Help with my mother's portfolio

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Kanefa
Posts: 12
Joined: Sat Sep 16, 2017 2:36 pm

Help with my mother's portfolio

Post by Kanefa » Mon Jan 08, 2018 10:13 pm

For the past decade my mother has saved and allocated very aggressively to make up for lost time. However, nearing retirement she needs to reallocate. She plans to retire in a couple of years and is 100% invested in stocks.

Emergency fund: 2 months
Debt: none
Tax Filing Status: Single
Tax Rate: 15% Federal 00% State
State: Texas
Age: 70
Social Security: $2,300 monthly
Pension: $350 month
Total invested funds: $315,000

Current retirement assets:

Her 401k
Company matches 1st 5%
04.8% FIAM INX TD 2025 V (0.10%)
20.2% FID GROWTH CO POOL (0.43%)
13.6% FID CONTRAFUND POOL (0.43%)
06.9% DODGE & COX INTL STK (DODFX) (0.64%)
12.2% TRP SM CAP VALUE I (PRVIX) (0.78%)
10.5% VANG WINDSOR II ADM (VWNAX) (0.25%)
17.1% WF DISCOVERY R6 (WFDRX) (0.77%)

Her Roth IRA at Vanguard
14.7% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

New annual Contributions
$15k her 401k (+$750 employer matching contribution)

Available funds
Funds available in her 401k
Fidelity Total Market Index Fund - Institutional Class (FSKTX) (0.03%)
BlackRock MSCI ACWI ex-US IMI Index Non-Lendable Fund R (ACWI EX US IMI NL R) (0.12%)
Managed Income Portfolio II Class 2 (MIP II CL 2) (0.47%)
BlackRock US Debt Index Non-Lendable Fund Class F (BTC US DEBT INDEX) (0.07%)
Prudential Core Plus Bond Fund Unit Class 6 (PRU CORE PL BD CL 6) (0.19%)
FIAM Index Target Date 2005 to 2060 Commingled Pool Class V (FIAM INX TD 2005 to 2060 V) (0.10%)
FIAM Index Target Date Income Commingled Pool Class V (FIAM INX TD INCOME V) (0.10%)

Questions:
1. My primary goal is to identify an appropriate asset allocation for her.
2. Next, help selecting funds that fit this allocation.
3. Finally, withdrawal strategies would be appreciated. We are both unsure, if $300,000 is enough.
Last edited by Kanefa on Fri Jan 26, 2018 6:48 pm, edited 1 time in total.

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dwickenh
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Location: Illinois

Re: Help with my mother's portfolio

Post by dwickenh » Mon Jan 08, 2018 10:17 pm

Kanefa,

Can you find out how much monthly/yearly income she needs after she retires?
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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FiveK
Posts: 5713
Joined: Sun Mar 16, 2014 2:43 pm

Re: Help with my mother's portfolio

Post by FiveK » Mon Jan 08, 2018 10:24 pm

dwickenh wrote:
Mon Jan 08, 2018 10:17 pm
Can you find out how much monthly/yearly income she needs after she retires?
+1

That answer is needed before answering your question #3, after which #1 and #2 can be addressed.

Kanefa
Posts: 12
Joined: Sat Sep 16, 2017 2:36 pm

Re: Help with my mother's portfolio

Post by Kanefa » Mon Jan 08, 2018 10:38 pm

dwickenh,

She says she could make $3,500 work. Her "number" is $4,000 a month.

Kanefa
Posts: 12
Joined: Sat Sep 16, 2017 2:36 pm

Re: Help with my mother's portfolio

Post by Kanefa » Fri Jan 26, 2018 6:46 pm

Not sure how to proceed, so I read The Boglehead's Guide to Investing. The book was very helpful and below is what I worked out.

I've selected a 60% stock / 40% bond allocation for my mother. This is a compromise as she would like to stay aggressive. I do not think she will handle a down market well, so I am pushing her to be more conservative.

I kept things simple and picked the following funds. If you have more appropriate fund suggestions for retirement that would be helpful.
60% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) 6.69% (since inception)
40% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) 4.2% (since inception)

Next, I estimate the funds's future returns. Total estimated returns are 5.69%.
60% VTSAX * 6.69% (since inception) = 4.01%
40% VBTLX * 4.2% (since inception) = 1.68%

Finally, I plan a withdrawal strategy. I estimate 3% inflation, and knock 3% off the top. This leaves her expected return at 2.69%. I then calculate how much she can withdrawal without touching her principal.
315,000 (principal) * 2.69% (estimated returns) = $8,474 year 1 (will adjust for inflation in future years)
$8,474 / 12 = $706 monthly

This leaves her with $3,366 per month. This is in the ballpark and she is healthy and willing to work part-time for a few years.
$2,300 (social security) + $350 (pension) + $706 (withdrawal)

Personally, I am in the accumulation phase, so it has been a challenge to think about my mother's retirement. I would really appreciate help vetting the above plan from people closer to that phase of life. In addition, there is one area that I would like assistance. My concern is my mother wants to be too aggressive. What do you think an appropriate asset allocation should be for her based on her financials.

TheAncientOne
Posts: 140
Joined: Wed Jul 19, 2017 8:53 pm

Re: Help with my mother's portfolio

Post by TheAncientOne » Fri Jan 26, 2018 6:55 pm

Your mom is pretty close to $4K/month already. If we use a 4% withdrawal rate on $315K, let's call that $12K, or $1K/month. Combine that with her SS and pension, she's just about there. If she's willing and able to work a couple more years as you suggest, she should reach that number.

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FiveK
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Re: Help with my mother's portfolio

Post by FiveK » Fri Jan 26, 2018 7:29 pm

Kanefa wrote:
Fri Jan 26, 2018 6:46 pm
60% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
40% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
A very reasonable asset allocation.
I then calculate how much she can withdrawal without touching her principal.
315,000 (principal) * 2.69% (estimated returns) = $8,474 year 1 (will adjust for inflation in future years)
This is probably too conservative.

TAO mentions 4%. That comes from Determining withdrawal rates using historical data and Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable.
The latter article is often called the "Trinity study" because the authors were professors of finance at Trinity University.

See also Trinity study update - Bogleheads and Safe withdrawal rates - Bogleheads for more on this.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Help with my mother's portfolio

Post by dbr » Fri Jan 26, 2018 8:30 pm

FiveK wrote:
Fri Jan 26, 2018 7:29 pm
Kanefa wrote:
Fri Jan 26, 2018 6:46 pm
60% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
40% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
A very reasonable asset allocation.
I then calculate how much she can withdrawal without touching her principal.
315,000 (principal) * 2.69% (estimated returns) = $8,474 year 1 (will adjust for inflation in future years)
This is probably too conservative.

TAO mentions 4%. That comes from Determining withdrawal rates using historical data and Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable.
The latter article is often called the "Trinity study" because the authors were professors of finance at Trinity University.

See also Trinity study update - Bogleheads and Safe withdrawal rates - Bogleheads for more on this.
Yes, I was going to refer to the same methodologies. However, note the OP wants to "preserve principal" and for that, in real dollars, the safe withdrawal rate falls back to 2.5% or so. It might be less if pessimistic estimates of return are believed. The OP may not be far off but for the wrong reasons. A different lesson from those studies is how variable the actual outcome can be. www.firecalc.com and similar calculators embody the Bengen and Trinity methodology.

Kanefa
Posts: 12
Joined: Sat Sep 16, 2017 2:36 pm

Re: Help with my mother's portfolio

Post by Kanefa » Sat Jan 27, 2018 11:46 am

Thanks for the links. I have heard of the 4% rule, and it is interesting to see where that came from.

The reason I mentioned preserving principal was to allow for major hiccups, say medical expenses. Maybe I was being too conservative?

Looks like my mother doesn't need my help. It seems her budget, that she pulled out of thin air falls in line with the 4% rule. With a 60/40 allocation her portfolio success rate is right around 95 - 98%.

:sharebeer

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

Re: Help with my mother's portfolio

Post by dbr » Sat Jan 27, 2018 1:01 pm

Kanefa wrote:
Sat Jan 27, 2018 11:46 am
Thanks for the links. I have heard of the 4% rule, and it is interesting to see where that came from.

The reason I mentioned preserving principal was to allow for major hiccups, say medical expenses. Maybe I was being too conservative?

Looks like my mother doesn't need my help. It seems her budget, that she pulled out of thin air falls in line with the 4% rule. With a 60/40 allocation her portfolio success rate is right around 95 - 98%.

:sharebeer
I would recommend two things re hiccups. One is to allow a contingency above "most likely" level of spending -- 10% to 25% maybe. Secondly I would test what the damage would be if a single major expenditure should occur due to some disaster --$10k, $25K, $50K depending on the scope of the individual situation.

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