Help w/ parents investments

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dvd7e
Posts: 48
Joined: Sat Dec 06, 2014 2:49 pm

Help w/ parents investments

Post by dvd7e » Mon Oct 16, 2017 9:09 pm

Hi, I'm a big believer in the general Bogleheads philosophy (e.g. passive index funds with low expense ratios etc) and I talked to my Dad recently just to see where his financial situation stood, and I was a little shocked to hear that he was paying a financial manager 1% of his assets annually to "manage" his investments. Also shocked that he's 100% in stocks. Here is his current situation, followed by my tentative recommendations, and I wanted to get some feedback on my proposed changes:

CURRENT SITUATION:
* Age: My dad is 67, mom is 68. Married, filing jointly.
* Employment: Dad is partially retired, he owns his own business that he does out of the house. He enjoys what he does and works when he wants and when he has work available, and is planning on working as long as he is able (which is indefinitely, as of now). Mom is fully retired.
* Current Income: Approximately 70k/year total. ~20k/yr from a Pension from an old teaching job + ~20k/yr from combined Social Security + whatever money my dad makes from his business (this fluctuates significantly, over the past few years it's been around 50-60k/yr, but his business has been slowly declining with some changes to the economy and technology, so a pretty conservative estimate would be around 30k/year for the next few years)
* Real Estate: They own their own home outright, plus a rental property making 10-12k/yr, which basically goes to cover the property taxes on both properties.
* Health Insurance: They have "very good" health insurance through his former state teaching job, plus medicare. Some minor health issues but really nothing major. They also have long term care insurance.
* Current Investments: Total ~ 2.3 million.
a) 1.7 million in a Pre-Tax IRA that is 100% stocks, spread across 62 individual companies that the financial advisor has picked
b) 300k in stock mutual funds (currently unknown which ones or what the expense ratios are, waiting for more info) that I think are in a taxable account
c) 300k in a taxable money market which he uses as a cushion to make up for any short term cash flow needs but is mostly just sitting there not being used
* Asset Allocation: 100% in Stocks (excluding the $$$ in the money market)
* Withdrawal Rate: 0% (see below)

As I mentioned above, he's paying around 1% of assets on the money that's in the IRA, so that's around $17,000 a year! (Plus fees for monthly rebalancing.) Yikes. They are currently living exclusively off of their current income (Pension + Social Security + Business income) and not withdrawing anything from their retirement portfolio, and don't plan on withdrawing anything as long as he keeps working part time at his business. He says he enjoys doing it, so he'll do that as long as he has the ability to do so. Because they aren't relying on the retirement accounts at all, their rationale was to put it all in stocks as a way to maximize long term growth for their estate. My Dad did say that if his business income was suddenly zero and had to start withdrawing from the retirement accounts, he would change to a 60/40 Stock/Bond allocation. If that were to happen, he sounded pretty confident that he could get by comfortably on a 3% per year withdrawal rate, which on the 2 million in retirement accounts is 60k/yr pre-tax, or approx 50k/yr after taxes. He's also currently not sure what to do with the money from the upcoming RMDs (Required Minimum Distributions) on the 1.7 million in his pre-tax IRA, which is only about 2 years away. That would be in the neighborhood of 75k/year in the first year.

PROPOSED CHANGES:
Please tell me what you think of the following recommendations:
1) Most importantly, dump the financial advisor and the high fees. I would help him manage them on an ongoing basis, including the asset allocation (see below) plus once a year rebalancing. Probably would do this by rolling over the IRAs over to Vanguard.
2) Here's a big question: What should the stock/bond asset allocation be? Should there be a glidepath (if so, increasing or decreasing?) as he gets older or keep it constant? What about if the business income suddenly goes away? I was thinking a constant 75/25 ratio and then if the business income goes away and he actually needs to withdraw from the retirement accounts, then changing to a 50/50 split.
3) Just looking at Fixed Income allocation, I was going to suggest to him 90% in Vanguard Total Bond Market (VBTLX) and 10% in TIPS. Just looking at the equities, I was going to suggest:
VTSAX Vanguard Total Stock 62%
VTIAX Vanguard Total International Ex-US Stock 21%
VSIAX Vanguard Domestic Small Cap Value 9%
VFSVX Vanguard International Ex-US Small Cap 8%
4) For the 300k that is in the money market and not gaining any appreciable interest, I would leave 50k (or however much he feels comfortable with) and then put the rest into the other retirement "bucket" and invest it according to the asset allocation that is determined above.
5) Any suggestions on handling the RMDs on his IRAs? I was thinking he could convert his RMD into a Roth IRA by paying taxes on the RMD at whatever tax bracket he's in, which would at least allow him to keep the money in a tax sheltered account rather than having to re-invest in a taxable account. Plus no future RMDs on the Roth money which would help with estate planning. He could also start converting some of the money now, ahead of when he turns 70, depending on what tax bracket he is in now vs how much he wants to withdraw. I just realized from a quick google search that you can't convert your RMD into a Roth. Darn. Any other options here? Would it be possible to use his RMD to pay his living expenses, and then use any money his business generates to put into a tax sheltered account (e.g. SEP IRA) through his business? Does gifting make sense here? I guess "worst case" situation if he didn't need the money then he would just take the RMD and re-invest in a taxable account.
6) What kind of fees are typical for a one-time sit down with a financial manager? My Dad already has a CPA to do his taxes, he should be able to advise him on some of these issues right?


Anything else to consider here?

Thanks for your input!

JBTX
Posts: 2991
Joined: Wed Jul 26, 2017 12:46 pm

Re: Help w/ parents investments

Post by JBTX » Mon Oct 16, 2017 11:17 pm

dvd7e wrote:
Mon Oct 16, 2017 9:09 pm
Hi, I'm a big believer in the general Bogleheads philosophy (e.g. passive index funds with low expense ratios etc) and I talked to my Dad recently just to see where his financial situation stood, and I was a little shocked to hear that he was paying a financial manager 1% of his assets annually to "manage" his investments. Also shocked that he's 100% in stocks. Here is his current situation, followed by my tentative recommendations, and I wanted to get some feedback on my proposed changes:

CURRENT SITUATION:
* Age: My dad is 67, mom is 68. Married, filing jointly.
* Employment: Dad is partially retired, he owns his own business that he does out of the house. He enjoys what he does and works when he wants and when he has work available, and is planning on working as long as he is able (which is indefinitely, as of now). Mom is fully retired.
* Current Income: Approximately 70k/year total. ~20k/yr from a Pension from an old teaching job + ~20k/yr from combined Social Security + whatever money my dad makes from his business (this fluctuates significantly, over the past few years it's been around 50-60k/yr, but his business has been slowly declining with some changes to the economy and technology, so a pretty conservative estimate would be around 30k/year for the next few years)
* Real Estate: They own their own home outright, plus a rental property making 10-12k/yr, which basically goes to cover the property taxes on both properties.
* Health Insurance: They have "very good" health insurance through his former state teaching job, plus medicare. Some minor health issues but really nothing major. They also have long term care insurance.
* Current Investments: Total ~ 2.3 million.
a) 1.7 million in a Pre-Tax IRA that is 100% stocks, spread across 62 individual companies that the financial advisor has picked
b) 300k in stock mutual funds (currently unknown which ones or what the expense ratios are, waiting for more info) that I think are in a taxable account
c) 300k in a taxable money market which he uses as a cushion to make up for any short term cash flow needs but is mostly just sitting there not being used
* Asset Allocation: 100% in Stocks (excluding the $$$ in the money market)
* Withdrawal Rate: 0% (see below)

As I mentioned above, he's paying around 1% of assets on the money that's in the IRA, so that's around $17,000 a year! (Plus fees for monthly rebalancing.) Yikes. They are currently living exclusively off of their current income (Pension + Social Security + Business income) and not withdrawing anything from their retirement portfolio, and don't plan on withdrawing anything as long as he keeps working part time at his business. He says he enjoys doing it, so he'll do that as long as he has the ability to do so. Because they aren't relying on the retirement accounts at all, their rationale was to put it all in stocks as a way to maximize long term growth for their estate. My Dad did say that if his business income was suddenly zero and had to start withdrawing from the retirement accounts, he would change to a 60/40 Stock/Bond allocation. If that were to happen, he sounded pretty confident that he could get by comfortably on a 3% per year withdrawal rate, which on the 2 million in retirement accounts is 60k/yr pre-tax, or approx 50k/yr after taxes. He's also currently not sure what to do with the money from the upcoming RMDs (Required Minimum Distributions) on the 1.7 million in his pre-tax IRA, which is only about 2 years away. That would be in the neighborhood of 75k/year in the first year.

PROPOSED CHANGES:
Please tell me what you think of the following recommendations:
1) Most importantly, dump the financial advisor and the high fees. I would help him manage them on an ongoing basis, including the asset allocation (see below) plus once a year rebalancing. Probably would do this by rolling over the IRAs over to Vanguard.
The 1.0% fees aren't good, but for a 69 year old who may not be interested in screwing with stocks, and has other additional income streams, that wouldn't be my primary concern. The bigger concern is the advisor having him strewn over a bunch of individual stocks and 100% stock allocation. That is terrible management. Is that allocation what the advisor recommends, or is it what your dad is pushing him to do?

As to generic advice, yes, he should dump the advisor. However, when dealing with family members things can get a bit sticky. Is it really a good idea for your relationship with your family for you to get heavily involved in managing his financial accounts? The answer to that greatly varies depending on the individuals involved.

I would think better options would be:

1. Consider Vanguard Advisory services, which charges something like 0.3% of total assets
2. IF you choose to get involved, put as much as you can in a retirement target fund like this

http://portfolios.morningstar.com/fund/ ... ture=en_US

(approx 43% equity)

or

http://portfolios.morningstar.com/fund/ ... ture=en_US

(approx 54% equity)

or

http://portfolios.morningstar.com/fund/ ... ture=en_US

(approx 63% equity)


Fees are 0.14%. That is very low, and you don't have to get involved with choosing funds, figuring out asset allocations, rebalancing, glidepaths, etc. etc. All that is taken care of for him (and you)

2) Here's a big question: What should the stock/bond asset allocation be? Should there be a glidepath (if so, increasing or decreasing?) as he gets older or keep it constant? What about if the business income suddenly goes away? I was thinking a constant 75/25 ratio and then if the business income goes away and he actually needs to withdraw from the retirement accounts, then changing to a 50/50 split.
Use above target funds and this is taken care of.
3) Just looking at Fixed Income allocation, I was going to suggest to him 90% in Vanguard Total Bond Market (VBTLX) and 10% in TIPS. Just looking at the equities, I was going to suggest:
VTSAX Vanguard Total Stock 62%
VTIAX Vanguard Total International Ex-US Stock 21%
VSIAX Vanguard Domestic Small Cap Value 9%
VFSVX Vanguard International Ex-US Small Cap 8%

Use above target funds and this is taken care of.
4) For the 300k that is in the money market and not gaining any appreciable interest, I would leave 50k (or however much he feels comfortable with) and then put the rest into the other retirement "bucket" and invest it according to the asset allocation that is determined above.
I'd leave more than $50k in Cash. At least $100k, maybe more, maybe all of it. Put in online savings accounts (federally insured, CD's, and whatever you can in ibonds - which is $20k per year if married). If he was determined to have some in the market, I would again use the target fund. Yes, I understand it will spit off some taxable income, and there may be more tax efficient ways to handle, but I'd opt for the simplicity. Or, if concerned with taxes, use this

http://portfolios.morningstar.com/fund/ ... ture=en_US

5) Any suggestions on handling the RMDs on his IRAs? Would it be possible to use his RMD to pay his living expenses, and then use any money his business generates to put into a tax sheltered account (e.g. SEP IRA) through his business? Does gifting make sense here? I guess "worst case" situation if he didn't need the money then he would just take the RMD and re-invest in a taxable account.
Those seems like viable options. As to gifting...to who, you? Gifting to family members won't have an immediate impact on taxes. It may make sense for estate planning purposes. Tread very lightly here....



6) What kind of fees are typical for a one-time sit down with a financial manager? My Dad already has a CPA to do his taxes, he should be able to advise him on some of these issues right?


Anything else to consider here?

Thanks for your input!
Not sure about fees. As to the CPA, yes they should be able to advise on tax related issues, RMD's, etc. As to whether he/she can advise on investing questions is a crap shoot. I'm sure he can advise, but whether his advice is any good is unknowable.

dvd7e
Posts: 48
Joined: Sat Dec 06, 2014 2:49 pm

Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 7:01 am

Fees are 0.14%. That is very low, and you don't have to get involved with choosing funds, figuring out asset allocations, rebalancing, glidepaths, etc. etc. All that is taken care of for him (and you)

...

Use above target funds and this is taken care of.
Target Date funds are a good idea, and we'll have to give that some consideration, but I'm not sure that totally addresses the issue. It's true that he wouldn't have to worry about rebalancing, but the issue is whether the glidepath that is specified in the Target Date fund is appropriate for their situation or not. All of Vanguard's Target Date funds end up with a 25/75 split in late retirement, which typically assume that the investor needs that money to live on. That may not be a good assumption in this case. I understand that if you want a higher stock allocation then you can pick a later date for the Target Date fund...but that is just moving the goal posts, you're still on a glidepath towards 25/75.

Also...does it make sense to make a sudden change to the Stock/Bond allocation depending on the expected outcome of the business income? i.e. that strategy would be something like: "High stock allocation for as long as it looks like the business income is there, and then make a sudden drop to low stock allocation once it looks like the business income will no longer be there (for whatever reason)".

RadAudit
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Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: Help w/ parents investments

Post by RadAudit » Tue Oct 17, 2017 7:16 am

dvd7e wrote:
Tue Oct 17, 2017 7:01 am
All of Vanguard's Target Date funds end up with a 25/75 split in late retirement, which typically assume that the investor needs that money to live on. That may not be a good assumption in this case.
Take a look at VG (or others) Life Strategy (Target Risk) Funds. They have fixed asset allocations - 20 / 80, 40 / 60, ... 80 / 20. One of them might be close to your goals.
FI is the best revenge. LBYM. Invest the rest. Stay the course.

dvd7e
Posts: 48
Joined: Sat Dec 06, 2014 2:49 pm

Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 7:23 am

Fees are 0.14%. That is very low, and you don't have to get involved with choosing funds, figuring out asset allocations, rebalancing, glidepaths, etc. etc. All that is taken care of for him (and you)

...

Use above target funds and this is taken care of.
Target Date funds are a good idea, and we'll have to give that some consideration, but I'm not sure that totally addresses the issue. It's true that he wouldn't have to worry about rebalancing, but the issue is whether the glidepath that is specified in the Target Date fund is appropriate for their situation or not. All of Vanguard's Target Date funds end up with a 25/75 split in late retirement, which typically assume that the investor needs that money to live on. That may not be a good assumption in this case. I understand that if you want a higher stock allocation then you can pick a later date for the Target Date fund...but that is just moving the goal posts, you're still on a glidepath towards 25/75.

Also...does it make sense to make a sudden change to the Stock/Bond allocation depending on the expected outcome of the business income? i.e. that strategy would be something like: "High stock allocation for as long as it looks like the business income is there, and then make a sudden drop to low stock allocation once it looks like the business income will no longer be there (for whatever reason)".
[/quote]

I forgot about Vanguard's "Lifestyle" funds, which I believe act like Target Date funds in that they automatically rebalance, except that there is no glidepath, the Stock/Bond allocation is static.

How about Vanguard LifeStrategy Growth Fund (VASGX) which is 80/20 with an expense ratio of 0.15%...and then if something in their situation changes where they need to start withdrawing from their portfolio, then changing to either the "Conservative Growth Fund" (VSCGX) which is 40/60 or the "Moderate" (VSMGX) which is 60/40, depending on what percentage of their portfolio they will be withdrawing and other circumstances. The bulk of the account is in the IRA so there wouldn't be any taxes due at the time of that wholesale change, although long term that will likely change due to the RMDs.

If things go well and their account has grown significantly by the time they need to start withdrawing, such that they only need 1-2% to meet their needs, then a change to their allocation may not even be necessary, since the focus at that point would be more on estate planning rather than current income.
Last edited by dvd7e on Tue Oct 17, 2017 7:24 am, edited 1 time in total.

dvd7e
Posts: 48
Joined: Sat Dec 06, 2014 2:49 pm

Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 7:24 am

RadAudit wrote:
Tue Oct 17, 2017 7:16 am
dvd7e wrote:
Tue Oct 17, 2017 7:01 am
All of Vanguard's Target Date funds end up with a 25/75 split in late retirement, which typically assume that the investor needs that money to live on. That may not be a good assumption in this case.
Take a look at VG (or others) Life Strategy (Target Risk) Funds. They have fixed asset allocations - 20 / 80, 40 / 60, ... 80 / 20. One of them might be close to your goals.
Ya, good idea, you beat me to the punch :D

Slothmeister
Posts: 62
Joined: Sun Sep 10, 2017 11:48 am

Re: Help w/ parents investments

Post by Slothmeister » Tue Oct 17, 2017 7:26 am

Maybe try to talk him into putting half of the stock investments in CDs? What kind of stocks does he have? If they're conservative stocks that won't disappear in a bear market, what's the worry? It sounds like he's got some revenue stream with real estate and a pension and medical care to boot. Maybe he likes his stocks?

dvd7e
Posts: 48
Joined: Sat Dec 06, 2014 2:49 pm

Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 7:39 am

Slothmeister wrote:
Tue Oct 17, 2017 7:26 am
Maybe try to talk him into putting half of the stock investments in CDs? What kind of stocks does he have? If they're conservative stocks that won't disappear in a bear market, what's the worry? It sounds like he's got some revenue stream with real estate and a pension and medical care to boot. Maybe he likes his stocks?
I don't think either of us know which stocks they are, without checking all 60+ and evaluating them. They were picked by the manager, not by my Dad. He wanted long term growth so he went with 100% stocks (not the other way around) because he wasn't withdrawing the money now or planning on it in the foreseeable future. It's not like he really wants to have those stocks specifically. But my concern for his sake was that 100% stocks was a little *too* aggressive, as he could easily lose 30-50% of his account value in a single year and still end up needing the money down the road. Also, 60 stocks *may* be well diversified, but I think the safer approach is a combination of total market mutual funds.

dbr
Posts: 26183
Joined: Sun Mar 04, 2007 9:50 am

Re: Help w/ parents investments

Post by dbr » Tue Oct 17, 2017 8:23 am

dvd7e wrote:
Tue Oct 17, 2017 7:39 am
Slothmeister wrote:
Tue Oct 17, 2017 7:26 am
Maybe try to talk him into putting half of the stock investments in CDs? What kind of stocks does he have? If they're conservative stocks that won't disappear in a bear market, what's the worry? It sounds like he's got some revenue stream with real estate and a pension and medical care to boot. Maybe he likes his stocks?
I don't think either of us know which stocks they are, without checking all 60+ and evaluating them. They were picked by the manager, not by my Dad. He wanted long term growth so he went with 100% stocks (not the other way around) because he wasn't withdrawing the money now or planning on it in the foreseeable future. It's not like he really wants to have those stocks specifically. But my concern for his sake was that 100% stocks was a little *too* aggressive, as he could easily lose 30-50% of his account value in a single year and still end up needing the money down the road. Also, 60 stocks *may* be well diversified, but I think the safer approach is a combination of total market mutual funds.
If he isn't planning on needing the money in the foreseeable future, aka the rest of his life plus the needs of his heirs, there is not a problem with risk. I would advise starting this conversation with answering the question what is his ability to take risk. What specifically are his income streams and how adequately do they meet his needs?

BarbK
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Re: Help w/ parents investments

Post by BarbK » Tue Oct 17, 2017 8:26 am

Has he considered making Roth contributions ($6.5K) each with some of the $ he is currently earning even if he would need to withdraw like amount from his IRA for living expenses? It seems like they are in the 15% tax bracket now with $70K income and would still have room for some Roth conversions in the 15% tax bracket.

Have you, your dad, or his CPA looked into what his tax situation will be once he starts taking RMDs?

JW-Retired
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Re: Help w/ parents investments

Post by JW-Retired » Tue Oct 17, 2017 8:31 am

dvd7e wrote:
Mon Oct 16, 2017 9:09 pm
Because they aren't relying on the retirement accounts at all, their rationale was to put it all in stocks as a way to maximize long term growth for their estate. My Dad did say that if his business income was suddenly zero and had to start withdrawing from the retirement accounts, he would change to a 60/40 Stock/Bond allocation. If that were to happen, he sounded pretty confident that he could get by comfortably on a 3% per year withdrawal rate, which on the 2 million in retirement accounts is 60k/yr pre-tax, or approx 50k/yr after taxes. He's also currently not sure what to do with the money from the upcoming RMDs (Required Minimum Distributions) on the 1.7 million in his pre-tax IRA, which is only about 2 years away. That would be in the neighborhood of 75k/year in the first year.
I'm at 60/40 and older, so naturally I think a 60/40 Stock/Bond allocation for your Dad's situation is perfectly fine. Next time a 50% crash happens we only drop 30% and can easily ride that out. However, his plan wait to for zero business income and only then go to 60/40 is flawed because his business income going to zero is likely to follow any crash. Stock market crashes are bad for business. It's apt to be much too late to go to 60/40 before he even realizes what's going on.

He needs to be at 60/40 now. I would work on that before anything else.
JW
Retired at Last

dvd7e
Posts: 48
Joined: Sat Dec 06, 2014 2:49 pm

Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 8:33 am

BarbK wrote:
Tue Oct 17, 2017 8:26 am
Has he considered making Roth contributions ($6.5K) each with some of the $ he is currently earning even if he would need to withdraw like amount from his IRA for living expenses? It seems like they are in the 15% tax bracket now with $70K income and would still have room for some Roth conversions in the 15% tax bracket.

Have you, your dad, or his CPA looked into what his tax situation will be once he starts taking RMDs?
This is a good idea, I'll bring this up with him. I was also wondering if he had the option of contributing all or a portion of his business income to a SEP IRA (Roth), and then withdrawing a like amount from his current Pre-Tax IRA. Seems like a similar type of idea.

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Help w/ parents investments

Post by dbr » Tue Oct 17, 2017 8:39 am

JW-Retired wrote:
Tue Oct 17, 2017 8:31 am
dvd7e wrote:
Mon Oct 16, 2017 9:09 pm
Because they aren't relying on the retirement accounts at all, their rationale was to put it all in stocks as a way to maximize long term growth for their estate. My Dad did say that if his business income was suddenly zero and had to start withdrawing from the retirement accounts, he would change to a 60/40 Stock/Bond allocation. If that were to happen, he sounded pretty confident that he could get by comfortably on a 3% per year withdrawal rate, which on the 2 million in retirement accounts is 60k/yr pre-tax, or approx 50k/yr after taxes. He's also currently not sure what to do with the money from the upcoming RMDs (Required Minimum Distributions) on the 1.7 million in his pre-tax IRA, which is only about 2 years away. That would be in the neighborhood of 75k/year in the first year.
I'm at 60/40 and older, so naturally I think a 60/40 Stock/Bond allocation for your Dad's situation is perfectly fine. Next time a 50% crash happens we only drop 30% and can easily ride that out. However, his plan wait to for zero business income and only then go to 60/40 is flawed because his business income going to zero is likely to follow any crash. Stock market crashes are bad for business. It's apt to be much too late to go to 60/40 before he even realizes what's going on.

He needs to be at 60/40 now. I would work on that before anything else.
JW
It is absolutely correct that if there is a risk here to be managed by reducing stock allocation, then that should be done now.

I differ somewhat on the risk, however. At a 3% withdrawal rate, if that should come to pass, the risk to continued retirement income is not much more or even any more for 100/0 than it is for 60/40 provided the investor does not panic and sell out when stocks go down. A 100/0 portfolio will leave much higher possible assets at death than 60/40 will. That said, the other side of the argument is that one should never take chances with the wisdom of diversity.

NotWhoYouThink
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Re: Help w/ parents investments

Post by NotWhoYouThink » Tue Oct 17, 2017 8:52 am

He is not 100% stocks. He has $300K in money market, out of $2.3M invested. That's maybe 87/13. Maybe he's 90/10 if you count his rental real estate.

What part of this is he unhappy with? You said he wanted to be 100% stocks for maximum growth.

No, the CPA probably can't help him with investment advice, but might be able to help him figure out potential tax liability on his mutual funds in the taxable account. Or you could figure that out yourself.

Do you have siblings? How do they feel about you handling your parents' money?

Do you propose to set up his investments and let them manage the portfolio from here, or are you planning to take over management of their investments? What do they want from you?

In general, telling friends and family what you are doing and why is fine. Telling them what they are doing is wrong is shakier. Taking over for them should be done with great caution, if at all. Maybe you could educate your parents and they could take over for themselves. Their choices might not be your choices, and that would be ok.

dvd7e
Posts: 48
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Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 8:58 am

[/quote]

It is absolutely correct that if there is a risk here to be managed by reducing stock allocation, then that should be done now.

I differ somewhat on the risk, however. At a 3% withdrawal rate, if that should come to pass, the risk to continued retirement income is not much more or even any more for 100/0 than it is for 60/40 provided the investor does not panic and sell out when stocks go down. A 100/0 portfolio will leave much higher possible assets at death than 60/40 will. That said, the other side of the argument is that one should never take chances with the wisdom of diversity.
[/quote]

I agree with what you're saying and I see both sides, and that's kind of why I was thinking of a middle-of-the-road approach of a constant Equity percentage around 75-80%.

You also make a good point about not panicking and selling out if stocks do crash.

Some back of the envelope calculations....if he needs 50k/yr in after tax money (might be a little conservative) from his portfolio, then that is 59k/year in Before Tax money (assuming 15% tax bracket). At a 4% withdrawal rate, then his portfolio needs to be at least ~1.5 million (all in todays money). So assuming he needed the money in the first place (which is not his current situation) he could comfortably withstand a 25% drop in value without any real change to his lifestyle.

dvd7e
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Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 9:06 am

NotWhoYouThink wrote:
Tue Oct 17, 2017 8:52 am
He is not 100% stocks. He has $300K in money market, out of $2.3M invested. That's maybe 87/13. Maybe he's 90/10 if you count his rental real estate.

What part of this is he unhappy with? You said he wanted to be 100% stocks for maximum growth.

No, the CPA probably can't help him with investment advice, but might be able to help him figure out potential tax liability on his mutual funds in the taxable account. Or you could figure that out yourself.

Do you have siblings? How do they feel about you handling your parents' money?

Do you propose to set up his investments and let them manage the portfolio from here, or are you planning to take over management of their investments? What do they want from you?

In general, telling friends and family what you are doing and why is fine. Telling them what they are doing is wrong is shakier. Taking over for them should be done with great caution, if at all. Maybe you could educate your parents and they could take over for themselves. Their choices might not be your choices, and that would be ok.
Fair enough, all good points. I don't necessarily want to manage their investments, other than for their own sake. I'd prefer they do it themselves, for the reasons that you bring up, but I'm not sure how much interest they have in doing it (that's why they were paying the high management fees in the first place.) After talking with my Dad, it seemed like he was paying way too much in fees to the financial manager, and then it's debatable if his stock allocation was too risky or not.

dbr
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Re: Help w/ parents investments

Post by dbr » Tue Oct 17, 2017 9:06 am

dvd7e wrote:
Tue Oct 17, 2017 8:58 am
It is absolutely correct that if there is a risk here to be managed by reducing stock allocation, then that should be done now.

I differ somewhat on the risk, however. At a 3% withdrawal rate, if that should come to pass, the risk to continued retirement income is not much more or even any more for 100/0 than it is for 60/40 provided the investor does not panic and sell out when stocks go down. A 100/0 portfolio will leave much higher possible assets at death than 60/40 will. That said, the other side of the argument is that one should never take chances with the wisdom of diversity.
[/quote]

I agree with what you're saying and I see both sides, and that's kind of why I was thinking of a middle-of-the-road approach of a constant Equity percentage around 75-80%.

You also make a good point about not panicking and selling out if stocks do crash.

Some back of the envelope calculations....if he needs 50k/yr in after tax money (might be a little conservative) from his portfolio, then that is 59k/year in Before Tax money (assuming 15% tax bracket). At a 4% withdrawal rate, then his portfolio needs to be at least ~1.5 million (all in todays money). So assuming he needed the money in the first place (which is not his current situation) he could comfortably withstand a 25% drop in value without any real change to his lifestyle.
[/quote]

I agree in general, but I think there is a misunderstanding about this whole business of withstanding a drop. The stock market goes up and down all the time. Drops are followed by gains, or by more drops, or by staying at a level for some time, and so on. For the investor who stays invested through all this history thinking about drops is meaningless. For the investor who changes his stocks back into money at the bottom of a drop the issue is not meaningless at all. If one wants to evaluate the effect of volatility in stocks, meaning the whole history of ups and downs as one hold the investment, then that is what retirement models look at. Those models evaluate the chances that a portfolio will fail under withdrawal and show the outcome for wealth remaining at death, which spreads out over a very wide range. All of this is affected by the expected return and the uncertainly of return, aka risk.

dbr
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Re: Help w/ parents investments

Post by dbr » Tue Oct 17, 2017 9:11 am

dvd7e wrote:
Tue Oct 17, 2017 9:06 am


Fair enough, all good points. I don't necessarily want to manage their investments, other than for their own sake. I'd prefer they do it themselves, for the reasons that you bring up, but I'm not sure how much interest they have in doing it (that's why they were paying the high management fees in the first place.) After talking with my Dad, it seemed like he was paying way too much in fees to the financial manager, and then it's debatable if his stock allocation was too risky or not.
There is an argument that you (or we) have a moral obligation to prevent advisor-thieves from stealing people's money until such activity can be made illegal and such people sent to prison. However, whether or not anyone should make that an actionable imperative remains to be debated. Note that the generally accepted view at this time is that making money from people by engaging in the generally accepted practices of business is not only not objectionable but rather applauded.

JW-Retired
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Re: Help w/ parents investments

Post by JW-Retired » Tue Oct 17, 2017 9:15 am

dbr wrote:
Tue Oct 17, 2017 8:39 am
It is absolutely correct that if there is a risk here to be managed by reducing stock allocation, then that should be done now.

I differ somewhat on the risk, however. At a 3% withdrawal rate, if that should come to pass, the risk to continued retirement income is not much more or even any more for 100/0 than it is for 60/40 provided the investor does not panic and sell out when stocks go down. A 100/0 portfolio will leave much higher possible assets at death than 60/40 will. That said, the other side of the argument is that one should never take chances with the wisdom of diversity.
I don't see this portfolio as saving for heirs at all. The OP will really need that 3% withdrawal when he isn't working any more. The pension & SS only come to $40k/yr.
JW
Retired at Last

dvd7e
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Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 9:30 am

JW-Retired wrote:
Tue Oct 17, 2017 9:15 am
dbr wrote:
Tue Oct 17, 2017 8:39 am
It is absolutely correct that if there is a risk here to be managed by reducing stock allocation, then that should be done now.

I differ somewhat on the risk, however. At a 3% withdrawal rate, if that should come to pass, the risk to continued retirement income is not much more or even any more for 100/0 than it is for 60/40 provided the investor does not panic and sell out when stocks go down. A 100/0 portfolio will leave much higher possible assets at death than 60/40 will. That said, the other side of the argument is that one should never take chances with the wisdom of diversity.
I don't see this portfolio as saving for heirs at all. The OP will really need that 3% withdrawal when he isn't working any more. The pension & SS only come to $40k/yr.
JW
Or will he? It's a good point, and I more or less agree which is why I was concerned about his 100% stock allocation in the first place. But the counter argument is that if he continues to work at his business for 5-10 years and isn't withdrawing anything and remains in a high equity position and his accounts grow significantly, then when he finally starts withdrawing what he needs, it won't be a 3% withdrawal, it might be 1-2%. (I haven't actually ran any numbers here, this is just off the top of my head). At such a low withdrawal rate, why not remain with a high stock allocation?

But I tend to lean towards "better safe than sorry"

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BL
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Re: Help w/ parents investments

Post by BL » Tue Oct 17, 2017 9:40 am

If they are readers, how about some good retirement books?
How to make your money last Jane Bryant Quinn
(also good as a reference for particular topics.)

Bogleheads' Guide to Retirement

Have they asked for your advice? They are "not old" according to me (old), and they have done well.

dvd7e
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Re: Help w/ parents investments

Post by dvd7e » Tue Oct 17, 2017 9:50 am

BL wrote:
Tue Oct 17, 2017 9:40 am
If they are readers, how about some good retirement books?
How to make your money last Jane Bryant Quinn

Bogleheads' Guide to Retirement

Have they asked for your advice? They are "not old" according to me (old), and they have done well.
:D Just last night I ordered Bogleheads' Guide to Retirement and Bogleheads Guide to Investing to be shipped to them.

JW-Retired
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Re: Help w/ parents investments

Post by JW-Retired » Tue Oct 17, 2017 10:08 am

dvd7e wrote:
Tue Oct 17, 2017 9:30 am
But the counter argument is that if he continues to work at his business for 5-10 years and isn't withdrawing anything and remains in a high equity position and his accounts grow significantly, then when he finally starts withdrawing what he needs, it won't be a 3% withdrawal, it might be 1-2%. (I haven't actually ran any numbers here, this is just off the top of my head). At such a low withdrawal rate, why not remain with a high stock allocation?
Why not remain with high stocks? Because you are describing a best case scenario with a bunch of beneficial "ifs". That isn't prudent retirement planning. You need to cover non-rosy scenarios too.

What about "if", in a couple of years at the bottom of the next bear market, he has to quit working for health reasons or just because there is no business. So he would need a 6% withdrawal from his then halved portfolio.
JW
Retired at Last

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