Helping Retired Parents with Investments

[brobocop87]

Hi there! My parents (age 67 and 62) retired last year. They have $350k in a 401k and $150k in a Traditional IRA. Right now, they get enough from SSA to cover all their expenses, so they haven’t touched these other funds.

Right now $267k of the 401k is in a Managed Income Fund with a .22% Exp Ratio and average annual return of 1.6%. The remaining 401k funds are all in Eastman Stock which has a -21.68% 1-year return. So I would like to move all of their 401k investments into other funds. The only available investment options I see available to move them to are FXAIX, FSMAX, FSGGX, FXNAX, and a bunch of Vanguard Target funds.

The IRA funds are sitting in SPAXX right now because that’s where my dads company is depositing his annual pension. So I would like to invest all of that as well for him.

Any thoughts or advice would be appreciated. Thanks!

[Rob_bob]

Is there a reason to leave the funds in the 401k with limited investment options?  Why not roll it into the IRA where you can invest in most anything?

What is their risk tolerance?  Some mix of a total market or S&P 500 and bond funds or CD's?

[brobocop87]

They called Fidelity a few months ago and asked about transferring the funds out of the 401k, but the person they got on the phone wasn’t very helpful and talked them in to leaving it as is.

I’ll have them call again and tell them they want to roll it in to their IRA.

They have a moderate risk tolerance. They already have about 200k in CDs right now, so for the 401k and IRA funds, I would think splitting them between Stocks and Bonds funds.

[MDM]

I’ll have them call again and tell them they want to roll it in to their IRA.

Just make sure that's a traditional IRA, not a Roth IRA. ;)

[brobocop87]

I’m pretty sure it’s a Traditional IRA, but I’ll be sure to verify. Thanks!

[MDM]

Speaking of Roth IRAs, if their AGI is below the standard deduction now then converting an amount from traditional to Roth that keeps the AGI just within the standard deduction is a "go do" item.

Converting more than that might or might not be worthwhile, and probably would require at least a moderately sharp pencil to evaluate.

[Financial.Velociraptor]

I'm going to give some self conflicting advice.  And I want to start with make sure you do not overestimate their risk tolerance.  You don't want to fall on your sword if they panic sell at the bottom of a correction.  My father's risk tolerance is effectively zero (It's everything I've worked for all my life!)   I put his old 401k in a single premium insurance annuity with 7 year term and have rolled that once.  Like your parents, he can get by on just his social security and has a 'cute little job' as a water board director that pays about $5,000 a year and pays for in state trips to conferences.  The 2020 crash revealed to me exactly how panicked he would have been in equity.   Everyone thinks they can stomach risk until the sharks circle.

I'd say with SS covering 100%, that is the same as an annuity or bond allocation and you don't need more bonds.  BUT, preferred funds might be attractive to them.  They rarely crater, pay a nice yield, and have some bankruptcy protection.  I wouldn't do whole market such as VOO, but focus on funds in defensive sectors.  They have 'won the game'.  Don't turn a sure thing into a loss by taking unnecessary risks.    Leave the CDs in cash and near cash alternatives.  Dad has been accumulating his RMDs in high yield savings, which last paid better than a CD as the only bank he'll put the money in.  He now has over $200k and it is his "sleep at night" fund. 

Lately, he has started spending about 1/3 to 1/2 of his RMD when it pays out.  Good for him.  This year, that means I spend a lot of time shopping with him for appliances such as refrigerator, washer, and dryer, all of which he has become super picky about and curiously wants to pay more for fewer features. 

If dad ever wants 'equity' (I doubt it), I'd put him defensive sectors and dividend paying sectors so has a return without selling.  It's erroneous mental accountant, I know, but he is quite the character and I don't want to explain to him that it is OK to sell in a down market but at the same time don't cash out completely at the bottom.

Also, understand the tax implications of what you do, including RMDs. I am dad's 'tax guy' and he is very crabby that he owes money each year (when he is paid in "all his life!"), even though it is usually less than 200 dollars and I've pushed him to withhold more from his water board check.

TL;DR - with 100% of retirement needs met by SS, capital preservation needs trump growth and income needs.

[ChpBstrd]

They called Fidelity a few months ago and asked about transferring the funds out of the 401k, but the person they got on the phone wasn’t very helpful and talked them in to leaving it as is.

I’ll have them call again and tell them they want to roll it in to their IRA.

Sounds like the Fidelity rep succeeded in keeping your parents within their walled ecosystem, where they cannot access things like VTI or VTSAX, and cannot hedge their exposure to risk other than to change their AA.

There's no reason to accept that as the status quo. With your parents' balances, they would qualify for a $500 bonus for moving to Schwab or M1 Finance, a $600 bonus for moving to Merril Lynch or Etrade, a $700 bonus for going to J.P.Morgan, or a $2,000 bonus for going to TastyTrade.
https://www.bankrate.com/investing/best-brokerage-account-bonuses/

The game plan is to set up a rollover IRA to receive the 401k balance without triggering taxes, take the bonus money, and hold a portfolio of VTI, BND, etc. for the long term. These brokerages will want you to trade or hold large cash balances, but the hack is to take their money and then B&H!

+1 on understanding risk tolerance when dealing with relatives. If they truly are low-tolerance, now is not a bad time to lock in rates on CDs, treasuries, i-bonds, or corporate bonds. But if their needs are met by Social Security, there's not a good argument not to take on some risk exposure in their brokerage accounts.

[Finances_With_Purpose]

I've helped and continue helping in this area as well.  And kudos to @Financial.Velociraptor for his thoughts - he brought up the #1 point I'm going to make, as well as giving the same point on risk-aversion:

Consider taxes.  Manage that now.  Go consult a CPA. 

Your dad has won the game.  Now, he just has to keep what he can.  Plus, he may be risk-averse, like @Financial.Velociraptor 's dad, in which case, he won't mind moving funds each year over from the 401(k) to a money market or CD.  It can all same in Fidelity, you just need to call once a year to do the transfer (or do it online). 

Why is this a huge issue now?  Your parents are going to have large RMDs if you just let it sit.  I consulted tax pros and started moving money OUT of tax-deferred accounts and into taxable accounts at a trickle each year for an account I manage because it made more tax sense. 

YMMV, because everyone's tax situation is different, and taxes get weird at that age: it depends on income/other income, SS, SS size, Medicare/private insurance - a whole list of factors.  E.g., I did this for someone because (1) RMDs are coming, (2) RMDs can increase tax brackets, (3) the income increase can cause Medicare cost increases, (4) I wanted to avoid having SS taxed as much as possible over the long term (by evening out the withdrawals more). 

In addition, I did this because it lets me keep the cash/cash equivalents in the taxable account, where they're not accumulating much tax anyway.  And where you want your cash to be if you need it.  Instead, I leave the more exciting investments in tax-deferred accounts. 

FWIW, I took some efforts to avoid large RMDs, but the return on the account I'm dealing with has eclipsed what I have withdrawn (which only makes the RMD manuever make even more sense).  We're almost ten years in now, and this has proven to be a good move for a whole variety of reasons.

(I'm somewhat jealous of @Financial.Velociraptor though: I still cannot convince my parent to spend any of the RMD, not even on a long-desired vacation, despite being in the same situation of having 100% of expenses covered already.) 

My second point is the same as @Financial.Velociraptor 's as well: be sure you know your parents' risk tolerance.  I have a parent whose risk tolerance is near zero.  This parent cashed out at the rock bottom of the '08 crash or would have an extra million lying around by now.  (I did the math.) 

I knew that the risk tolerance was close to zero, but I confirmed that and have kept everything extremely conservative for that reason - mostly in CDs - except for one small piece.  It has gone very well.  It would not have gone well had I been aggressive with risk. 

Plus, your parents may not even feel like they can spend their savings (that's somewhat common); e.g., I can't convince mine to.  Your parents may look at that savings as "all they have left" and hold it until they die. 

I keep trying to convince my parent that it's better to spend some - as does the accountant - because I want the parent to enjoy it rather than me inherit it someday.  But I have yet to get anywhere on that. 

[Finances_With_Purpose]

Two other things, after seeing the last post:
1.  I bought some investments for the parent to hedge inflation (what I saw as the largest risk of fixed income) in the small chunk, thinking of SS and a pension as basically a giant bond.  That has turned out to be a good move in light of the past two years.  I also lock in longer-term bonds when rates are higher, but that's more of a guessing game. 
2.  They should be able to roll accounts within Fidelity.  Fidelity offers practically all options if you get out of whatever proprietary 401(k) setup they have.  It might require rolling into an IRA there, so check first as to tax issues on that, but I assume they're past the age where they're doing backdoor roths (where that would matter more). 

[brobocop87]

Thank you all for the feedback! Much appreciated!!

[Gremlin]

Late to the party I know, but…

Upfront you talked about what YOU’D like.  Are you 100% sure that’s what THEY’D like? If it were me, I wouldn’t do a thing without understanding what they want from me.  Nor would I do anything without them 100% understanding the trade-offs, consequences, upsides and pitfalls. 

Mrs G and I have recently been through something similar with my MIL.  She is financially savvy but still has a number of quirks in how she manages finances.  Some of the quirks had to be maintained, even if strictly speaking it wasn’t an optimised outcome to do so, because that’s what made her feel comfortable. 

[MustacheAndaHalf]

brobocop87 - All of their choices are cash, and all of yours are equities.  You should follow Financial.Velociraptor's example and adapt your parent's portfolio to their objectives (preserve money) and risk tolerance (none - they're in cash).

I would suggest they keep 75% in cash, and move the other 1/4th into an "all in one fund" with mostly bonds.  An example, not at Fidelity, would be VTWNX, which I mention only as an example.  That fund has 30% stocks and 70% bonds - that's an example of what you want for 1/4th of their portfolio.

The Fed predicts a "mild recession", but a deeper recession is possible.  If you push your parents into equities, the next crash will wipe out your parent's desire to listen to you for advice.  They'll blame you for crashing their portfolio as they sell at the bottom.  You don't get ideal people - you get people.  Keep that in mind, and push a smaller change on them, into a fund least likely to take losses.