Managing Parent’s Money in Retirement

[renata ricotta]

TL;DR: Where to invest a retirement stash that is currently in cash when retirement is <4 years away?

Background:

My dad is coming up on traditional retirement age and has asked me to take over management of his financial life because managing his money has always been a source of anxiety for him, and he wants to, as he puts it, “enjoy his retirement by acting like a carefree ten-year-old.” Basically, he wants a monthly cash allowance and to never have to think about his money again. I am happy to do this, and because we have a really good relationship and I trust that he trusts me to handle it completely, I’m not worried about it from a family relationship perspective.

He plans to work until 66.5 (in less than four years; he is about to turn 63), even though he could retire now by my calculations, because he feels a sense of responsibility to leave my mom with the maximum widow’s SS benefit assuming she outlives him. This seems silly to me, but it is what it is and I doubt I’ll be able to talk him out of it. For various reasons, he and my mom run their financial lives separately; he covers the majority of household expenses from his income and funds retirement, and her earnings are essentially for her discretionary spending. Again, not going to even try to talk them out of this because it seems to work for them. Therefore, the numbers below reflect only his income, savings, and spending on what are "his" expenses. 

He is naturally very mustachian - he doesn't have a car (he walks, takes public transportation, bums rides from my brother, and  hitchhikes(!) to get around). When he retires and doesn't have to have a cell phone anymore, he wants to switch to a dumb phone and put as few minutes on it as possible and leaving it at home as often as possible. He wears clothes and shoes until they are literally held together by duct tape, and walks around the neighborhood taking everybody's old kitchen scraps to feed his chickens for free, etc. So, his spending is pretty dialed in already.

In his savings to date, he has been risk averse - his investment strategy has been to not lose any money, which he has done, rather than to maximize gains. He has done this by whenever the S&P 500 hits a record high, he pulls out all of his money and puts it in a money market account and only buys again when it's substantially less than what he sold for. This means he bought a lot in 2008, but then 2-3 years ago when the market hit a high he put it in a money market account. Because the market kept climbing and hasn't been back to that point, he's been in essentially cash ever since, including new money he contributes every paycheck. As I take over, this seems to clearly be the thing we need to fix. If it were me, with decades and decades to let my money sit, I would put it all in VTSAX (although it would pain me a little bit to do it all at the time we are again at a record high). With him, I think he needs a somewhat more conservative allocation, but I'm not sure quite what, and am not quite sure how to spread that out - dollar cost averaging or lump sum? At the very least, his new money should be invested.

Numbers:

[This isn't a case study because his spending is pretty low already and he isn't asking for help on trimming fat. I did use the Case Study spreadsheet to come up with the numbers below]

Annual spending: $28,441 (this used to be higher, which is why his retirement savings aren't higher, because all of us kids are gradually phasing into adult independence; my youngest sister is really the only one who is still being supported, and she's in college).

Roth 401(k): $236,782.35 in a money market fund

Expected Annual Pension Payment: $31,560

Expected Annual Social Security Payment: $24,612

Crucially, social security and pension alone more than cover his annual expenses - he'll probably continue saving after retirement. This makes the problem of what to do with his 401(k) a little less urgent, since it's technically just gravy. Even so, it seems crazy to just let it sit in cash for the rest of his life. Realistically, it will probably be used to cover my mom's "discretionary spending" after she retires in 10 years and stops funding that herself from her paychecks, and any household emergencies. He's also very generous and would like the flexibility to help out my siblings financially if they get into a bind (for example, he gave my deadbeat brother a car loan a couple years ago).   

Where would you put the 401(k) money?

[kite]

If his pension ends when he dies, his strategy to work longer to give his spouse a larger SS benefit is solid.  Don't try to dissuade him. 
Recommendations for allocating your retirement money (equities, fixed-income or cash equivalent) are dependent upon how soon you need the money.  The fact that retirement is 4 years from now doesn't mean they'll pull it out in 4 years.  It means you need to know their life expectancy to best set their asset allocations. 
I agree with you, that it shouldn't all be in money market funds.  But the other side of the question is sleeping soundly without worrying that you'll go broke.  I have a far higher risk tolerance than my spouse and the difference is evident in the performance and balances of our respective retirement accounts.  As part of a couple, I use this to my advantage and rather than keep any share of my own assets in cash, I invest nearly all of it aggressively.  At the end of the day, it's all 'ours' anyway.  Which leads to the next thing you need to know -- what does she have?
With that knowledge, you can start to structure his assets.  You won't be putting all of it into one thing, so it's not going to be a lump sum for the entire balance.  You can ballpark with 100 minus his age and put that % into equity index fund in one shot.  But ideally, you are evaluating their total assets and their respective life expectancies and his comfort level. 
I'm going to address what you didn't mention.....
It's vital to consider disability.  Not if, but when.  What do they want out of the rest of their lives and how will they pay for it when they aren't physically able to be frugal ninjas who walk everywhere and collect free scraps for their chickens?  The cold hard truth is that his entire savings would cover a little over a year in a dementia ward of a nursing home. If they spend it on one of them, the other has a much smaller nest egg (this is where the bigger SS check matters).  Ideally, he works as long as he wants.  When he retires, his expenses are covered by his Pension and he saves *ALL* of his SS in a way that lets him sleep soundly  With experience and a comfort level in index funds he can continue socking perhaps a third of continued savings there (possibly into her RothIRA). 
Lastly......
His retirement savings is too underfunded for any of his children to be looking to him for help getting out of a bind.  Get yourselves out of binds, or better yet, don't get into them.     

[renata ricotta]

Thanks, kite (and as noted, I am not trying to dissuade him from anything, just help him make informed decisions about how to set things up and then executing the plan for him). And like you said, his annual expenses are less than his pension payments, so I expect him to be saving most of his SS payments for quite a while and not drawing on the 401(k). That's a good idea to put the excess in a Roth for my mom. She hasn't asked me to look into her retirement savings, but I believe they are minimal as she was a stay-at-home mom until about 10 years ago (I would guess under $30k).

His pension includes payments to a surviving spouse for up to 10 years after he dies, as well as good health insurance (the premiums for the post-retirement plan are included in his annual expense number). Although I appreciate that many pension funds didn't turn out to be what they were cracked up to be, his employer is famous for being both extremely fiscally conservative and cash-rich, so I'm not too worried about that. As for disability risks after health insurance (and possibly Medicaid?) what do you recommend? I believe he can purchase extra long-term care insurance through his post-retirement plan, but I'd have to look into the details.

He also has an unusually good family and social support system, so I think he's on the low end of risk for needing to pay top dollar for full care (average in his state for full-time private nursing home care looks to be around $100k/year). My mom is in great health and 10 years younger than him, he's been in the same tight-knit church congregation for literally his entire life, and he has six kids (five of whom live close and wouldn't hesitate to take him in or spend lots of time and money on his care). He also has a paid-off home (worth about $350k) that is another asset that could be drawn on if something pretty drastic was needed.

As for us kids, I'm certainly not planning to get myself in a bind (at 30, my 401(k) balance is around what his is now), and my siblings are all set up to be fine, but it's his money. Basically, he wants to be able to ask me "can I afford to spend an extra $1000 this month" and have me say yes or no, regardless of whether that's on a new couch or a plane ticket or giving it to a kid in need or donating it to charity or burning it.

[Bernard]

Put all of it into VTSAX. As you pointed out, he doesn't need any of that money once pension and SS are available to him. And if he needs "some" of the money, he can pull it out. I'd try to turn the $236K into $500K if at all possible.

[robartsd]

Sounds like planning for your mom's needs after his death is the most important thing. There is a very good chance that she will outlive him by more than the 10 years his pension will pay out. I would ask them if you can work on a combined plan for both of them. I think your dad wants you to tell him he can spend $x per month without risking her long term financial health. As x is already likely more than current spending he might not care what x is (or even spend it after you tell him what x is), but he wants to be free to spend it without having to think about future consequences.

As a worst case scenario, I'd make the plan based on your dad dying immediately and your mom living into her 90's (or later). Each time you review the plan, your conservative estimates of market returns and the fact that your dad out lived the prior plan should easily allow you to increase the spending allowance without additional savings.

I doubt that your dad's plan to maximize the SS benefit is ideal (unless he is planning on delaying taking SS until age 70). The way the SS formula works, his contributions are likely having a much smaller impact than the impact of delaying taking benefits has.

Planning her SS benefit is a bit more complicated. If benefits on her own record would exceed the benefit she would get based on his record (50% of the benefit he would receive at the same age), she likely should apply for retirement benefits at age 62 to maximize the benefits received before she switches to survivor benefits (100% of benefit he was receiving if she is at least full retirement age when she starts taking it). If he dies before her full retirement age, she can delay switching to the survivor benefit if she is taking a retirement benefit on her own record, but if her retirement benefit is based on his record it will switch automatically to the survivor benefit upon his death (permanently reducing the survivor benefit amount if she is not yet full retirement age).

[cchrissyy]

Does he consider it a mistake that he pulled the money out of the market and got priced out from coming back in?  or does he stand by that decision?

if he still feels it was the right decision, then i think his money market needs to go in CDs or bonds. just to beat the cash return and not fall behind inflation as much as it has been

if he feels willing to have money in the market through the next ups and downs, I agree you should do that. the relevant time horizon isn't his 4 years working, it's the fact nobody expects to touch this money unless/until he's passed away and 10 years of pension have played out.

[renata ricotta]

Does he consider it a mistake that he pulled the money out of the market and got priced out from coming back in?  or does he stand by that decision?

if he still feels it was the right decision, then i think his money market needs to go in CDs or bonds. just to beat the cash return and not fall behind inflation as much as it has been

if he feels willing to have money in the market through the next ups and downs, I agree you should do that. the relevant time horizon isn't his 4 years working, it's the fact nobody expects to touch this money unless/until he's passed away and 10 years of pension have played out.

He stands by it, but not because he thinks it was the only reasonable way to go, but because it did help him sleep at night and as he puts it, he did the best he could with how he understands the market. A big reason he wants me to take over is because he acknowledges there are better ways to do it, but it would make him too anxious or stressed to try to put that into practice himself. He would rather outsource it and not ever think about it again, and he'll trust me to just take care of it (again, based on my knowledge of my dad, I believe him).

I think I'm going to propose:

Immediately changing his current contributions to be in 100% VTSAX;

Invest 37% of the 401(k) portfolio in a Vanguard total bond fund;

Invest the 63% in VTSAX (possibly in monthly or bi-monthly chunks over the next year, so that the transition isn't too shocking for him and so if the market goes down he'll have cash to invest -- if it were me I would lump sum it but I think this will make more sense to him);

Get him to increase his contributions in the meantime - he's currently only up to the match and has tons of tax-advantaged space left, it doesn't make sense to have his extra money sitting around in a checking account.

[renata ricotta]

Reviving a dead thread for an update! My dad has been taking banked sick leave for the past month due to the covid crisis. His management asked him to come back to work this morning, although he is 63 and has preexisting conditions. After talking it through all weekend and looking at the numbers fifty different ways, he went into work today only to inform them he is retiring. He'll take 3 weeks of vacation and then be done.

In terms of numbers, this is what we're doing:

- He will take the pension option that starts at about 50% lower, but increases 4% per year. It lasts through his death AND my mom's death, and 10 years to a beneficiary after that. The 4% will break even in about 14 years (according to the social security administration, my mom's life expectancy is approximately 30 years from now, so this definitely seems like the right long-term decision to me).

- Starting with this low amount, his pension benefit will currently be about $17,000/year, leaving a budget shortfall of $11,000 if he doesn't start taking any social security or drawing down on his 401(k) (which I have invested and am managing as noted above). We agreed that I would make up the difference for the next three years until he is 66.5, when he will start drawing on social security. I am more than happy to do this and can easily afford to give him $33,000 outright, which seems like a very cheap way to give my dad three years of freedom and keep him much much safer from covid. Plus, the difference between taking SS now and taking it when he's 66.5 is about $500 per month through the life of a surviving spouse. If my mom's life expectancy of 30 more years is accurate, that's $162k not adjusting for inflation, so $33k now for $162k later seems like an easy call.

- Even conservatively estimating that his spending increases at 4% per year, but that COLA increases to social security only increase at 1.6% per year, he wouldn't have to start drawing on his 401(k) to make up an inflation difference for almost 20 years. Instead, I think that when my mom retires in 10 years, small 401(k) withdrawals should be used to replace her discretionary spending currently provided by her paychecks [no RMDs because it is a Roth]. cFIREsim estimates a 100% success rate if she withdraws $10k per year, and 95% if she takes $15k per year (remember, all essential expenses like housing, food, taxes, clothing, basic cars, and insurance are covered by my dad's spending budget, so this is for "extras"). She will also have her own (probably small) 401(k) and social security income.

The summary is that long-term, he should come out ahead and probably will save money every year  after 66.5 in the event of (additional) unexpected disasters. He may or may not pay me back the $33k I am fronting in the short term while his pension benefit is at its lowest; he probably could, but I don't really care either way. It's mostly a cash flow thing to get him through the lower pension payments and to facilitate deferring social security.

[Dicey]

Nice update. Good on you!

[MDM]

I am more than happy to do this and can easily afford to give him $33,000 outright....

To avoid the need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return | Internal Revenue Service, don't give more than $15,000/yr to him.

Appears your dad has no traditional (IRA, 401k, etc.) accounts.  If your mom has traditional accounts, they should look at how much and when traditional to Roth conversions make sense.

Open Social Security: Free, Open-Source Social Security Calculator might interest them.  It analyzes SS benefit start dates for a couple.

Good luck!

[renata ricotta]

I am more than happy to do this and can easily afford to give him $33,000 outright....

To avoid the need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return | Internal Revenue Service, don't give more than $15,000/yr to him.

Appears your dad has no traditional (IRA, 401k, etc.) accounts.  If your mom has traditional accounts, they should look at how much and when traditional to Roth conversions make sense.

Open Social Security: Free, Open-Source Social Security Calculator might interest them.  It analyzes SS benefit start dates for a couple.

Good luck!

Thanks! Agree, I won't give him $33k outright (especially because he will stick anything I give him in a checking account, which isn't a super efficient place to park it). That's just the total amount. I'll be giving him $900ish a month and guaranteeing I'll keep that up until he starts drawing on SS, which will be under the reporting threshold for each year.

Good point about my mom's 401(k) - that is the only traditional one. She hasn't yet asked me for help with her finances, but I'll make the suggestion if she does.

[frugaldrummer]

I don’t see where you have accounted for your mom’s social security benefit when she retires - remember she will get 50% of your dad’s benefit amount.( When he dies that goes up to 70%).  Are you saying she would need $10k per year on top of her social security benefit to replace her discretionary spending?

Also heads up about how you dispense funds. He wants a monthly check and to be a carefree ten year old. But there are episodic expenses beyond monthly basics, like property taxes and house repairs, insurance payments etc. Ten year olds aren’t great about saving for those things. So rather than just dividing his income into 12 equal installments, hold back the amount needed for these episodic expenses and give him a monthly check for the rest.

Also - evaluate the house for possible future repair needs. My current house is 27 years old. In budgeting for my retirement, I also need to account for:
Repair work that needs to be done including replacing wood patio awnings and ultimately a kitchen redo (for electrical and other reasons not cosmetic). Fences between my yard and the neighbors need redoing. Flooring/carpet will eventually need replacing.  My tile roof is still good but will need replacing at some point in my retirement. My two story house needs exterior painting eventually (not a job I can do myself). It all adds up to a considerable amount that I will have to budget for in my retirement planning.

Also - your dad is retiring young - what will he be doing with himself in retirement once this pandemic has resolved? Does he have a solid social circle and hobbies? Watch out for depression with this unplanned retirement.

[TravelStache]

With respect to gifting, the $15K is per person. You can gift $15K to your father and $15K to your mother without having to worry about gift tax returns.  To the extent you are married, your spouse can also gift $15k to each of your parents.