mustachian allocation of investments for someone 62 years old

[tskzes]

Hey all. My father is about 62 and just retired due to losing his job. He has about 700k in retirement savings (in traditional IRA), 400K equity in a house, recent 100k windfall.

My main advice so far has been for him to sell the expensive large house and to downsize to a significantly cheaper house/lower cost of living place.

So for the investments I have read the praises of stock market index funds for accumulating wealth but I am less familiar with what is the best investment strategy for someone like my father who is actually retiring near the standard retirement age. I know the traditional approach is to go more conservative but given he is pretty well situated with cash to live off of and may have more on the way from sale of a home, I think he can afford the short term risk of market fluctuation for higher return in the longer term. Any advice specific for someone at that age? In retirement are there any benefits to allocating more to regular income earning investments such as bonds, dividend earners or REITs compared to investing in the broad stock market? Any general rules of thumbs about minimizing taxes at this age? I'm thinking he would also want to max out ROTH IRA contributions with extra money going forward.

Any advice or links to info on older age allocation appreciated!

[clarkm04]

Not enough info to adequately answer your question.

What are your father's living expenses?

Does this money account just for him or for another person?

Is he taking SS?  If so when?

Will he be selling his house and moving into something smaller or even renting?

William Bernstein's Rational Expectations is a great book that covers what to do as you closer to retirement.  His adult series, also has some solid advice.

Basically Bernstein's advice is the money you absolutely need to live off of should be in savings, CDs, TIPS, or an annuity.  Any money left off, you can be risky as you want.

[tskzes]

Not enough info to adequately answer your question.

What are your father's living expenses?

Does this money account just for him or for another person?

Is he taking SS?  If so when?

Will he be selling his house and moving into something smaller or even renting?

William Bernstein's Rational Expectations is a great book that covers what to do as you closer to retirement.  His adult series, also has some solid advice.

Basically Bernstein's advice is the money you absolutely need to live off of should be in savings, CDs, TIPS, or an annuity.  Any money left off, you can be risky as you want.

1) Expenses currently high as he lives on LI NY, just his property taxes are 14000$/year. I am hoping my parents will sell the house, and move into something cheaper in the cheaper southern states. I hope they would buy a cheaper house in cash to avoid mortgage related expenses.
2) S.S at 62 I expect. Estimated income from that is 1800/month. I expect just the S.S should be more than enough to live on for my mother and father in a cheaper southern state with house fully paid off.

[RichMoose]

I would recommend he take out a total of 3 years expenses (after accounting for S.S. and any other income) and keep that in a high interest savings account or T-bills. Adjust back to 3 years approximately every 6 months. If the market becomes undervalued, he can always let the cash cushion drop to 2 years or even 18 months so that he doesn't sell at the market bottom. The remainder 100% in a stock index fund.

Edit: Of course if it's all in tax sheltered accounts, you can mimic the same thing within those accounts. Can he do anything to reduce tax on his 100k windfall?

[Another Reader]

www.early-retirement.org  Lots of discussion about the subject, despite the website title.

Has your father solicited your advice?  Or is he still in shock and hasn't told you he's got it figured out?  At 62, he probably has or had an idea of how he would fund his retirement.  Any discussion would probably be best started with understanding that plan and if or how it has changed.

As someone that's near to your father's age, my opinion is what he needs is an income plan and a withdrawal plan.  That requires gathering all the assets and the income and deciding what gets spent first and what stays invested or is deferred.  If your father is married, that affects the Social Security strategy, as two people may collect on his record instead of one.  It may make more sense to defer taking Social Security, depending on the spouse's benefits.  It may make sense to sell the house now, or it may not, depending on your father's long term objectives.

He cannot make any IRA contributions without earned income.  He can convert his traditional IRA, but that may not make sense in his situation.

Lots to research and consider in this situation.  It's best to take the time to work through this slowly and carefully.  Your help is likely welcome, but in the end, it's up to him to decide how to move forward.

[tskzes]

www.early-retirement.org  Lots of discussion about the subject, despite the website title.

Has your father solicited your advice?  Or is he still in shock and hasn't told you he's got it figured out?  At 62, he probably has or had an idea of how he would fund his retirement.  Any discussion would probably be best started with understanding that plan and if or how it has changed.

As someone that's near to your father's age, my opinion is what he needs is an income plan and a withdrawal plan.  That requires gathering all the assets and the income and deciding what gets spent first and what stays invested or is deferred.  If your father is married, that affects the Social Security strategy, as two people may collect on his record instead of one.  It may make more sense to defer taking Social Security, depending on the spouse's benefits.  It may make sense to sell the house now, or it may not, depending on your father's long term objectives.

He cannot make any IRA contributions without earned income.  He can convert his traditional IRA, but that may not make sense in his situation.

Lots to research and consider in this situation.  It's best to take the time to work through this slowly and carefully.  Your help is likely welcome, but in the end, it's up to him to decide how to move forward.

Thanks, yes he has solicited my advice. He has done pretty good for himself but as I recently got more into researching early retirement I could see some ways he could improve his lifestyle and investing strategy to maximize returns of his nest egg. His idea was to go mostly into bonds but it is interesting what the previously poster said about putting 3 years worth of living expenses into a savings account and investing rest into stock market moderately aggressively.

 Also that is good to know about not being able to contribute to retirement fund without earned income, I did not know that. I think the strategy to convert as much as possible per year to ROTH IRA also makes sense as his earned income will be low in the upcoming years and then that money can grow and gains wont be taxed.

[Another Reader]

There are a lot of moving parts here.  It may not make sense to convert the IRA if he is paying taxes on other income. 

Is your father married?  If so, you and he must read up on the nuances of social security spousal benefits.  If he takes social security early, it will permanently reduce his benefit and the spousal benefit.  All these things must be considered.

Yes, it is wise to have expenses set aside in cash to reduce "sequence of returns" risk.  The amount that is set aside depends on the other income coming in,  If social security is covering a portion of current expenses, then less cash is needed.  With $100k in a windfall, holding some or all of that in cash may make sense.  There are varying theories on how to invest in your father's situation.  But all these decisions need to be made as part of an overall plan.  Your dad has lots of free time now.  He should start working through this.

Selling the house has issues as well.  How long has he owned the house?  Is there a taxable capital gain if the house is sold?  As an individual, he gets a $250,000 exemption from capital gains tax on the sale of a primary residence.  However, if he sold another house a couple of decades ago and rolled the basis into this house, the capital gain may be larger.  It may also be necessary to do some work on the house to maximize its value in the market.  Figuring out how to fund that will be part of the process.

The point is that none of this is simple and mistakes are costly.  You and your father need to do a lot of homework before you make any decisions.

[clarkm04]

Too many variables you haven't nailed down to chart a plan or for me to offer advice that I feel us worthwhile.

Your dad's risk tolerance and interest in actively controlling his money also factors into what chart you course.  If he handled the '87, '00, and '09 crashes well, a little more risk is good.  If he bailed, less risk.

If he wants to actively engage, then hands on CDs, bonds and stocks are good.  If he wants to be hands off, an annuity or setting up a TIPS ladder or a retirement mutual fund to gradual withdraw from is the way to go.

I rarely disagree with posters since there's numerous methods to get there and rarely is one method truly superior, but only 3 years into bonds with the rest 100% stock is why too risky given your father has limited time to recover and no new income. 

The biggest concern is inflation, so the goal is to beat that with as risk less assets as possible for the portion of portfolio he will absolutely need to live off of.

Furthermore, I think this forum is great, but there's a ton of young investors, many who haven't experienced a bear market, given your dealing with retirement it's important to understand risk and protect more of that nest egg.

It seems your dad won the retirement game, no need to blow it now being greedy.

[dividendman]

Not to get morbid, but what nobody mentioned so far is your father's health. Is he in good health? What you should do varies a lot depending on your life expectancy, in my opinion.

[tskzes]

There are a lot of moving parts here.  It may not make sense to convert the IRA if he is paying taxes on other income. 

Is your father married?  If so, you and he must read up on the nuances of social security spousal benefits.  If he takes social security early, it will permanently reduce his benefit and the spousal benefit.  All these things must be considered.

Yes, it is wise to have expenses set aside in cash to reduce "sequence of returns" risk.  The amount that is set aside depends on the other income coming in,  If social security is covering a portion of current expenses, then less cash is needed.  With $100k in a windfall, holding some or all of that in cash may make sense.  There are varying theories on how to invest in your father's situation.  But all these decisions need to be made as part of an overall plan.  Your dad has lots of free time now.  He should start working through this.

Selling the house has issues as well.  How long has he owned the house?  Is there a taxable capital gain if the house is sold?  As an individual, he gets a $250,000 exemption from capital gains tax on the sale of a primary residence.  However, if he sold another house a couple of decades ago and rolled the basis into this house, the capital gain may be larger.  It may also be necessary to do some work on the house to maximize its value in the market.  Figuring out how to fund that will be part of the process.

The point is that none of this is simple and mistakes are costly.  You and your father need to do a lot of homework before you make any decisions.

Thanks I really appreciate your advice. Yes my father is married, I didn't say "my parents" because my dad was the predominant bread earner of the family and thus he handles most of the financial stuff but my mother did work throughout her life, still works and albeit having a lower salary of less than 30k and has about 100k in a traditional IRA. She is also about 62 years old. I will read up on social security benefits for married couples and try to run the numbers about withdrawing early versus waiting until 65.

The house has been owned since about 2001. Still have ~100k on the mortgage, estimated market value is about ~500k. It was funded with proceeds from the sale of a previous primary residence but I don't know about the details of that and will look into it.  I'm thinking the plan for the sale of the house would be related to the purchase of a cheaper primary residence, I will read the tax code about this and how capital gains are handled. I also thought about the idea of them just buying a significantly cheaper house and renting that house, given the favorable tax treatments for owning rental property but that's a whole 'nother can of worms.

Not to get morbid, but what nobody mentioned so far is your father's health. Is he in good health? What you should do varies a lot depending on your life expectancy, in my opinion.

Both my parents are fairly healthy for someone their age and have had no serious health problems, luckily.

Too many variables you haven't nailed down to chart a plan or for me to offer advice that I feel us worthwhile.

Your dad's risk tolerance and interest in actively controlling his money also factors into what chart you course.  If he handled the '87, '00, and '09 crashes well, a little more risk is good.  If he bailed, less risk.

If he wants to actively engage, then hands on CDs, bonds and stocks are good.  If he wants to be hands off, an annuity or setting up a TIPS ladder or a retirement mutual fund to gradual withdraw from is the way to go.

I rarely disagree with posters since there's numerous methods to get there and rarely is one method truly superior, but only 3 years into bonds with the rest 100% stock is why too risky given your father has limited time to recover and no new income. 

The biggest concern is inflation, so the goal is to beat that with as risk less assets as possible for the portion of portfolio he will absolutely need to live off of.

Furthermore, I think this forum is great, but there's a ton of young investors, many who haven't experienced a bear market, given your dealing with retirement it's important to understand risk and protect more of that nest egg.

It seems your dad won the retirement game, no need to blow it now being greedy.

My father handled the 2008 crash fairly well and did not cash out for a loss. I am a young investor, but I do also remember the 2008 crash because it happened right after I bought my first stock at the age of 18 years old or so, it was a mortgage company that went bankrupt, go figure. It took me a couple more goof ups but those mistakes did teach me a lot about investing and, granted the market has only gone up since then, I do feel more disciplined and learned not make investment decisions based on emotion.

My mom is still working, my dad has hobbies that make a little income such as selling stuff on ebay and he is currently doing some part time landscaping so I wouldn't say they have no earned income going forward but I agree that it would be a mistake to be overly invested in the stock market particularly when it is at an all time high. I agree with you though that there should be a combination of bonds, CDs and stock funds.

I don't know too much about annuities, TIPs ladder so I will look into that.

[Another Reader]

Your parents situation is pretty typical.  Your mom has a much lower income than your father, so she will probably be better off taking the spousal benefit from social security.  Women generally out live men, so maximizing her income should he die first is an important consideration.  In all likelihood, your father should not file for social security now, but instead wait for full retirement age (FRA).  She will get half his benefit which will be more than hers.  There are social security planning programs, but your best bet is to read up on FRA and spousal benefits so you fully understand the choices.  BTW, full retirement age for your parents is 66, not 65.

At 65, your parents will be eligible for Medicare.  Until then, they will need health insurance.  Does your mom have employer-provided health insurance?  Is it possible to cover both of them through her employer?  If not, did your father receive a severance package? Is COBRA available?  If so, you will have to figure out whether to use the COBRA plan or move to a private/ACA plan. 

Keeping your mom's salary is part of deciding where to live.  If she is ready to retire and move south, that's great.  If she wants to keep working and they want to stay on Long Island, her salary is an important piece of the retirement puzzle.  Does she have a 401k or a pension in addition to her IRA?  If she is adding to those, or she can cover both of them under her health insurance, working longer has important benefits that should be considered.

I could go on, but I think you get the idea that retirement is a complex set of decisions that will take time and research to work through.  The most important thing is not to make rash decisions that cannot be undone.

[clarkm04]

Vanguard just put out a nice article on the Social Security puzzle:

https://personal.vanguard.com/us/insights/article/social-security-timing-082013?&Link=home_banner1&LinkLocation=HomepageOverviewContent

[TheSimpleLife]

Is there a taxable capital gain if the house is sold?  As an individual, he gets a $250,000 exemption from capital gains tax on the sale of a primary residence.  However, if he sold another house a couple of decades ago and rolled the basis into this house, the capital gain may be larger.

The house has been owned since about 2001. Still have ~100k on the mortgage, estimated market value is about ~500k. It was funded with proceeds from the sale of a previous primary residence but I don't know about the details of that and will look into it.  I'm thinking the plan for the sale of the house would be related to the purchase of a cheaper primary residence, I will read the tax code about this and how capital gains are handled.

Upon sale, there will be no taxes on proceeds based on facts you described.  Not sure what Another Reader is talking about, but there is no issue with "basis" with a primary residence.  If your parents had a large gain from previous house and fell under the exemption (currently $250k/$500k), nothing about that rolls forward to the current home.  You can buy junkers, stay for two years and fix up, and sell for large gain and never pay tax a day in your life.

Probably the bigger issue... If you want your parents to move, your mom will probably have to give up her job.  Is she wanting to retire as well?

[Another Reader]

Under the old rules, you could buy "up" and defer the gain.  The $250k/$500k exemption replaced that sometime in the 90's.  Lots of older baby boomers in high cost housing markets that bought low or rolled the gain from a prior sale have trapped equity, especially if they are single, widowed or divorced.  The capital gains tax can be well into the six figures.  Since the OP's parents are married, there is a $500k exemption and there would be no tax.