Author Topic: Just sold the family business. Parents are afraid of the stock market...  (Read 7477 times)

riverhawk

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First, the comradery of this forum is pretty cool. Thanks in advance.

My family has always been in the restaurant business(immigrants who worked their way up) and I've helped along the way. I'm 35 and they are in their late 60's. We've accumulated some cash and also decided to sell the business. We own the business property so we'll still be getting rent after the sale of the business. We also have one single family rental. Our money is weirdly combined since we all worked together and trust each other. Kind of a grey area as to who owns what so we make decisions together(tough, I know). They are afraid of investing in the stock market in any sense. We have a MetLife financial guy we've used for years, but his annuities we put some money in have not done well which is why my parents are against "stocks". Plus, they're old and don't want to risk their egg. It would be great to be able to put our cash safely somewhere that helps pay some bills along with the rents we're getting.

I guess I need some advice as to what we should be doing with the accumulated cash just sitting in the bank and from the sale of the business.


Cliff notes:
-I'm 35, parents are over 65 collecting some SS
-Our family's money(my parent's and myself) is unconventionally entangled due to us working together
-Sold the family business, but not the building...so I guess we're all technically not working hah
-Collect $5000/month from two rents
-House bills including all mortgages/taxes are ~$4000/month
-No credit card debt
-2 mortgages:
   Business building combined with our house=$230,000@4%
   Rental property=$100,000@6%
-$40,000 in a retirement annuity for me(not sure of theirs)
-$30,000 in a Roth IRA(for me)
-$20,000 in wrap accounts suggested by my MetLife guy
-Cars paid off
-Small vacation home paid off
-Roughly $1,000,000 in cash in different very small interest saving accounts

Should we pay off all mortgages? At a minimum, put the cash in some type of CD? Try to convince them the market isn't a black hole(their old school)?

Thanks.

Apocalyptica602

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With ~1,000,000 in various low interest savings accounts and parents that are very against the stock market. (Mine are as well, they don't own stocks, and to be honest I'm surprised they don't keep their money stuffed in a mattress)

I would immediately pay off all outstanding mortages.

Think about it this way, the interest rates are 4 and 6 percent. Technically you could probably do better investing. Some people like carrying a heavy load of low interest debt because they would rather leverage their money elsewhere.

I'm of the debt-adverse / peace of mind camp.

ALSO, it would probably be much easier to convince your parents to pay off the debt at a GUARANTEED 4-6% return rather than 'risk' anything in the market.

Eliminate the $330k of mortage debt and you still have ~670,000 still in cash.

I'd go crazy if I had that money in a savings account, essentially losing 2% a year of it to inflation.

I think there are other people here more well versed in the nuances of investing advice than I who can tell you what to do with the leftover cash. But I would definitely get rid of that lingering debt, especially when you have the assets to pay it off in full 3 times over.

Although in any decision just remember: Your family is in a very good financial situation that many people today wish they could consider themselves to be in. With that much money there isn't much you could do that would be considered "WRONG".

Other than buying 2,000 iPads and using them as frisbees.
« Last Edit: June 10, 2012, 10:59:13 PM by Apocalyptica602 »

riverhawk

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Thanks. Any downside to not having a mortgage? Do you have to pay more taxes on the rental income?

Also, I should have stated that they may be OK with getting another house as a rental. However, I will note that the single family we bought was kind of a disaster being our first time doing it. We spent way too much fixing it up. Plus it put some strain on the relationships with us trying to collaborate on everything...but it still may be an option.

Miyazaki

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I agree that it's ridiculous to have that much cash when you have so much debt. According to your calculation, you're making 5k per month in rent and paying 4k per month in expenses, so your yearly income is 12k. However, if you paid off the houses tomorrow, your yearly income will jump to 60k!

As for the other cash... It seems your parents are scared of stocks, but really into real estate. How about showing them a prospectus for a REIT index fund ETF, showing them a part of all the commercial and residential property that they could own, and suggest putting a relatively small amount of money towards it (50k? 20k?). I would say the daily fluctuations of the fund would just make them nervous, so manage it by yourself and just show them the dividend checks. If they start to feel more comfortable, you could consider investing more later. What do you think?

Gerard

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According to your calculation, you're making 5k per month in rent and paying 4k per month in expenses, so your yearly income is 12k. However, if you paid off the houses tomorrow, your yearly income will jump to 60k!
But that $4k includes property taxes, maintenance, and probably principal payment on the mortgage. So their actual taxable income from the properties would increase by only the interest portion of the mortgages, about $1270 a month. And that's spread over three people, so it wouldn't increase their taxes by much if at all (unless or until they start making big bucks from their million bucks in investments).
If your parents are seriously risk-averse and distrust the market (even ETFs and the like), why not pay off the mortgages and put the rest into something crazy safe, like a CD (which I assume is what Canadians call a Term Deposit) or high-interest savings account? If y'all need a bigger cash flow (despite your mustachian spending), the parents could get 7% or so by putting some of it into a real (guaranteed) annuity, not some fake mutual fund masquerading as one:
http://www.mrmoneymustache.com/2012/04/14/guest-posting-annuities-a-solution-for-the-cautious-retiree/
Or here's a crazy idea: just spend the money. If you pay off the mortgages, the rents will provide enough to guarantee freedom from poverty and to give the young 'un an income-earning inheritance. The rest is money the family doesn't actually need to save.

arebelspy

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A real annuity (like a private pension you purchase, basically, not something invested in the stock market, different from what they had) does seem like a good solution.

Cash is really, really bad.  Losing 2% of your money (due to inflation) on a good year is not the best scenario.  Especially when a bad year has you losing 10+% (see: early 80s).

The best thing is education.  Show them FIRECalc, and model some scenarios.

Also, congrats on the sale of the business!  Glad to hear stories of well deserved success.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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MrSaturday

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A simple immediate annuity without cost of living increases has the same inflation risk as cash.

COLA riders on annuities tend to be very expensive.

James

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Obviously trying to convince them that the market is "safe" won't work, it's not safe.  I would focus on the idea of dividends.  Knowing how a small business works, seeing how income is being provided by the rent (which is like a "dividend" from the company who now owns the business that was sold), you can explain how purchasing parts of lots of other companies will pay dividends just like that rental income.  Even if the market value falls, the dividends will continue to provide stable income at some level, certainly more than the bank accounts will.


I would also pay off the debts, seems like an easy investment and probably faster and easier to talk them into.

vwDavid

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In response to James's post this video series may help. Yes it is dividend biased. Lowell Miller wrote the book single best investment. There are a some similarities between dividend investing and rental prop (both are nice passive income).

http://www.mhinvest.com/media/index.html

'

Obviously trying to convince them that the market is "safe" won't work, it's not safe.  I would focus on the idea of dividends.  Knowing how a small business works, seeing how income is being provided by the rent (which is like a "dividend" from the company who now owns the business that was sold), you can explain how purchasing parts of lots of other companies will pay dividends just like that rental income.  Even if the market value falls, the dividends will continue to provide stable income at some level, certainly more than the bank accounts will.


I would also pay off the debts, seems like an easy investment and probably faster and easier to talk them into.
« Last Edit: June 11, 2012, 02:59:05 PM by vwDavid »

JR

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Have you considered buying more rental properties?

riverhawk

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Thanks for the replies. It seems the consensus is:

1. Pay off the mortgages.
2. Look into dividend yielding ETFs.
3. Get another rental property.

I think selling them on the ETFs will be hard without mentioning that there is a risk they could lose money. Forgive my ignorance, how much in dividends do you think I can get on a $300,000 investment per quarter?

Enphuego

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It seems like what is separating them from the stock market is an educational issue.  Would they be willing to read a couple books on investing and then decide after that?  I wouldn't be willing to invest in something I didn't understand either, that's very reasonable.

arebelspy

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how much in dividends do you think I can get on a $300,000 investment per quarter?

If you just want a real rough number, I would figure on about 3% yearly for dividends.  So that'd be $2250/qtr.

Would it be possible - without straining family relations - to split out money?  Explain that you realize they aren't comfortable with the stock market, but you would like a portion of yours in the market, so they could buy SPIAs (COLA'd annuities) and you could be invested in the stock market with your part?
« Last Edit: June 11, 2012, 08:39:33 PM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Mr Mark

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Great position to be in. You should be able to set things up so your stash can run forever.

Given the situation,
1 agree to clear the mortgages. That's guaranteed returns. And they should be on board.
2. Do they get social security?
3. Whatever they would be happy with as a minimum income for the rest of their lives, after taking account of ss, think about standard annuities, as mentioned. Via the web they should be able to get around 5k per year for 100k of annuity. Could you put say 400k into such assets, and - their income and assets secured, the rest can go into a long term asset allocation, with 4% swr [max].


sol

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Our money is weirdly combined since we all worked together and trust each other. Kind of a grey area as to who owns what so we make decisions together(tough, I know).

That money may seem weirdly combined to you, but I guarantee you that the IRS doesn't see it that way.  Somebody owns those assets.  For tax purposes, it matters.

For whatever part is yours, do with it what you please.  I suspect that very little of it is technically yours, though, unless you are a named owner in a corporation or trust that holds the assets.  In most cases like yours, the parents retain 100% control of the assets with the understanding that they will dole it out to the kids in small chunks until they die, and the kids serve as slave labor as long as they believe that promise.

Annuity rates are terrible right now, so I'd hold off on that.  I'd definitely clear both of your mortgages, and then find as asset allocation your parents can live with.   Maybe that's an income fund designed for retirees that only averages 2% because it focuses on capital preservation, but that's still a hell of a lot better than letting it waste away as cash.

I'd also advise against getting another rental property.  Buying an individual property is like buying an individual stock.  Way riskier than a diversified portfolio.

« Last Edit: June 11, 2012, 10:56:13 PM by sol »

smedleyb

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A real annuity (like a private pension you purchase, basically, not something invested in the stock market, different from what they had) does seem like a good solution.

Cash is really, really bad.  Losing 2% of your money (due to inflation) on a good year is not the best scenario.  Especially when a bad year has you losing 10+% (see: early 80s).

The best thing is education.  Show them FIRECalc, and model some scenarios.

Also, congrats on the sale of the business!  Glad to hear stories of well deserved success.

This is dangerous advice.  We need to stop pretending around here like it's 1982 and the stock and bond markets are about to go on a wild tear, or that it's a no-brainer to dump all of your funds into these markets.  No, we are still clearly within the confines of a major bear market which began in 2000 and continues to this day.  In bear markets, capital preservation is the key to survival.  Reward chasing is a recipe for financial ruin.

Riverhawk, I understand your position because my family and your family are in almost identical situations, save for the fact that we still run our business.  Recognize that putting that 1 million into stocks is a dangerous proposition when you consider that:

(1) the markets are where they are today only after the government/Fed has thrown nearly 15 trillion at the economy, all in the effort to achieve a paltry growth rate of 1.9%.  Makes you wonder what happens when they turn off the liquidity spigot.

(2) unemployment/underemployment is hovering near 20%, and it's unclear how this economy can grow it's jobs or what sector can step in and provide employment.

(3) stocks have doubled off their 2009 lows; the move off the 2009 lows was engineered by the government and does not represent a self-sustaining economic cycle.  In other words, we are in uncharted waters and uncertainty and risk remain high.

Personally I'm 100% cash -- even in my long term IRAs -- because I think I'll get the opportunity to buy stocks much cheaper at some point over the next several years. Much cheaper.  Your parents are old and need the certitude of cash; if you want to invest in the wall street casino, go ahead, but you need to think twice about putting any of their money in due to their age and the market conditions outlined above.

Good luck and be cautious.   

ShavinItForLater

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Enough with the doom and gloom.  Markets have cycles, which can be hard to predict.  It is way too common after a bear cycle for everyone to be full of doom and gloom, "I'm 100% cash", all of that.  Then in times like 1999 everybody is falling over themselves to find more money to invest and making plans for what their 600% per year returns are going to do for them in 10 years, since after all this is the "new normal" with the Internet Economy (or whatever rationale they invent).  At some point I think it's wise to realize that when everybody is predicting doomsday, it might just be the best time to invest.

My return on investments is very small over the last few years.  But I'm 40 years old and have been investing since 21.  I've seen several of the up and down cycles now, and I think living through them gives some perspective.  Since 1992 my returns are 11.6%, with all the ups and downs in between.  Will next year be up or down?  I don't know, I'm betting on up right now, I think the S&P 500 will hit the 1500s within a year.  But that's just my view, and I don't know that it matters.  I don't think it'll go straight up forever, we will have a bear cycle again, and maybe soon after.  But if you're able to stick it out for the long term with investing, I sincerely believe the historical trend will continue.

In the OP's case however, I'm not sure I'd be advising stock investing because it sounds like your family may not be willing to ride out the down cycles.  Sure education would be great but not everyone can be convinced if they already have strong negative opinions about stocks.  You'll never get the long term historical returns if that's the case, because *when* the bad times come you will pull your money out, and not put it back in until prices are high again--ruining your long term returns.  If that's on target, I'd say either choose more stable investments with less ups and down, accepting a smaller return in exchange for the reduced volatility, or go into real estate (learning from your mistakes) if they are more willing to stick with that over a longer term.  If you look into asset allocation I believe you can craft a portfolio that is virtually guaranteed (based on past history) not to lose money over a 5-10 year time period, if you're willing to reduce your return by a significant amount.

smedleyb

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Enough with the doom and gloom.  Markets have cycles, which can be hard to predict.  It is way too common after a bear cycle for everyone to be full of doom and gloom, "I'm 100% cash", all of that.  Then in times like 1999 everybody is falling over themselves to find more money to invest and making plans for what their 600% per year returns are going to do for them in 10 years, since after all this is the "new normal" with the Internet Economy (or whatever rationale they invent).  At some point I think it's wise to realize that when everybody is predicting doomsday, it might just be the best time to invest.

I guess I'm a contrarian sentiment indicator now?  lol!

Enough with the bash on cash, I say. 

ShavinItForLater

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Enough with the doom and gloom.  Markets have cycles, which can be hard to predict.  It is way too common after a bear cycle for everyone to be full of doom and gloom, "I'm 100% cash", all of that.  Then in times like 1999 everybody is falling over themselves to find more money to invest and making plans for what their 600% per year returns are going to do for them in 10 years, since after all this is the "new normal" with the Internet Economy (or whatever rationale they invent).  At some point I think it's wise to realize that when everybody is predicting doomsday, it might just be the best time to invest.

I guess I'm a contrarian sentiment indicator now?  lol!

Enough with the bash on cash, I say.

Yes, that's precisely what I'm saying.  Not you personally, but the attitude you're stating which is echoed in so much of the press and all over every investing-related forum.  I think about it this way.  The more people (and brokerage houses, analysts, financial advisors, etc.) who are 100% cash, the less likely it is that cash is exiting the market.  The skittish have pulled their money out, and the money left in is more solid--owned by people who are more bullish or unwavering regardless of market conditions.  And the flipside is also true--there is a ton of cash sitting on the sidelines available to invest when the wind direction changes, which will drive prices up when it happens.

In the opposite scenario, when everyone is falling over each other to invest (generally after returns have been high for a while, indexes are reaching new historical highs, etc.), the skittish are back in the market (unfortunately for them, they probably got back in near the top).  If you're a market timer (generally not recommended, but I confess I'm guilty of it from time to time), that's when you should be more likely to worry.  Sentiment is certainly not the only factor, but honestly I think if you look at the fundamentals, a lot of things are pointing up right now at least for the next 6-12 months.  Of course, that's just one man's opinion, and likely worth what you paid for it.

If you're in it for the long haul, and if you are diversified enough that *you* are comfortable with the ups and down, this whole discussion is all just noise.

Sorry to hijack the post.

smedleyb

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Shavin, I see your points and respect them.  I am -- obviously -- talking my book! 

That said, this thread is a topic devoted to how to invest the money of a retired couple in their late 60's, and I'll be dammed if I sit here and tell them to put their money in stocks or, even worse -- and much worse, long term -- bonds.  If they were in their twenties I would say go ahead and start making periodic investments in broad market funds -- no bonds, period -- but that is not the case here.

I don't want to come off as a pessimist.  I think opportunities exist on the horizon -- glorious, multi-decade investment opportunities.  The point is to sail over to that horizon without sinking the ship in the process.  Excessive money printing, debt oversupply, and anemic job growth do however give me pause in the short term (say, 3 years).  Fade that state-of-affairs if you wish, but until the debt issues are worked out, I'll happily wait on the sidelines for a better investment risk/reward to manifest itself.  And that will be achieved either through lower stock prices, or real reform that deals with our (and Europe's) problems.

Agree or disagree, I'm just laying out my thoughts for you or anyone to critique.   

Mr Mark

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It does depend on the absolute size of the stash. The larger it is, the more tempting to allow them some personal  calls on what value means and invest accordingly. You're rich enough perhaps to afford lower returns.

But their age should be immaterial to the strategy. My goal for my stash is that it will grow forever, while meeting essential needs always. That's FI. Relying on dying to achieve a swr seems foolhardy.

Your answer is a diversified portfolio,  annually rebalanced,  via Vanguard. Pick your asset allocation of X% cash, Y% intermediate bonds, Z% estate, % dividend big caps index, % international equity, etc. Use low cost mutuals or ETFs, look at tax management, and forget about it except 1 time per year.

Once you pay down the debt, would a swr of 4% meet your needs?

ShavinItForLater

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Shavin, I see your points and respect them.  I am -- obviously -- talking my book! 

That said, this thread is a topic devoted to how to invest the money of a retired couple in their late 60's, and I'll be dammed if I sit here and tell them to put their money in stocks or, even worse -- and much worse, long term -- bonds.  If they were in their twenties I would say go ahead and start making periodic investments in broad market funds -- no bonds, period -- but that is not the case here.

I don't want to come off as a pessimist.  I think opportunities exist on the horizon -- glorious, multi-decade investment opportunities.  The point is to sail over to that horizon without sinking the ship in the process.  Excessive money printing, debt oversupply, and anemic job growth do however give me pause in the short term (say, 3 years).  Fade that state-of-affairs if you wish, but until the debt issues are worked out, I'll happily wait on the sidelines for a better investment risk/reward to manifest itself.  And that will be achieved either through lower stock prices, or real reform that deals with our (and Europe's) problems.

Agree or disagree, I'm just laying out my thoughts for you or anyone to critique.

If we're talking market outlook, I don't think we're that far off from each other.  Right now, I think the next year or so will be positive for stocks, and the next 3-5 years might very well bring a bear market.  Long term, I'd still bank on stocks outperforming most other investment choices.  A lot of very smart people call market timing a fools game though, and even though I've been guilty of doing some market timing, I'd honestly say they could be right.

Regarding the age being in the late 60s, I would assess their time horizon as pretty long term.  First, someone currently in their late 60s, in relatively good health, has a pretty good shot at living into their 90s, giving them 30 years to invest for.  Second, in this example it is being portrayed as multi-generational money--for the benefit of both the 35 year old poster and the parents in the 60s, bringing the overall time horizon closer to 60 years, or maybe 45 if you average the two.  I might advise being super-conservative with some minor portion of the business proceeds, but not with all of it--inflation is a much bigger risk than stock market volatility for the longer term.