Help me decide asset allocation for my mother

[TheThirstyStag]

Hi all,

I am looking for some advice regarding asset allocation for my 62-year-old mother, who will likely retire in a year or so.  Here's a snapshot of the nest egg, with a line dividing what I am now helping to manage and just brought to Vanguard:

- $250000 in a TDA program with a fixed 7% return (basically her 403(b))
- A modest teacher's pension
- Social security
-----------------
- $150000 IRA (Vanguard)
- $50000 Roth IRA (Vanguard)
- $50000 Taxable/non-qualified (Vanguard), with a probably upcoming deposit of a $100000 windfall, so $150000 total

My mother informs me that, in retirement, she plans to live entirely on her TDA, pension, and social security (assets above the line) and the Vanguard accounts (below the line) will eventually be inherited by me.  So my questions relate to asset allocation of the three Vanguard accounts, as I am in the process of migrating them over from a carrier with unreasonable fees and expense rations.  I plan to do a simple three fund portfolio with these accounts, but I am unsure of what type of ratio of equities to bonds I should be considering.  On the one hand, I can afford to be risky and go for a higher proportion of equities since she insists it's money she won't need.  On the other hand, I do want to consider a small possibility that she does decide to dip into them later in life. In other words, I don't want to think of that money as mine!

I guess my question is twofold:

1) Considering the three Vanguard accounts as one whole unit invested in the standard three fund portfolio index funds, what ratio of equities to bonds would you consider?

2) Do I make the same asset allocation in all three accounts, or should I place the equities entirely in the non-tax-advantaged account for the sake of tax efficiency and make sure all of the bonds are in the IRAs since they're less tax efficient? 
For example, if the Vanguard accounts will have a net balance of $350000 after we invest the windfall, and I suppose I decide on 60% equities ($21k) and 40%($14k) bonds, do I invest the $150000 in the non-tax advantaged account entirely in equities, and the remaining $6000 equities and $14000 bonds in the IRAs?

2a) Do non-tax-efficient investments like bonds do better in a Roth than traditional?

I thank you all in advance for sharing your thoughts.

[Tyler]

Managing someone else's investments is a lot of responsibility, and I admire your willingness to help.  In this situation, I think it's important to not only be conservative but also to do it in a way that your mother is likely to understand and trust.  Money sometimes complicates relationships, and even if the intention is that you will eventually inherit the money I agree with your instinct to treat it like it is still hers. 

As much as I personally prefer DIY asset allocation, let me propose something even simpler for you to consider as a baseline.  Just put all of the money in every account into Vanguard Wellesley (VWIAX).  It's a highly reputable Vanguard mutual fund very popular with retirees that has been around for many decades.  While actively managed, it maintains roughly a 40/60 stock/bond split (with a focus on maintaining a consistent income stream) and has low turnover and expenses.  For a one-stop-shop, it's a great option that I would be comfortable putting my own mother's money in.

[Indexer]

Before I give my own answer, I just want to say... don't put it all in Wellesley. I can think of several arguments to using that(active, no international, lifestrategy is more diversified/lower cost, etc.), but my primary reason for shooting it down is tax efficiency. If you tried really hard you can find something less tax efficient, but it won't be easy. It is active, regularly has short and long term gains distributions, and it is really heavy in taxable bonds. No, it is not tax efficient, and you don't want it in a taxable account. I also don't agree that it has low turnover. 31% turnover might be low compared to highly active funds, but by Vanguard standards that is really high. A lot of Vanguard active funds have turnover that is less than 10%. Even if you wanted a simple one fund solution to achieve a 40/60 you could accomplish the same thing with a lifestrategy fund. Again, I wouldn't do that because it isn't tax efficient.


1) Figuring out asset allocation: I appreciate that you are trying to help your mom, but I don't think this is a question you can answer by yourself. Part of the question is logical, what is the best portfolio for the goal? Part of the question is emotional, how does she feel about volatility? You can't answer the second part of that question for her. Here is how I would handle this.

Show her this:

Source: https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk

Look at the bottom number, the worst year. Ask her how she would feel if her portfolio did that in a crisis. I would start with the 60/40, but you know her better. If the -26.6% freaks her out, move to the left. Keep moving to the left until you find something you can both agree with.

2) Yes, try to put the stock index funds in the taxable, and bonds in the IRA. Making sure you get the AA right is priority number 1, but then focus on tax efficiency. Put all the stocks in the taxable, bonds in the IRA, but if you have to put bonds in the taxable to achieve AA then that is the priority and you will have a small amount of bonds in the taxable.

3) They are better in trad, but if you have to put it in the Roth as well. Here is the logic, the Roth never gets taxed again, so all else equal, you want the Roth growing faster than the Trad.

Tax efficiency, step by step:  Put stock index funds in taxable, put bonds in pre-tax, if you need more bonds put them in Roth, if you still need bonds after that then put them in taxable, if you didn't put bonds in the Roth put your most aggressive investments(international or small cap) in the Roth, now fill in the blanks with stock index funds.

[Another Reader]

It's nice that she wants you to have the money when she passes on, but unless she is well insured for long term care, that money should be invested for the possibility it will be needed for her care.  Wellesley is a good choice for the tax deferred and Roth IRA's, or appropriately selected index funds are fine as well.  The taxable portion needs to be invested relatively tax efficiently, with consideration that the money may be needed for her care in 10 to 20 years.

For a perspective from people close to your mother's age, I suggest looking at the forums over at early-retirement.org.  The specific information discussed there by her contemporaries will likely be of more use.

[Tyler]

Very good points about taxable vs. tax-deferred.  Wellesley may not be the best choice in taxable.  That's what I get for dipping my toes in the non-index waters.  ;)

To answer your question on the best percentages for a three-fund portfolio in her situation, I would say that anything between 40-60% stocks seems reasonable.  Most 3-fund investors usually split the stock portion to have between 1/3 and 1/2 international. 

[TheThirstyStag]

The advice here is really superb and spot on.  I truly appreciate it.

I will approach her with a 60/40 proposal and some risk-related numbers and see how she feels about it.  If I know her (and I do, very well), She will likely say that she doesn't care because she doesn't intend to dip into that money.  I prefer to go into it thinking that she will eventually use it.

[rpr]

One other consideration is that RMDs will begin at age 70 on the 403b and the Trad IRA. Is she going to annuitize her TDA/403b? If so, then the annuity received may satisfy the RMD requirement.  The 7% rate on the 403b is pretty good.

[TheThirstyStag]

One other consideration is that RMDs will begin at age 70 on the 403b and the Trad IRA. Is she going to annuitize her TDA/403b? If so, then the annuity received may satisfy the RMD requirement.  The 7% rate on the 403b is pretty good.

I hadn't considered that.  With a fixed 7% return, wouldn't it be unwise to annuitize?  Full disclosure:  I know very little about annuities aside from the idea of purchasing a contract that pays you a guaranteed amount and eliminates volatility.