Factoring heirs into overall asset allocation

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xb7
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Factoring heirs into overall asset allocation

Post by xb7 » Sat Nov 16, 2019 1:36 pm

I've seen this topic mentioned in passing in other threads, but haven't seen any that focus on this one aspect of asset allocation.

Assume that you have more money than you're likely to spend in your lifetime (yes, always a guess, but still). And that you want to pass the bulk of the remainder to one or more heirs, who are presumably younger than you are. Thus the portion of your total assets that best-guess suggests might pass to heirs should have a more aggressive (more stock, less bond) asset allocation "glide path" than the portion set aside for your own 'consumption'.

One approach would be to make an estimate of the sizes of those two pools of money, and then separately work out what might be an appropriate glide path for each. Then either literally separate the money out and apply two different asset allocation schemes, or just calculate a hybrid asset allocation for the entire pool of money.

Or --- just stick your arm out, close one eye and sight along your thumb to an indeterminate future. Recognize that there are multiple guesstimates going on, so just somewhat arbitrarily goose the stock percentage in your allocation higher than you might otherwise.

Thoughts?

Copernicus
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Re: Factoring heirs into overall asset allocation

Post by Copernicus » Sat Nov 16, 2019 1:56 pm

Interesting approach. I don't see much risk in this if the projections are made fairly accurately. - Is this not similar to the "bucket" approach?
One could put the money for own retirement in a very conservative portfolio enough to fight inflation and have little bit of growth (maybe) - like 10/90 or 20/80 stocks bonds. The 'inheritance' bucket could be aggressive bucket like 80/20 or 100/0.
Two key considerations: (1) Would you truly have the wherewithal to sustain the same allocations when markets are melting up or down, and not switch part of the way? (2) How would you get as accurate projections of retirement income/expenses over years?

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JoeRetire
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Re: Factoring heirs into overall asset allocation

Post by JoeRetire » Sat Nov 16, 2019 1:57 pm

xb7 wrote:
Sat Nov 16, 2019 1:36 pm
Assume that you have more money than you're likely to spend in your lifetime (yes, always a guess, but still). And that you want to pass the bulk of the remainder to one or more heirs, who are presumably younger than you are.

Or --- just stick your arm out, close one eye and sight along your thumb to an indeterminate future. Recognize that there are multiple guesstimates going on, so just somewhat arbitrarily goose the stock percentage in your allocation higher than you might otherwise.
Take a guess at your own desired asset allocation.
Take a guess at an asset allocation appropriate for your heirs, based on their ages.
Consider the percent of your assets that you are likely to spend compared to the percent you are unlikely to spend.
Come up with an overall asset allocation that is appropriate for your overall portfolio.

Precision isn't needed, just do your best and don't worry about it.
Don't be a lemming.

stan1
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Re: Factoring heirs into overall asset allocation

Post by stan1 » Sat Nov 16, 2019 2:13 pm

Sure, once you have more than "enough" you may decide to do multiple things to benefit your heirs. You could choose a riskier asset allocation. You could gift them money now, pay for family vacations, pay for grandchildren's education expenses, or similar. You could convert Traditional IRAs to Roth IRAs (effectively paying taxes for your heirs). Many more I could think of that aren't illegal.

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Steelersfan
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Re: Factoring heirs into overall asset allocation

Post by Steelersfan » Sat Nov 16, 2019 2:33 pm

If I take my "Age in bonds" AA suggestion (30%/70%) and what I think would be a good AA for my heirs (80%/20%) and average them, I get 57%/43%. That's very close to the AA I have, which I decided on without doing that calculation.

inbox788
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Re: Factoring heirs into overall asset allocation

Post by inbox788 » Sat Nov 16, 2019 6:02 pm

xb7 wrote:
Sat Nov 16, 2019 1:36 pm
One approach would be to make an estimate of the sizes of those two pools of money, and then separately work out what might be an appropriate glide path for each.
What you haven't considered is the glidepath of the heirs themselves and how they're tracking and whether your pot mixes with their pot. Are you leaving behind whatever is left (equity account) or a specific amount (life insurance)? Unless you gift now and along the way, the timing of receiving the pot makes it difficult for the heir to appropriately take into consideration any future windfall and optimize their own glidepath.

FWIW, I use 100% equities in my DAF since I assume it's my lifetime and the charity lifetime is longer if any is left behind.

Practically speaking, I wouldn't worry about glidepath much and keep it about 50/50 (or 60/40 vs 40/60) as a combined AA that's probably a good compromise for all involved and let them take care of the own AA their own way without involving you. If you live longer, you might leave behind a smaller inheritance, but the heirs will be older too, and I assume they'll be less likely to need it. At that point, you might be thinking about the next generation down.

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xb7
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Re: Factoring heirs into overall asset allocation

Post by xb7 » Sat Nov 16, 2019 6:44 pm

inbox788 wrote:
Sat Nov 16, 2019 6:02 pm
xb7 wrote:
Sat Nov 16, 2019 1:36 pm
One approach would be to make an estimate of the sizes of those two pools of money, and then separately work out what might be an appropriate glide path for each.
What you haven't considered is the glidepath of the heirs themselves and how they're tracking and whether your pot mixes with their pot. Are you leaving behind whatever is left (equity account) or a specific amount (life insurance)? Unless you gift now and along the way, the timing of receiving the pot makes it difficult for the heir to appropriately take into consideration any future windfall and optimize their own glidepath.
Perhaps I didn't communicate well --- by "appropriate glide path for each", one of the "each" was ... "the heirs themselves". Indeed, one of the many variables is what is appropriate as an asset allocation glide path for them. I don't pretend that I can get this stuff just right (!), but I do think that it's helpful to factor in the heirs this way.

My own approach on this is a bit fuzzy, just because of all of the variables. We know that when you have a number of factors to estimate that the magnitude of potential error is very large. Thus for me indeed, it comes down to just biasing things a bit more towards stocks than bonds. But I do still use a glide path, just nothing so bond-heavy as Vanguard does in their target-date fund glide path. And partly for this reason.

I realize that everyone who is interested in this topic won't form instant harmonious and complete consensus on "an answer" here (or anywhere). Just interested in how others think about it! (so thanks all for the input)

inbox788
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Re: Factoring heirs into overall asset allocation

Post by inbox788 » Sat Nov 16, 2019 7:28 pm

xb7 wrote:
Sat Nov 16, 2019 6:44 pm
Perhaps I didn't communicate well --- by "appropriate glide path for each", one of the "each" was ... "the heirs themselves". Indeed, one of the many variables is what is appropriate as an asset allocation glide path for them. I don't pretend that I can get this stuff just right (!), but I do think that it's helpful to factor in the heirs this way.
Upon re-reading my response, I'm also not being clear. I was trying to point out that the heirs themselves has their own pots and glidepath they set for themselves that's separate and may be different than what you would do with your pot intended for them. A third pot in the picture. You're suggesting taking your big pot and splitting it into "pot for self" and "pot for heirs" (or multiple pots for hers). Your heirs themselves have pots of their own, and it would help them if they knew or had certainty about what they were going to inherit. The most certainty would come from immediate receiving a big gift. When you were younger, would you have invested differently if you had an extra $500k cash gift? I would have been more aggressive. But if instead, you had a rich parent or uncle that promised you a big inheritance, but wasn't certain and you didn't know if it was in 10 years or 30 years or if it would ever come, would it have changed your investment?

As much as you want to factor in for the heirs, do the heirs know about their potential inheritance, and should they be factoring that possibility into their own planning? Anyway, you wind up second guessing each other and possibly being overly conservative or aggressive.

Personally, I've given up on the bond tent idea, and if sequence of return hits my portfolio, I'm not going to suffer, but my heirs and charitable contributions will. They will also benefit from expected higher returns. In any case, this is all for extra (I expect heirs will do just fine without it) and not for cases where moneys truly needed like taking care of a special needs child.

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siamond
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Re: Factoring heirs into overall asset allocation

Post by siamond » Sat Nov 16, 2019 8:51 pm

If you have more money than you're likely to spend in your lifetime and you're actively planning for a sizable bequest, then ANY asset allocation will be fine for your needs in your lifetime, whether it is conservative or aggressive. Therefore you should define your asset allocation based on the expected horizon for the portfolio, which is the lifetime of your heirs. Or possibly grand-heirs if some money skips a generation. Glide paths don't make a whole lot of sense in general imho, but in this case, they are squarely indefensible.

OP, you'd better make it simple, choose something suitable for a looong time horizon (e.g. 80% stocks, 20% bonds) and stick with a fixed asset allocation. And when you heirs receive their bequest, they'll do whatever they want, up to them. That is my plan, by the way.

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Re: Factoring heirs into overall asset allocation

Post by Dandy » Sun Nov 17, 2019 8:36 am

We are fortunate to be in a "we have enough" assets situation. I am a relatively conservative investor with an overall allocation of about 43/57. Our pension and SS income comes close to our normal expenses so my RMD is mostly not needed by us.

Rather than increase our allocation we decided to gift "early inheritance" to our two children and their spouses. And we will probably add our two grandchildren next year. These tax free gifts to our heirs now is valuable to them now instead of them waiting, hopefully for a decade or 2, for inheritance. Also, it allows us to see them enjoy a bit of extra income and less stress while we are alive.

I still feel that they will come into a nice inheritance at some future point. I don't think we are endangering our finances and not subjecting our portfolio to risks that we are not comfortable with.

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RickBoglehead
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Re: Factoring heirs into overall asset allocation

Post by RickBoglehead » Sun Nov 17, 2019 8:42 am

Unless you are discussing this with heirs, and amounts, then do whatever you want.

For example, we have 529s for future grandchildren set at 100% Total Stock Market. 18+ years away, except for one step grandchild that is 10 (marriage last year). 529 current balance could find 3 or more grandkids. Even if market dips, 8 years for one is non-issue. Maximize growth.
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