Helping my mother (retirement allocation)

[RedMaple]

My mother (age 56) says she will let me reallocate her 401k (which is currently all in bonds) and open an IRA for her. Her 401k is probably worth $45k, I don't know about the IRA probably less than $10k. She is married, her husband throws tantrums whenever I try to talk about his retirement... so I'm just dealing with her retirement.

1. Can she have several IRAs in different institutions? She says she has an old IRA in Chase, I want to open an IRA in either Vanguard/Fido//Schwab and then eventually move/close her Chase account and move the money into the IRA I opened. Can I do this?

2. She claims her accountant said that she can't contribute to an IRA - but she can't give me a valid reason why. She and her husband earn less than $181k jointly. What other reason could there be that she can't contribute? She has a regular job and her husband works for the city. I feel like she misunderstood the accountant.

3. What information should I know about them before reallocating her retirement? I told her she'd have to tell me how much cash she has, how much money they make, any debts they have. Is there anything else I need to know?

4. Given her age I think the best allocation (401k & IRA) would be to do 55% bonds, 45% stocks - but if she has $100k+ cash in the bank then that allocation isn't correct. I'd have to open a brokerage account for her and maintain it. If she won't let me, I think that her 401k & IRA allocation should be 10% bonds, 90% stocks. What do you think?

[MDM]

RedMaple, kudos to you for looking out for your mom.  Regarding your questions:

1)  Yes, you can have IRA funds in different institutions.

2)  See http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014--IRA-Contribution-and-Deduction-Limits---Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work - does that apply?

3)  For starters, her risk tolerance and ability to ride through (both financially and emotionally) a large drop in stock prices.

4)  Seems you are on a reasonable track - one could argue for higher stock percentage, but only with hindsight would one know what is "correct".  You probably should know more about pension and social security for both her and husband, assuming they don't live separate financial lives, to paint the overall picture.

[Chrissy]

Is it possible for you to speak with the accountant directly, perhaps with your mother present, and find out why she was told not to contribute to her IRA?

There are a lot of factors to consider regarding allocation.  More than I will address.  How much does she need to retire?  And, when does she want and expect to retire?  If the amount she needs is on track to meet her expectation, then the 55%/45% allocation looks right for her age.  However, if she needs to work another 10 years, maybe a 35% bonds/65% stocks or 30% bonds/70% stocks split would help generate some growth.

http://www.financialsamurai.com/the-proper-asset-allocation-of-stocks-and-bonds-by-age

I understand the reasons you might want 10% bonds/90% stocks.  My folks are 69, retired, and entirely in stocks.  That's their choice.  It'll probably be my choice for myself too, but if I managed someone else's retirement account, I'd be more conservative.

[boarder42]

So i've been wondering this same thing.  Historically stocks win 100% of the time.  why would you ever put money into bonds.  to me it just doesnt make sense... build enough wealth to ride out the rough patches and rather than seeking comfort in knowing you wont lose 40% of your wealth seek comfort in knowing you're going to make alot more in up years than what you lose in down years. 

[Chrissy]

Boarder42, you ask "why would you ever put money into bonds?"

If you're retired and withdrawing the oft-spoken of 4% from your retirement accounts to live on, and you're entirely in stocks, then a 50% pullback like we had in 2008 will reduce your withdrawal for the year by the same 50%.  In 2009, stocks gained back half of what they'd lost.  Following the same scenario, your withdrawal for that year still would've been 25% less than what it had been 2 years before.  This might create a real hardship.

However, had you some diversity in your portfolio--stocks, foreign stocks, bonds, cash--your accounts would've only lost 28% in 2008, and almost back to even for 2009.

Now, my folks are retired and entirely in stocks.  That's okay for them, because they haven't touched their retirement accounts, and have no plan to do so; one pension and two social security cheques cover their living expenses (for now).  Not everyone is so lucky.

[boarder42]

yes i agree an early pull back into your retirement could cause this hardship.  but you will historically create less wealth over time not 100% in stocks.  so 10 years into retirement a 50% pull back assuming you havent increased your standard of living with portfolio growth would not hurt to the tune of 50% ... this is where i'm confused at to why people feel the need of a bond safety net.