr= $1305/month.

So you need 32% inflation before their monthly draw even catches up to the fixed annuity. That wil be many years from now, and then you still need years after that to get back to even with the annuity in terms of total income received over the years. IMO, they would like the annuity better.
JW
I just ran the numbers again. The estimate is $1,605 based on ages and states. I should add -- there were two buckets of money here. First was a lump sum pension for $210K -- the remainder was a $401K for $138. To get the $1,600 you would need to invest everything. My parents do not have significant cash savings or emergency funds or a taxable account, so if unexpected things would come up with an annuity, you either need to save for it from the $1,600, or dip into savings and when it's gone, it's gone. Even if they wanted an annuity, I would have recommended that they keep some of it back as an extra cash cushion. So the annuity payment would likely be closer to $1550 or maybe even a tad less. At that point, if you are debating $1300 versus $1550 -- inflation will cross over around year 7 or 8. That doesn't seem that far away, even with a shorter life span. If one or both of them beats the odds and live a long time, they will only have the decreased annuity plus SS. At least with the investment route, if we get lucky, perhaps there will still be money left to draw from in the latter years.

These are reasonable points though; things I considered and are still considering. No black and white answer in my view.

If your parents hit 75 in good health, really consider an annuity at that time - payout will be better at 75. Don't put all money into it but say 100k.

Dottie57
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Re: Investing parents nest egg -- any final thoughts?

Post by Dottie57 » Thu Sep 14, 2017 7:39 pm

DC3509 wrote:
Tue Sep 12, 2017 4:54 pm
JW-Retired wrote:
Tue Sep 12, 2017 4:29 pm
DC3509 wrote:
Tue Sep 12, 2017 10:18 am
We looked at annuities, but it didn't seem to make sense. First, if one or both of them do live longer than expected, I was concerned that inflation would kill the annuity over time. Buying an inflation protected annuity wasn't an option because the payments are so much less now. Moreover, we needed to buy an annuity with full survivor benefit. The reality is that Mom is more of a spender. If something happens to Dad first, she will still want the same income. The same is not true for dad, but it is of course impossible to predict the sequence of events. Buying an inflation protected joint survivor annuity will not get them anywhere near a 4.5% withdrawal rate.
Annuities usually do make sense if the investor might need to draw heavily from their portfolio. IMO, a 4.5% inflation increased draw is pretty heavy.

You said they are both in their late 60's
If that is 68, then a full J&S (non-indexed) immediate annuity costing $348k would pay them $1720/month.
see https://www.immediateannuities.com/

You plan your 4.5% withdrawal rate to be indexed with inflation, but it only starts at $1305/month.
0.045x$348k = 15.66k/yr= $1305/month.

So you need 32% inflation before their monthly draw even catches up to the fixed annuity. That wil be many years from now, and then you still need years after that to get back to even with the annuity in terms of total income received over the years. IMO, they would like the annuity better.
JW
I just ran the numbers again. The estimate is $1,605 based on ages and states. I should add -- there were two buckets of money here. First was a lump sum pension for $210K -- the remainder was a $401K for $138. To get the $1,600 you would need to invest everything. My parents do not have significant cash savings or emergency funds or a taxable account, so if unexpected things would come up with an annuity, you either need to save for it from the $1,600, or dip into savings and when it's gone, it's gone. Even if they wanted an annuity, I would have recommended that they keep some of it back as an extra cash cushion. So the annuity payment would likely be closer to $1550 or maybe even a tad less. At that point, if you are debating $1300 versus $1550 -- inflation will cross over around year 7 or 8. That doesn't seem that far away, even with a shorter life span. If one or both of them beats the odds and live a long time, they will only have the decreased annuity plus SS. At least with the investment route, if we get lucky, perhaps there will still be money left to draw from in the latter years.

These are reasonable points though; things I considered and are still considering. No black and white answer in my view.

If your parents hit 75 in good health, really consider an annuity at that time - payout will be better at 75. Don't put all money into it but say 100k.

DC3509
Posts: 77
Joined: Wed Jul 12, 2017 7:25 am

Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Thu Sep 14, 2017 8:01 pm

bigROI wrote:
Thu Sep 14, 2017 1:25 pm
I would carve it out:

50% total stock
15% international
25% total bond
10% total international bond

Try to start with 4% and see how far they can run with it for the year. Better to keep as much as you can working for them while it can be earning.

You might want to run this simulation below and show them for thoughts - looks like with 4.5% withdrawal they have about 80% chance of the money lasting 35 years, at 4% it has about a 90% chance

https://retirementplans.vanguard.com/VG ... ggCalc.jsf

Its important to be clear that they could lose 10-20-50k on a correction but if you stick with the plan it should recover in time vs selling low.
Thanks for the reply; if you take 30 years at 4.3%, you still get a 90% success rate. This site seems to use Monte Carlo -- Bengen's calculations do not and he even has a chapter on why he prefers to use the dataset he does -- but either way, you are talking about a success rate of somewhere between 90-100%.

Curious about the bonds -- any reason for the international ones? I have actually thought about using a short term govt bond fund as well in trying to find something as good as cash. But haven't really considered international bonds.

dbr
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Re: Investing parents nest egg -- any final thoughts?

Post by dbr » Fri Sep 15, 2017 10:09 am

DC3509 wrote:
Thu Sep 14, 2017 8:01 pm

Thanks for the reply; if you take 30 years at 4.3%, you still get a 90% success rate. This site seems to use Monte Carlo -- Bengen's calculations do not and he even has a chapter on why he prefers to use the dataset he does -- but either way, you are talking about a success rate of somewhere between 90-100%.
Those estimates cannot by definition produce a number greater than 100% so it might be a useful exercise to look at how high a withdrawal rate first produces the onset of less than 100% and also how rapidly the success rate falls with increased withdrawal rate. The point is not to try to sort out the difference between 90% and 95% but rather to see where and how rapidly things fall off a cliff, if they do.

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Re: Investing parents nest egg -- any final thoughts?

Post by itstoomuch » Fri Sep 15, 2017 10:34 am

DC3509 wrote:
Tue Sep 12, 2017 10:18 am
We looked at annuities, but it didn't seem to make sense. First, if one or both of them do live longer than expected, I was concerned that inflation would kill the annuity over time. Buying an inflation protected annuity wasn't an option because the payments are so much less now. Moreover, we needed to buy an annuity with full survivor benefit. The reality is that Mom is more of a spender. If something happens to Dad first, she will still want the same income. The same is not true for dad, but it is of course impossible to predict the sequence of events. Buying an inflation protected joint survivor annuity will not get them anywhere near a 4.5% withdrawal rate.
I think you need to understand what happens in Inflation and how it affects the Markets.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

DC3509
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Re: Investing parents nest egg -- any final thoughts?

Post by DC3509 » Fri Sep 15, 2017 10:58 am

dbr wrote:
Fri Sep 15, 2017 10:09 am
DC3509 wrote:
Thu Sep 14, 2017 8:01 pm

Thanks for the reply; if you take 30 years at 4.3%, you still get a 90% success rate. This site seems to use Monte Carlo -- Bengen's calculations do not and he even has a chapter on why he prefers to use the dataset he does -- but either way, you are talking about a success rate of somewhere between 90-100%.
Those estimates cannot by definition produce a number greater than 100% so it might be a useful exercise to look at how high a withdrawal rate first produces the onset of less than 100% and also how rapidly the success rate falls with increased withdrawal rate. The point is not to try to sort out the difference between 90% and 95% but rather to see where and how rapidly things fall off a cliff, if they do.
Bengen's 2006 book has an exact chart showing this -- I do not have the book with me right now, but his models and estimates show a 90% success rate still at slightly more than 5% -- I want to say 5.25%. It is actually a central part of that part of the book -- that decreasing your success rate from 100% to 90% but being able to withdraw much more might be a trade-off that many retirees find acceptable, especially if they are doubtful about living 30 years.

dbr
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Re: Investing parents nest egg -- any final thoughts?

Post by dbr » Fri Sep 15, 2017 10:59 am

DC3509 wrote:
Fri Sep 15, 2017 10:58 am
dbr wrote:
Fri Sep 15, 2017 10:09 am
DC3509 wrote:
Thu Sep 14, 2017 8:01 pm

Thanks for the reply; if you take 30 years at 4.3%, you still get a 90% success rate. This site seems to use Monte Carlo -- Bengen's calculations do not and he even has a chapter on why he prefers to use the dataset he does -- but either way, you are talking about a success rate of somewhere between 90-100%.
Those estimates cannot by definition produce a number greater than 100% so it might be a useful exercise to look at how high a withdrawal rate first produces the onset of less than 100% and also how rapidly the success rate falls with increased withdrawal rate. The point is not to try to sort out the difference between 90% and 95% but rather to see where and how rapidly things fall off a cliff, if they do.
Bengen's 2006 book has an exact chart showing this -- I do not have the book with me right now, but his models and estimates show a 90% success rate still at slightly more than 5% -- I want to say 5.25%. It is actually a central part of that part of the book -- that decreasing your success rate from 100% to 90% but being able to withdraw much more might be a trade-off that many retirees find acceptable, especially if they are doubtful about living 30 years.
Interesting. Thanks for the comment.

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