I need help to advise my parents on AA to be ready to retire

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Sam2
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I need help to advise my parents on AA to be ready to retire

Post by Sam2 »

I need help to advise my parents on AA to prepare for retirement.
My father is planning to retire at 62 in 2011, because of health issues and my mother is planning to work part time until 65 (she is 55 now) and also she will receive a small government pension and medical insurance until 65.


My parents have almost $2M at Vanguard in cash, which is 57% of the portfolio. 20% in TIPS and BND in IRA/401K, 10% in Muni in taxable account and 10% in equities (VTI plus some individual stocks).

I was planning to advise them to have $500k in cash for emergency and medical needs and split the rest into 60% in BND and 40% in VTI.

Any comments?

Thank you,

Sam
DSInvestor
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Post by DSInvestor »

The asset allocation needs to be your parent's decision. Only they can determine how much risk they're willing to take. A 40/60 stock/bond AA seems reasonable. Their stocks could fall 50% in a bear market which would take a 3M portfolio down to 2.4M.

Do they have any debt, mortgage etc? It may make sense to pay off the mortgage ahead of retirement if they have one (assuming they will stay in the same home in retirement).

If the cash is a taxable account, your parents could boost tax advantaged space to hold their bond allocation by maxing out all workplace plans with catchup and making IRA contributions while they're working.

New Contributions:
His 401k: 22K (with catchup)
Her 401k/403b/457: 22K (with catchup)
His IRA: 6K
Her IRA: 6K
This would add 56K of tax advantaged space per year until your dad retires in 2011. In three years, they would have an extra 168K to hold their fixed income allocation.

After dad retires, your mom's income could allow her to contribute:
Her 401k/403b/457: 22K (or whatever the limit will be later)
Her IRA: 6K
His IRA: 6K (spousal IRA).
This could be another 34K per year for another 10 yrs.

If you the taxable account is is positioned for tax efficiency, your parents could be in a very low tax bracket after your dad retires and mom makes large retirement contributions. There may be some opportunities to convert some IRA assets to ROTH-IRA for little or no tax. If they slowly convert their IRA assets to ROTH before they turn 70.5, they'd avoid RMD (which applies for TradIRA, Trad 401k, 403b). With taxable assets, there's less need to draw down on IRA money so it's best to let IRA money compound in tax free or tax deferred accounts.

For more information on tax efficiency, please see Principles of Tax-Efficient Fund Placement on the Bogleheads Wiki.

You seem to be leaning towards ETFs. Note that if the tax advantaged accounts are not big enough to hold the entire bond allocation, you should fill tax advantaged with bonds and complete the bond allocation in taxable with tax exempt bonds. Unfortunately, Vanguard doesn't offer ETF shares for their tax exempt bond funds. Bond ETFs have had problems with large discount/premium to NAV during the credit crisis in 2008 and it may be better to use admiral shares of open ended vanguard mutual funds instead. Ishares has some tax exempt bond ETFs but their expense ratios are higher than Vanguard's investor shares.

edit: sorry I missed the point that 2M was 57% of portfolio. I have adjusted the retirement portfolio from 1.5M to 3M above.
Last edited by DSInvestor on Thu Jun 18, 2009 2:35 pm, edited 3 times in total.
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preserve
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Post by preserve »

DSInvestor wrote:The asset allocation needs to be your parent's decision.
Yes, absolutely. They will listen to you, but they won't. You just have to go with it.
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Post by pkcrafter »

The total portfolio is around 3.7M? The AA is partly dependent on the withdrawal rate. How much will your parents be withdrawing annually when your father retires?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Sam2
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Post by Sam2 »

My parents plan to withdraw 130K to 150K a year.

Sam
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Re: I need help to advise my parents on AA to be ready to re

Post by YDNAL »

Sam2 wrote:My parents have almost $2M at Vanguard in cash, which is 57% of the portfolio.
Sam,

No disrespect, but with a $3.508M portfolio, your folks need a *fee only* financial advisor to help them put together a comprehensive plan that includes investment options for the portfolio, tax planning, estate planning, etc.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Sam2
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Re: I need help to advise my parents on AA to be ready to re

Post by Sam2 »

YDNAL wrote:
Sam2 wrote:My parents have almost $2M at Vanguard in cash, which is 57% of the portfolio.
Sam,

No disrespect, but with a $3.508M portfolio, your folks need a *fee only* financial advisor to help them put together a comprehensive plan that includes investment options for the portfolio, tax planning, estate planning, etc.
I agree and I told them to do it, but my father had a bad experience.
Any suggestion how to look up one in the San Francisco Bay Area?

Sam
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grabiner
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Re: I need help to advise my parents on AA to be ready to re

Post by grabiner »

Sam2 wrote:
YDNAL wrote:
Sam2 wrote:My parents have almost $2M at Vanguard in cash, which is 57% of the portfolio.
Sam,

No disrespect, but with a $3.508M portfolio, your folks need a *fee only* financial advisor to help them put together a comprehensive plan that includes investment options for the portfolio, tax planning, estate planning, etc.
I agree and I told them to do it, but my father had a bad experience.
Any suggestion how to look up one in the San Francisco Bay Area?

Sam
Contact Vanguard; your parents should be able to get a financial plan through Vanguard, and as Flagship members, they should be able to get an initial plan for free.

David
Wiki David Grabiner
YDNAL
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Re: I need help to advise my parents on AA to be ready to re

Post by YDNAL »

Sam2 wrote:
YDNAL wrote:
Sam2 wrote:My parents have almost $2M at Vanguard in cash, which is 57% of the portfolio.
Sam,

No disrespect, but with a $3.508M portfolio, your folks need a *fee only* financial advisor to help them put together a comprehensive plan that includes investment options for the portfolio, tax planning, estate planning, etc.
I agree and I told them to do it, but my father had a bad experience.
Any suggestion how to look up one in the San Francisco Bay Area?

Sam
Sam,

Look HERE.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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