Asset Allocation for Aging Parents

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BlueMind
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Asset Allocation for Aging Parents

Post by BlueMind » Wed May 16, 2018 11:31 am

Hello,

Long time lurker, first post :)

My parents are 65 and 72 and have recently 'semi-retired' and downsized their home, leading to about $600k in cash currently sitting in VFSTX (short term investor grade) in a taxable account at Vanguard.

This $600k is their principal retirement nest egg. Their new, smaller home, and both vehicles are paid off. They collect social security and run a small business that takes care of their annual spending needs for now.

I have given my mom a couple books to read so she can become a bit more educated on the topic before we set up an asset allocation.

What would you all recommend we place her into? A simple three fund set up with percentages that they are comfortable with? Lifestrategy fund with percentages they are comfortable with?

I am also trying to help them invest this lump sum ASAP while being mindful of regret minimization and sequence of returns issues. They won't need this capital for at least a couple years due to their SS and small business income stream, but thought maybe investing a chunk now, and then smaller chunks on a set interval over the next 6 months could help avoid regret if the market pulls back quickly.

Any other thoughts/considerations I should be thinking through as I help them through this?

Thanks!

delamer
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Re: Asset Allocation for Aging Parents

Post by delamer » Wed May 16, 2018 11:42 am

How much will the need to cover their expenses once they start drawing from the $600,000?

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vineviz
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Re: Asset Allocation for Aging Parents

Post by vineviz » Wed May 16, 2018 12:30 pm

It's my opinion that Vanguard's Target Date funds, because they offer a glide path that adjusts over time AND automatically rebalance internally), are good choices for investors who don't want to be super engaged with their portfolios.

For instance, it sounds like they are technically still a few years from needing their retirement income so maybe something like Vanguard Target Retirement 2025 Inv (VTTVX) – or not, spending on their risk tolerance and/or income needs – would be appealing to them.

Because regret works both ways (i.e. they may regret not being fully invested if markets are strong, or regret being fully invested if markets are weak) I usually recommend taking no more than 12 months to reinvest a lump sum. Moving 25% of their VFSTX now and an equal amount each quarter until the portfolio is where you want it would be a strategy that is likely to be as good as any AND easy to explain.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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siamond
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Re: Asset Allocation for Aging Parents

Post by siamond » Wed May 16, 2018 1:50 pm

Let me suggest a two-step approach.

First, don't meander, they should go straight with the simplest choice possible, invest it all in say Vanguard LifeStrategy Moderate Growth Fund (VSMGX), a fixed 60/40 allocation, following the good old sage advice from Peter Bernstein. Or maybe the Conservative Growth Fund (40/60) if they are really itchy about the vagaries of the stock market. Do not fall for the Target-Retirement marketing appeal, the glide paths of those funds are very poorly designed, and basically ignore that a typical retiree (notably a 65 years old) still has 30+ years in front of them. Plus there is just very little point in having such a glide path, as simple backtesting shows quite clearly. What matters for a retiree is sustained income for the entire retirement period.

Next, with the peace of mind that this money isn't sitting idle, once your parents finished their reading, I'd suggest you have long discussions with them about what they read, then step back, and help them discuss their primary goals and fears. Take your time about this, maybe setting a deadline of Dec 31st, or something like that. Then they can refine their choices, possibly move to a 3-funds portfolio or another LifeStrategy variant. Or just stay with the VSMGX, which frankly is a really good one, notably for a not-so-huge amount like $600k.

Overall, I'd strongly suggest to keep it very simple. And don't forget, you're a facilitator in this (which is nice of you), but the final decision has to be theirs, something they truly believe in.

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vineviz
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Re: Asset Allocation for Aging Parents

Post by vineviz » Wed May 16, 2018 2:12 pm

siamond wrote:
Wed May 16, 2018 1:50 pm
. . . invest it all in say Vanguard LifeStrategy Moderate Growth Fund (VSMGX), a fixed 60/40 allocation, following the good old sage advice from Peter Bernstein. Or maybe the Conservative Growth Fund (40/60) if they are really itchy about the vagaries of the stock market. Do not fall for the Target-Retirement marketing appeal, the glide paths of those funds are very poorly designed, and basically ignore that a typical retiree (notably a 65 years old) still has 30+ years in front of them.
The 2020 Target Retirement fund offers a 50% stock allocation, which conveniently both splits the difference between the Moderate Growth and Conservative Growth funds mentioneded and IMHO demonstrates Vanguard’s awareness that people at retirement age generally still benefit from a healthy allocation to stocks.

That said, I’d say the main thing is to find an allocation that meets their needs and to get invested in a way that makes everyone involved comfortable with the process. Whether the allocation is accomplished with individual funds, a Target Date fund, or a Life Strategy fund will ultimately not make very much difference.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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siamond
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Re: Asset Allocation for Aging Parents

Post by siamond » Wed May 16, 2018 4:30 pm

vineviz wrote:
Wed May 16, 2018 2:12 pm
siamond wrote:
Wed May 16, 2018 1:50 pm
. . . invest it all in say Vanguard LifeStrategy Moderate Growth Fund (VSMGX), a fixed 60/40 allocation, following the good old sage advice from Peter Bernstein. Or maybe the Conservative Growth Fund (40/60) if they are really itchy about the vagaries of the stock market. Do not fall for the Target-Retirement marketing appeal, the glide paths of those funds are very poorly designed, and basically ignore that a typical retiree (notably a 65 years old) still has 30+ years in front of them.
The 2020 Target Retirement fund offers a 50% stock allocation, which conveniently both splits the difference between the Moderate Growth and Conservative Growth funds mentioned and IMHO demonstrates Vanguard’s awareness that people at retirement age generally still benefit from a healthy allocation to stocks.
I agree with you that 50/50 would be an ok choice, but as a fixed allocation, not as the starting point of a glide path that will quickly move to 30/70 (a bad choice in many situations, as backtesting easily demonstrates). This isn't Vanguard's fault actually, it apparently came from overreaching (and inept if you ask me) regulations. And I'd better stop there, or moderators will get itchy! :wink:

Now if the 2020 TD fund is suggested as a quick fix until more thoughts have been put in the AA of choice, then sure, I see your point, but I would be itchy about it, as quick fixes have a tendency to stay... Hence my LifeStrategy suggestion. Just my 2 cents.

123
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Re: Asset Allocation for Aging Parents

Post by 123 » Wed May 16, 2018 5:16 pm

I'd have them go with a 50/50 stocks/bonds AA.
The closest helping hand is at the end of your own arm.

VinhoVerde
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Re: Asset Allocation for Aging Parents

Post by VinhoVerde » Thu May 17, 2018 2:59 am

If I was in this situation I'd go with Wellesley Income fund. About 36% big cap value stocks and 63% intermediate to long term quality corporate bonds. Solid record since 1970. Currently yielding more than 3%, I'd dollar cost average in over 18 months.
VinhoVerde

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