Author Topic: My retired parents have finally listened! But is it too late to invest?  (Read 1666 times)

bowk

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Morning to all of the mustachians reading this.

I am a long time reader of MMM but a newbie mustachianista. Iíve finally sorted out my finances and this has inspired my retired 70-ish year old parents to do the same. For a bit of context they have been frugal mustachians for their entire lives, built quite the nest egg, retired and are still living frugally and loving it.

But their money is in cash savings accounts yielding on average 1% interest. This makes me feel sick! I think they need to get their money out of cash and into something a little higher yielding! However I am no expert and am looking for some help here about what their options are. I suppose some of this depends on what they want to do with the money (just to make clear I think they should spend it on a worthwhile venture/charity/high quality care for themselves as they become less able) and how long they live.

Any advice on what they could/should do and what their options are? Are index trackers a viable option considering this isnít going to be a long term investment? Thanks in advance.

Enough

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #1 on: November 02, 2018, 04:07:28 AM »
The below funds are as risky as I would advise (maybe too risky) for a couple in retirement in their 70s that is currently happy living off their nest egg earning 1%.

https://investor.vanguard.com/mutual-funds/profile/VTINX
https://investor.vanguard.com/mutual-funds/profile/vtxvx

Over the long run, they would for sure get better returns, but the question is do they need it given where they are at right now?  I'd say they should assess their risk tolerance, and depending on where that is, decide whether moving their cash to investments is worth the additional risk and stress for higher long term gains

BSL18

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #2 on: November 02, 2018, 06:23:20 AM »
You know what they say... quit playing if you've won the game. Why would they care about their yield if they have more than enough? You seem to be yourself on a good path, so you won't need it either.

If they want safety and a better yield, a GIC ladder would be quite bulletproof and offer something a higher yield (at least matching inflation).

Financial.Velociraptor

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #3 on: November 02, 2018, 06:55:51 AM »
Safety is clearly important to them.  A ladder of Treasuries, maybe including TIPS; and investment grade municipal bonds with maturities less than 5 years probably fit the bill.  Basically cash-like investments.  (They can probably get 3.25 to 3.5% on investment grade munis with short durations and fed tax exempt, much better than passbook savings!)

My elderly father asked for help when he retired.  His only requirement was "it can't ever go down, its every thing I've worked for all my life!"  We put him in a single premium annuity because it paid better than CDs.  They might look into same but rates are much lower now than when we locked in.

lollipop_hurricane

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #4 on: November 02, 2018, 07:17:08 AM »
ptf

BrightFIRE

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #5 on: November 02, 2018, 09:34:14 AM »
The below funds are as risky as I would advise (maybe too risky) for a couple in retirement in their 70s that is currently happy living off their nest egg earning 1%.

https://investor.vanguard.com/mutual-funds/profile/VTINX
https://investor.vanguard.com/mutual-funds/profile/vtxvx

Over the long run, they would for sure get better returns, but the question is do they need it given where they are at right now?  I'd say they should assess their risk tolerance, and depending on where that is, decide whether moving their cash to investments is worth the additional risk and stress for higher long term gains

They're only in their 70s. They might live into their 90s or longer. Is 20 years not long term?

ChpBstrd

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #6 on: November 02, 2018, 09:36:42 PM »
Your parents are actually in a tough place. Consider that the last time unemployment dipped down to today's rate of 3.7% was 1969, right before inflation took off. Over the next 10 years, people watched their cost of living zoom up 91%. In the meantime, both stocks and bonds got murdered in the early 1970s, so for most people the standard investing advice wiped out their accounts WHILE the cost of everything was skyrocketing.

Your parents could live another 20-25 years (not likely, but could). A retiree in 1969 who lived another 20 years would see their cost of living more than triple. Actually, it's worse than that, because healthcare will come to be a larger and larger percentage of your parents' growing budget and these expenses seem to inflate with a multiplier effect. Do the math with different inflation assumptions; you might find the parents are less "set" than you think.

https://www.bls.gov/data/inflation_calculator.htm

Your parents might do well to try the ETF "TIP". It yields only 3% but that's triple their current return while invested in safe inflation-adjusted US treasuries and, most importantly, the yield goes up with inflation. This instrument will only keep up with inflation, but your folks are currently losing a couple percent of their purchasing power per year, and that bleeding is only likely to get worse if inflation rises.

For myself at their age, I'd suggest a more aggressive bond/REIT/stock/preferred share portfolio, but I understand your parents are in a 1% bank account for a reason. They like to never see their statement number go down. The market value of an investment in TIP will fluctuate, even though it is much safer in the long run. It has fluctuated between 92 and 122 since 2009. You might have to rationalize this with them. The deal is: at least triple the income if you can ignore your broker statements. Another angle: You do know that your bank is paying you 1% to invest your money in treasuries yielding 3% and keeping the difference, right? Yet another angle: By moving your $ to a brokerage, you could earn a cash bonus of $X risk free, which makes up for the trouble and would take X months for you to earn at 1% interest.

See: https://www.bankrate.com/investing/best-brokerage-account-bonuses/

Villanelle

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #7 on: November 03, 2018, 06:05:52 AM »
Do they need, or really even want more money?  My parents are in their 70s and as of a few years ago at least, still had a positive cash flow, on top of a very large stache.  They could double or maybe even triple their annual spending and be just fine at or under a 4% SWR).  But the reason they don't spend more isn't that they don't have it or worry about running out.  They just don't want to buy things they don't need or at prices higher than they need to pay.

So if entering the market makes your parents uncomfortable and they have enough, there's not much reason for the to change.  Or perhaps they can put 10% in the market (index fund, of course) and 5% in bonds, and 5-10% in TIPS (or some other configuration that is still a minority of their funds) and then leave the rest as is (or see if you can set them up with some sort of ladder that at least pushes them up a point or two).  IOW, if they want to start, do so very conservatively and with a relatively small portion of their wealth.  And make sure they are prepared for down markets and aren't going to panic, or they need to stay out of the market all together. 

 

BicycleB

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #8 on: November 03, 2018, 07:40:07 AM »
What is this money you speak of?

I mean... is it $10,000 of savings, but irrelevant to their lifestyle because they have $30,000/year of Social Security vs a $25,000/year spending rate? $1 million in cash accounts, but they are happy because the dividends on their $2 million index fund covers the cost of their $25k lifestyle comfortably even though they have no Social Security? $50,000 of cash, but their three debt free rentals have positive cash flow that combined with Social Security exceeds their spending, yet to them its purpose is to cover repair costs, so they want the cash to be stable? Is it excess, or part of their plan for covering living expenses, in other words, and what is their default plan for using the money, and what role does it play in their plan? What % of their total assets is this "money"?

I guess I'm saying that a good answer to your question depends on what your parents' spending rate and future needs are, what their assets and other income streams are, and whether they have any debt, as well as what their own goals are. Investment decisions should consider all of these factors. Please explain.
« Last Edit: November 03, 2018, 07:44:41 AM by BicycleB »

pecunia

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #9 on: November 03, 2018, 10:31:14 AM »
I'm not as young as I used to be.  Investment advisors have told me a "rule of thumb" is to have an amount of bonds invested that equals your age.  So, this would mean 70 percent.  The return isn't there, but as J L Collins says, bonds smooth the ride.  Some growth may be made by putting the other 30 percent in equities.

It's what I've been told, but some of what I've been told is pure BS too.

"Your parents are actually in a tough place. Consider that the last time unemployment dipped down to today's rate of 3.7% was 1969, right before inflation took off. Over the next 10 years, people watched their cost of living zoom up 91%. In the meantime, both stocks and bonds got murdered in the early 1970s, so for most people the standard investing advice wiped out their accounts WHILE the cost of everything was skyrocketing.

Is unemployment going down due to demand or primarily due t the vast numbers of baby boomers leaving the work force?  If it is the latter, there will be little inflationary pressure.

Dicey

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #10 on: November 03, 2018, 10:42:10 AM »
Y'all understand that when interest rates go up, bonds go down exponentially, right?

jacoavluha

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #11 on: November 03, 2018, 10:55:14 AM »
To provided reasonable answers would need to know how much in savings, is it in taxable, IRAs, pension, how much social security income, medical expenses, how much spending per year.

If they have a billion dollars put it all in VTSAX.

If 250k then cash may be appropriate.

bwall

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #12 on: November 04, 2018, 06:31:23 AM »
Y'all understand that when interest rates go up, bonds go down exponentially, right?

+1

This is NOT a time to invest in bonds.

jacoavluha

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #13 on: November 04, 2018, 08:03:20 AM »
Y'all understand that when interest rates go up, bonds go down exponentially, right?
Y'all understand that when interest rates go up, bonds go down exponentially, right?

+1

This is NOT a time to invest in bonds.

These comments deserve a separate thread to further discuss

PizzaSteve

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #14 on: November 04, 2018, 08:16:04 AM »
Y'all understand that when interest rates go up, bonds go down exponentially, right?

+1

This is NOT a time to invest in bonds.
This is actually wrong.  Expected interest rate changes are priced into bonds, and 'exponentially' is just hyperbole meant to scare.  Irrational bond hate on this site is actually a bit annoying.  Just google the historic return on bonds.  It is such a straight line it is almost laughable people post this.  This fear of rising interest rates impact on a bond or bond funds is irrational. 

1) Any single bond held to maturity returns its full capital, plus interest. 
2) Bond funds will see dividend yields rise as rates rise, mitigating any slight drop in share price.

This is basic stuff.
« Last Edit: November 05, 2018, 09:46:02 AM by PizzaSteve »

ChpBstrd

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #15 on: November 05, 2018, 06:28:30 AM »
What is this money you speak of?

I mean... is it $10,000 of savings, but irrelevant to their lifestyle because they have $30,000/year of Social Security vs a $25,000/year spending rate? $1 million in cash accounts, but they are happy because the dividends on their $2 million index fund covers the cost of their $25k lifestyle comfortably even though they have no Social Security? $50,000 of cash, but their three debt free rentals have positive cash flow that combined with Social Security exceeds their spending, yet to them its purpose is to cover repair costs, so they want the cash to be stable? Is it excess, or part of their plan for covering living expenses, in other words, and what is their default plan for using the money, and what role does it play in their plan? What % of their total assets is this "money"?

I guess I'm saying that a good answer to your question depends on what your parents' spending rate and future needs are, what their assets and other income streams are, and whether they have any debt, as well as what their own goals are. Investment decisions should consider all of these factors. Please explain.

There are a few problems with leaving this status quo in place:

1) If they live another 20 years, their currently happy $25k lifestyle might become a $75k lifestyle due to inflation.
2) If they live in the U.S,. medically-induced bankruptcy and poverty is a common occurrence, even for conservative investors who were once "set".
3) Most of our common measures of having "enough" to retire assume the assets are invested. The 4% rule does not apply to cash stuffed into mattresses. In that event, you need to apply a wasting assets model and about 3x the funds.
4) Winding down one's assets in FDIC insured bank accounts may seem like a responsible thing to do, but consider that your children and grandchildren may not live in such unusually fortunate times as you did. For most people in the world, unemployment rates of 20%, inability to afford medical care, food insecurity, living in violent places with no means to escape, and having no money to obtain higher education is the norm. Actually, your city almost certainly has such an area, and almost no one escapes it. Leaving a small inheritance might make a major difference in your family's future. If your family are assholes, I guarantee there will be a charity around when you die who could use the money to make a difference in another family's future. All that difference just for being able to stomach modest market returns.

MustacheAndaHalf

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #16 on: November 05, 2018, 07:32:20 AM »
Y'all understand that when interest rates go up, bonds go down exponentially, right?
That's false.  A bond fund is impacted linearly in inverse proportion to it's duration.  A bond fund with duration 7 years is expected to lose -7% in value when interest rates change +1%.

Dicey

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #17 on: November 05, 2018, 09:36:01 AM »
Y'all understand that when interest rates go up, bonds go down exponentially, right?
That's false.  A bond fund is impacted linearly in inverse proportion to it's duration.  A bond fund with duration 7 years is expected to lose -7% in value when interest rates change +1%.
You are right -  I have the concept down, but made a poor word choice. I thought "exponentially" was a more concise way of saying "impacted linearly in inverse proportion to it's duration". I can math, but I am not a mathematician, nor a rocket surgeon. Though one [rude] person would have you believe otherwise, mine was no attempt to spread misinformation. Just saying that bonds can be trickier than most people realize, especially when interest rates are rising. It's impossible to know with certainty when they will rise and by how much.

As to my qualifications? Well...I'm six years FIRE and so far, so good. I hang out here in hopes of helping others, not criticizing them to prove how smart I am.

PizzaSteve

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #18 on: November 05, 2018, 09:43:15 AM »
Y'all understand that when interest rates go up, bonds go down exponentially, right?
That's false.  A bond fund is impacted linearly in inverse proportion to it's duration.  A bond fund with duration 7 years is expected to lose -7% in value when interest rates change +1%.
You are right -  I have the concept down, but made a poor word choice. I thought "exponentially" was a more concise way of saying "impacted linearly in inverse proportion to it's duration". I can math, but I am not a mathematician, nor a rocket surgeon. Though one [rude] person would have you believe otherwise, mine was no attempt to spread misinformation. Just saying that bonds can be trickier than most people realize, especially when interest rates are rising. It's impossible to know with certainty when they will rise and by how much.

As to my qualifications? Well...I'm six years FIRE and so far, so good. I hang out here in hopes of helping others, not criticizing them to prove how smart I am.
Why not just correct your post then?  You accuse me of being rude, but the intent of your post was pretty clear, and you only post that sort of stuff when I explain about bonds as an option.

So it is rude to call you out when you are flat out posting wrong information?  I thought you advocated face punches as a good thing when people are wrong, or do you just have a personal thing going on here?  Why was it rude for me to say you are wrong when you were factually wrong?

So please clarify.  Were you not intending to imply a bond fund is a bad, scary option or you were?  Efficient bond funds by vanguard are an excellent investment, on par with their stock index funds.  They are different, yes, but that is a good thing because they are best as an uncorrellated asset clase with stocks.  Sadly they are not perfect, but they are among the best options and scaring people about them needlessly because of interest rate fear mongering is not doing anyone any favors.

I am not anti-you, I am anti-missinformation.  You literally just told someone this is not the time to buy bonds.  If you can market time the bond market you are able to do what no one I know can.
« Last Edit: November 05, 2018, 12:56:15 PM by PizzaSteve »

Telecaster

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #19 on: November 05, 2018, 07:02:29 PM »
FWIW, my mom invested in stocks for many years, but she been 100% in bonds.   She has no desire at all to run up the score, and no desire to take any risk.   I don't know how much money she has.  I keep telling her to make sure and spend the principal and she keeps telling me she doesn't have to. 

Since the OP's parents are in their 70's maybe 100% bonds is okay. 

jacoavluha

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #20 on: November 05, 2018, 08:19:16 PM »
Without more from the OP this is pretty pointless

Dicey

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #21 on: November 06, 2018, 12:21:28 AM »
Y'all understand that when interest rates go up, bonds go down exponentially, right?
That's false.  A bond fund is impacted linearly in inverse proportion to it's duration.  A bond fund with duration 7 years is expected to lose -7% in value when interest rates change +1%.
You are right -  I have the concept down, but made a poor word choice. I thought "exponentially" was a more concise way of saying "impacted linearly in inverse proportion to it's duration". I can math, but I am not a mathematician, nor a rocket surgeon. Though one [rude] person would have you believe otherwise, mine was no attempt to spread misinformation. Just saying that bonds can be trickier than most people realize, especially when interest rates are rising. It's impossible to know with certainty when they will rise and by how much.

As to my qualifications? Well...I'm six years FIRE and so far, so good. I hang out here in hopes of helping others, not criticizing them to prove how smart I am.
Why not just correct your post then?  You accuse me of being rude, but the intent of your post was pretty clear, and you only post that sort of stuff when I explain about bonds as an option.

So it is rude to call you out when you are flat out posting wrong information?  I thought you advocated face punches as a good thing when people are wrong, or do you just have a personal thing going on here?  Why was it rude for me to say you are wrong when you were factually wrong?

So please clarify.  Were you not intending to imply a bond fund is a bad, scary option or you were?  Efficient bond funds by vanguard are an excellent investment, on par with their stock index funds.  They are different, yes, but that is a good thing because they are best as an uncorrellated asset clase with stocks.  Sadly they are not perfect, but they are among the best options and scaring people about them needlessly because of interest rate fear mongering is not doing anyone any favors.

I am not anti-you, I am anti-missinformation.  You literally just told someone this is not the time to buy bonds.  If you can market time the bond market you are able to do what no one I know can.

You clearly have me confused with someone else. Here are my actual words:

Y'all understand that when interest rates go up, bonds go down exponentially, right?

I did not "You literally just told someone this is not the time to buy bonds". I have already clarified my choice of the word "exponentially". My point is that it's important to know what you're doing, especially in this case, where the OP doesn't want to fuck up his parent's life savings by making un- or under-informed choices that may not suitable for them.

Further, Pizza Steve, there is absolutely nothing for me to teach you, so I wouldn't dream of trying. I was not responding to you. I generally avoid speaking to you, becsuse you have made your lack of respect clear. I'd rather just continue to do so and hope for some sort of reasonable peaceful co-existence.

GettingClose

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #22 on: November 06, 2018, 11:50:57 AM »
Quote
Your parents might do well to try the ETF "TIP". It yields only 3% but that's triple their current return while invested in safe inflation-adjusted US treasuries and, most importantly, the yield goes up with inflation. This instrument will only keep up with inflation, but your folks are currently losing a couple percent of their purchasing power per year, and that bleeding is only likely to get worse if inflation rises.

ChpBstrd, could you explain what this would look like in an actual investment account?  If someone invested $100k in TIP, would $750/quarter show up as a dividend? or would it be interest? or ??

ChpBstrd

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #23 on: November 06, 2018, 04:24:35 PM »
Quote
Your parents might do well to try the ETF "TIP". It yields only 3% but that's triple their current return while invested in safe inflation-adjusted US treasuries and, most importantly, the yield goes up with inflation. This instrument will only keep up with inflation, but your folks are currently losing a couple percent of their purchasing power per year, and that bleeding is only likely to get worse if inflation rises.

ChpBstrd, could you explain what this would look like in an actual investment account?  If someone invested $100k in TIP, would $750/quarter show up as a dividend? or would it be interest? or ??

TIP pays a small monthly dividend (probably qualified, but I'm not sure). See https://m.nasdaq.com/symbol/tip/dividend-history

With yields this low, there's a strong case for just buying TIPS directly and avoiding the ETF's 0.2% fee. In the OP's case this might also remove an anxiety-provoking minute by minute market value quotes.

https://www.bankrate.com/retirement/how-to-buy-individual-tips-in-an-ira/

JRA64

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #24 on: November 06, 2018, 04:42:12 PM »
One risk no one has mentioned: if they invest in equities, for example through a diversified index fund, are they likely to panic and sell if the market drops considerably? If they are likely to lock in losses, I think they would be better off to stay where they are or choose bonds.

TomTX

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Re: My retired parents have finally listened! But is it too late to invest?
« Reply #25 on: November 06, 2018, 05:35:21 PM »
This is actually wrong.  Expected interest rate changes are priced into bonds, and 'exponentially' is just hyperbole meant to scare.  Irrational bond hate on this site is actually a bit annoying.  Just google the historic return on bonds.  It is such a straight line it is almost laughable people post this.  This fear of rising interest rates impact on a bond or bond funds is irrational. 

I'm sure lots of bankers in 1969 expected the super-high inflation of the 1970s, right?

Nope. Wasn't priced in.

The 30 year Treasury yield is currently 3.4% - the bond markets are expecting continued low inflation for ~30 years. Slightly higher than they expected previously, but still quite low.