Treasuries for parents’ retirement funds

[Abe]

I wonder what you all think about this scenario:

My parents have saved quite a bit in their 401k and 457b accounts. It is mostly low-cost fixed income funds (primarily treasuries, investment-grade corporates, some REITs). They have an only 30% in stocks (institutional equivalent of VTSAX). I was thinking of converting the fixed-income money from funds to just purchasing 10-year T bonds. They (and I) honestly don’t need the money (pensions + SS are enough), so this is mostly to preserve the principal and eventually transition fund some research scholarships. In the event that everything else went down the toilet, interest at 3.9% would be enough to fund their retirement expenses. I’m inherently skeptical of something being this easy, so would like to hear the pitfalls I’m missing…

[AnxietyFly]

Right now is not a good time to purchase long term treasuries. I would purchase the ones that only last a few months for now. Nothing over six months. I'm planning on the same system as your parents. The closure you get to retirement the more you put into fix income and less into stocks.

[Abe]

Right now is not a good time to purchase long term treasuries. I would purchase the ones that only last a few months for now. Nothing over six months. I'm planning on the same system as your parents. The closure you get to retirement the more you put into fix income and less into stocks.

Why do you think long-term ones aren’t a good idea? I guess rates could go even higher?

[Radagast]

First I have to say there is no historical evidence to support more than a 40% bond allocation, more than that actually runs a higher risk of running out of money and over long periods pretty much always has lower returns. TIPS would be better at not running out of money, though on average should not provide more return. Basically the bonds you are looking at are garbage and do not return 3.9% adjusted to cost of living, so instead you should use TIPS to maintain purchasing power. You could make a ladder of TIPS, with some expiring every year for 30 years. That would be better than nominals. Otherwise if you are using nominals, just put it 60/40 and let it ride. Don't forget at least a small allocation to international stocks.

[Dicey]

Right now is not a good time to purchase long term treasuries. I would purchase the ones that only last a few months for now. Nothing over six months. I'm planning on the same system as your parents. The closure you get to retirement the more you put into fix income and less into stocks.

Why do you think long-term ones aren’t a good idea? I guess rates could go even higher?

I had the same question, until I noticed the user name.

[ChpBstrd]

Considering that AA-rated corporate bonds are somehow yielding less than US treasuries these days, I fully support the decision to reallocate from corporate bonds into treasuries. Be aware that some payments might be missed in the event of a debt standoff later this year.

Interest rates will likely be lower a couple of years from now, and we might be emerging from recession at that time. If your parents really don't need the asset stability, maybe talk to them about contingency plans. Would they go to a heavier stock allocation if the market dropped by xx% or if valuations reached a certain level?

@Radagast is right. Their AA is too conservative in the long run. Use the next correction to reallocate.

[Abe]

Thanks everyone for the advice, sorry for the slow response - had covid for the first time! I did move their bond allocations to TIPS instead. We're going to keep the same asset allocation since both of their life expectancies are to the lower end (hopefully 10-15 years). Once the money is distributed as inheritance we may shift to a stock-predominant allocation for the donor-advised fund.

[Dicey]

Hey, Abe! I thought of you when I read this recently. It was some random article that popped up when I should have been sleeping (like now, lol). It pointed out  that delaying RMD's could actually result in more taxes being paid. I'm not sure it will matter much if their remaining funds are earmarked for charity, but I thought it was an interesting point.

In our own case, .I'm wondering if we should start taking RMDs now and delay Social Security. Sometimes I think it's just as difficult to sort all this out as it was getting to FIRE. MPP for sure.

ETA: I had to come back to say I'm sorry you finally got Covid. It's kind of miraculous it didn't catch you sooner. I hope you've made a full recovery.

[Finances_With_Purpose]

Hey, Abe! I thought of you when I read this recently. It was some random article that popped up when I should have been sleeping (like now, lol). It pointed out  that delaying RMD's could actually result in more taxes being paid. I'm not sure it will matter much if their remaining funds are earmarked for charity, but I thought it was an interesting point.

In our own case, .I'm wondering if we should start taking RMDs now and delay Social Security. Sometimes I think it's just as difficult to sort all this out as it was getting to FIRE. MPP for sure.

ETA: I had to come back to say I'm sorry you finally got Covid. It's kind of miraculous it didn't catch you sooner. I hope you've made a full recovery.

Everyone needs a good CPA near retirement: it becomes a game of paying the least amount of taxes possible by making educated guesses about income, future income, asset returns, and allocations. 

E.g., it may well make sense to do smaller early withdrawals (not before retirement age/penalized) so that you avoid the big whack of RMDs once they hit, which can push into higher brackets and cause all SS to be taxed as well.  There's just no one-size-fits-all solution to the complicated issue of taxes, and that's the #1 place many retirees can save by proper planning, so you really have to go see a CPA and see what you can do by planning out various scenarios. 

One other thought, Abe: if your parents know that they want to allcoate some amount for charity, they could always put it in a Donor Advised Fund in order to take the deduction from income now and give it out later.  That makes sense the more they're planning to give (and you can always under-shoot by putting less in there now than you think you'll ultimately want to).  Just a thought; it might save them from paying income taxes on it / RMD issues if they're just going to turn around and give it away.  I would consult a CPA about it. 

[Abe]

Thanks Dicey, I'm slowly getting back to normal. It's a pain with all the operating I'm doing, but can't delay people's treatment. I'll look into the RMD situation and agree, Finances, that we need a CPA. They actually have one to help with taxes, but I should probably talk with the CPA since my parents don't really understand anything about finances beyond credit card & mortgage payments.