Author Topic: How the MMM way of investing applies to 70/65 year old parents...  (Read 6024 times)

tyleriam

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I am modifying this topic to get it out of the weeds.

My parents are 70 and 65 years old.  They are having money trouble.  They own two homes and could sell the big one, move into the small one to reduce costs significantly and get a lump sum of money (big house is paid off).  They are not doing it because "money in the bank does not earn interest".  They are also scared of stocks because they feel like everyone lost all their money in 2008 therefore stocks are just a ticking time bomb to lose it all.

How does the MMM low cost index fund concept of investing apply to 65/70 year old's?  What would MMM say they should be in?  At this age is 4% still the accepted safe withdraw rate?

If they do withdraw lets say 4% how do they actually/mechanically do this?  Do they take the dividends in cash and then sell a little stock every year?
« Last Edit: July 28, 2016, 09:28:44 AM by tyleriam »

DrF

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #1 on: July 27, 2016, 10:29:12 AM »
Are you worried about how much money they have? Are they worried about how much money they have? What are they doing with the little house, renting it out? Likely, they have plenty of money to support their lifestyle. At this point I would recommend them doing whatever the hell they want. If they aren't making ends meet, then it may be better to sell one or both properties (this depends on the costs to keep/maintain the home vs current market value). If they have plenty of retirement savings and are able to pay monthly expenses with just social security, then they don't really need to do anything.

tyleriam

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #2 on: July 28, 2016, 09:31:01 AM »
Are you worried about how much money they have? Are they worried about how much money they have? What are they doing with the little house, renting it out? Likely, they have plenty of money to support their lifestyle. At this point I would recommend them doing whatever the hell they want. If they aren't making ends meet, then it may be better to sell one or both properties (this depends on the costs to keep/maintain the home vs current market value). If they have plenty of retirement savings and are able to pay monthly expenses with just social security, then they don't really need to do anything.

I modified the original post to simplify things.  Long story short they are barely covering expenses and constantly stressed about money.  Little house is rented currently, lease comes up soon.

bobechs

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #3 on: July 28, 2016, 09:45:21 AM »
They need to sell the big house, move into the small one and use the cash generated to buy a single premium immediate two-life annuity. Vanguard sells them and that's better than the local retirement planning shop's product no doubt.

That is not the long term highest-yielding financial strategy by a long, long shot but it does answer all of their specific niggling objections and practically guarantees they will not have any more bill-paying stress in this life.

It also guarantees that they will not be leaving any of that money in their estates, but you don't say that a bigger inheritance is a major goal of theirs, or yours.  If that is not true, disregard everything above.

DrF

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #4 on: July 28, 2016, 10:14:38 AM »
Are you looking for the "best" scenario, or just good enough? I agree with bobechs, that a 2 life annuity may make sense in their particular situation. But, both of your parents should/could be receiving social security benefits. With 2 homes (big one paid off and small one being rented with a mortgage on it), and both parents on social security, they should take a hard look at their spending to see why they aren't meeting expenses.

To understand the scenario better, you would need to ask if it makes more financial sense to 1) sell the big house only, 2) sell the small house only, 3) sell both big and small homes and rent a place that costs less, 4) rent out 1 or both homes and parents live/rent in a less expensive location. Here is a calculator that compares renting vs owning. You can run the scenario AS IF you had the choice to buy either of the homes your parents own and compare it to available rentals in the area. If the calculator says to rent, then that's a recommendation to sell. If the calculator says to buy, then it may make sense for them to live in the least expensive home that still gives them a good quality of life. Or, you could run the comparison using rentals in a VERY low cost of living area that your parents wouldn't mind moving to. I'm not a big real estate guy, but I think the general rule is if you can get >1% of what the current sale price would be in monthly rent for either home it may be better to rent them. Anything <1% would be a preliminary indication to sell the home. Please correct me if I'm wrong all you real estate MMM people.

You could also try and educate your parents on how quickly people's investments recovered after 2008/2009 bear market (very fast). That way, they could invest all their money, most likely be able to take more per month than the annuity, and be able to pass anything along (if there is anything left) to their heirs once they retire.
« Last Edit: July 28, 2016, 10:17:25 AM by DrFunk »

tyleriam

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #5 on: July 28, 2016, 12:31:57 PM »
Part of their goal is to pass the houses on, I don't want them to go broke doing it.  I think they need to downsize and live more conservatively but they don't seem to agree.  It's their life, their money and they should spend every penny of it if that's what they want to do.  It just pains me/stresses me out to see them stressed out about money at their age.

This is part of what brought me to MMM, high savings rate, downsize house and life, etc.  I will soon be at 50%+ savings rate and within a year 70-80%.  I try to tell them how nice it is to have that kind of savings and security but they don't seem to care.

bobechs

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #6 on: July 28, 2016, 01:04:58 PM »
Seems like you want them to have everything you want for them and everything they want for them, all without making any substantial changes in any of your several and collective arrangements.

Good luck with that.

Proud Foot

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #7 on: July 28, 2016, 03:39:40 PM »
If they are wanting to pass both houses on, how would they feel about moving into the smaller house and then renting the larger house?  Would a higher rent income from the larger house help them feel more secure?

marty998

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #8 on: July 28, 2016, 03:55:39 PM »
No matter how old or senile you get, some parents will never take dictation from their children. There's a certain amount of "get back in your place" that parents will always hold over their kids :D

Health outcomes are better for those who stay in their own home - a sudden shift to a new location for oldies can be quite disruptive.

I agree with bobechs. Annuities are not the most optimal solution as noted, but it is the most optimal solution for your parents.

tyleriam

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #9 on: July 29, 2016, 11:31:16 AM »
I don't think they would rent the big house because it would be so much maintenance.  It is directly on salt water and requires constant upkeep.  There are workmen there every week doing something.

What sorts of things are normal Mustachian 65/70 year old's invested in?  Do they just stay in index funds, take the dividends in cash and sell a little stock every month or what?

DavidAnnArbor

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #10 on: July 29, 2016, 09:57:34 PM »
I don't think they would rent the big house because it would be so much maintenance.  It is directly on salt water and requires constant upkeep.  There are workmen there every week doing something.

What sorts of things are normal Mustachian 65/70 year old's invested in?  Do they just stay in index funds, take the dividends in cash and sell a little stock every month or what?

The problem with the question about stock investing starting at 65/70 years of age is that what if the stock market plunges for the next 5 years?  Your parents may or may not have much life expectancy left. IF the stock market has a dramatic downturn, then you may have lost a substantial amount of what they anticipated to live on, and they don't have many options at this point, just the meager income that is barely keeping up with expenses. At least  if you invest the proceeds of the large house into the annuity you have some guarantee of what to expect, and this also takes care of longevity risk too. Stock market investing is really meant for longer time frames, flexibility in spending (which your parents aren't willing to do), and the psychological ability to deal with volatility in the markets.

Drifterrider

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #11 on: August 05, 2016, 06:25:44 AM »
I don't think they would rent the big house because it would be so much maintenance.  It is directly on salt water and requires constant upkeep.  There are workmen there every week doing something.

That doesn't really make sense.  If workmen are there every week doing something, where your parents live won't change that.  If it is a nice waterfront house, wouldn't it make a lot of rent each month? 

Also, if they constantly have workmen there, that sounds like a lot of deferred maintenance.

If they move into the smaller house, wouldn't they have more income because of the larger rent on the larger house?  Also, if they live in the smaller house for the next two years, they can take the "up to" $500K capital gains exclusion (not considering depreciation recapture) upon the sale, then move back into the larger house.

Your parents probably don't have time for a substantial gains in the stock market unless they are buying dividend stocks and not counting on price growth.

Interest Compound

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #12 on: August 05, 2016, 12:57:26 PM »
If they do withdraw lets say 4% how do they actually/mechanically do this?  Do they take the dividends in cash and then sell a little stock every year?

Sorry no one has directly answered your question yet.

It's pretty simple, here's the easy answer:

Step 1: "I want Vanguard's experts to do everything for me. I'll just tell them my age and they'll put it in the appropriate Target Retirement Fund"

This is probably the one you want - https://investor.vanguard.com/mutual-funds/target-retirement/#/mini/overview/0303

Step 2: Setup an automatic withdrawal to their bank account, so they never have to even login/call Vanguard again.



Step 3: Sit back, relax, and enjoy your monthly paychecks!

lifejoy

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #13 on: August 05, 2016, 01:02:44 PM »
If they do withdraw lets say 4% how do they actually/mechanically do this?  Do they take the dividends in cash and then sell a little stock every year?

Sorry no one has directly answered your question yet.

It's pretty simple, here's the easy answer:

Step 1: "I want Vanguard's experts to do everything for me. I'll just tell them my age and they'll put it in the appropriate Target Retirement Fund"

This is probably the one you want - https://investor.vanguard.com/mutual-funds/target-retirement/#/mini/overview/0303

Step 2: Setup an automatic withdrawal to their bank account, so they never have to even login/call Vanguard again.



Step 3: Sit back, relax, and enjoy your monthly paychecks!

This sounds really simple and easy... Not to be a huge thread hijacker, but do you have any suggestions for Canadian retired parents? :) same are and circumstances, but Canadian.

K-ice

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #14 on: August 05, 2016, 01:12:39 PM »

This sounds really simple and easy... Not to be a huge thread hijacker, but do you have any suggestions for Canadian retired parents? :) same are and circumstances, but Canadian.

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Cassie

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #15 on: August 05, 2016, 01:42:48 PM »
I would tell them that you don't want an inheritance and that you want them to enjoy their $ while they can. Ask what they would love to do like travel, eat out, etc?  Then use those answers to help them craft a plan. It sounds like selling the big house and using the funds to supplement their SS would be the best plan.  We downsized when we retired 4 years ago to reduce our expenses and it has  worked out great. We have the $ to do more of the things we want and plan to spend all our $ and not leave it to anyone.  This is what my Mom did and it was a great plan. She got to do the things she loved.  WE are a little younger then your parents at 62 and 57.  I would help them with goal planning so they don't have to struggle with $.  I hope that they will let you help them.

Interest Compound

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #16 on: August 05, 2016, 02:06:50 PM »
If they do withdraw lets say 4% how do they actually/mechanically do this?  Do they take the dividends in cash and then sell a little stock every year?

Sorry no one has directly answered your question yet.

It's pretty simple, here's the easy answer:

Step 1: "I want Vanguard's experts to do everything for me. I'll just tell them my age and they'll put it in the appropriate Target Retirement Fund"

This is probably the one you want - https://investor.vanguard.com/mutual-funds/target-retirement/#/mini/overview/0303

Step 2: Setup an automatic withdrawal to their bank account, so they never have to even login/call Vanguard again.



Step 3: Sit back, relax, and enjoy your monthly paychecks!

This sounds really simple and easy... Not to be a huge thread hijacker, but do you have any suggestions for Canadian retired parents? :) same are and circumstances, but Canadian.

Sure! I wrote a bit about that here:

http://forum.mrmoneymustache.com/investor-alley/still-using-a-mutual-fund-advisor-(face-punches-accepted)-((first-post))/msg1175655/#msg1175655

But just realized I skipped the brokerage part! To buy those recommended ETFs you need a brokerage account. The popular ones seem to be:

Questrade - http://www.questrade.com
Qtrade - https://www.qtrade.ca/investor/
TD Direct Investing - https://www.td.com/ca/products-services/investing/td-direct-investing/

I'd probably go with TD Direct Investing, but they are all priced pretty competitively. However, this isn't the same type of "one button push never have to worry about it again" investing that you'd get with Vanguard in the states. If you want that, you'll have to pay a bit more in fees:

Step 1: Open a TD Direct Investing account, so you can invest in their Mutual Funds:

https://www.td.com/ca/products-services/investing/td-direct-investing/investment-types/mutual-funds/index-investing.jsp

And choose the funds as listed here based on your risk tolerance (conservative if you're 65-70 years old):



Step 2: Setup a "TD Direct Investing Systematic Investment Plan (SIP)" to automatically withdrawal to your bank account (I'm assuming withdrawals are possible, as contributions are).

Step 3: Sit back, relax, and enjoy your monthly paychecks!

Note, this is #2 on the CanadianCouchPotato.com investment page. Personally, I'd avoid #1 at all costs, and I'd only choose #2 if I were dealing with someone so old they didn't know how to use a computer/cell phone. The additional fees compared to ETF investing simply aren't worth the additional 5 minutes a month it takes to login or call my broker and say "Please withdrawal $4000 to my checking account, thanks!"

lifejoy

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #17 on: August 05, 2016, 02:27:44 PM »
Interest compound, many thanks! That is beautifully laid out.

tyleriam

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #18 on: August 09, 2016, 09:28:40 AM »
That seems simple, I guess it would be having them trust that the market would work for them.  The key being not selling in a downturn.  Do you back off the 4% when there is a downturn or just keep on going/ignore the downturn?

I (we, brother) have told them spend all their money it's theirs they have earned it owe us nothing, zero, zilch.  They still consider it a goal to leave us an inheritance.

My Dad wants to travel, my Mom wants does not.  My Mom is frugal, my Dad spends money freely.  My Dad's spending stresses my Mom out. 

The point of this thread was for me to able to counter argue their claim that there is no point in selling the big, expensive, stressful, constant maintenance house because "money in the bank pays nothing".  I said "That's why you don't put it in the bank you put it in the stock market".  To which they laughed and said "Yeah so we can watch it all disappear like everyone we know."

That is the attitude I am arguing against.  My point is you don't have to keep the big, expensive, stressful, constant maintenance house that is a cash flow drain.  You can rid yourself of that stress, the part time job of keeping the house up, and all the cash OUT and turn it into cash flowing IN.  Then I get the bank argument > stocks are too risky arguments.

FrugalFan

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #19 on: August 09, 2016, 09:55:37 AM »
That is the attitude I am arguing against.  My point is you don't have to keep the big, expensive, stressful, constant maintenance house that is a cash flow drain.  You can rid yourself of that stress, the part time job of keeping the house up, and all the cash OUT and turn it into cash flowing IN.  Then I get the bank argument > stocks are too risky arguments.

But those two arguments don't directly relate to one another. Just cutting that huge time/money/stress expense would be beneficial regardless of what they do with the money. If they worry about the stock market, an annuity as suggested above takes care of that. Alternatively, if they want to leave an inheritance, at their age they can have a more conservative asset allocation. Or if they want to preserve some capital, they could take out just the dividends annually (on a classic 3-fund index portfolio my dividends average over 2%). It sounds like they don't really need the house money to make money, as cutting the house expenses would already dramatically improve their financial situation.

DrF

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #20 on: August 09, 2016, 10:20:12 AM »
Seems like your parents need a little info. Do you have a good enough handle on the stock market to show them a couple of slides that prove if you had just kept your money in a combination of total stock market and total bond market index funds through the 2008-2009 downturn you'd have been just fine? If your parents had invested a lump sum of $500,000 into the stock market on Jan 1 of 2006, their principal would have been recovered to the pre-crash levels by October of 2010 (adding no additional money!). Then if they had kept their money invested until today they'd have realized between ~6.5-7.15% yearly returns, and doubling the original principal in the account from the beginning of 2006.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2006&firstMonth=1&endYear=2016&lastMonth=12&endDate=08%2F08%2F2016&initialAmount=500000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTI&allocation1_1=60&allocation1_2=50&allocation1_3=40&symbol2=VBTLX&allocation2_1=40&allocation2_2=50&allocation2_3=60

I'd recommend your parents sell the homes, put the money in a 40/60 (stock/bond) portfolio, withdraw 4% from it each year (unless they don't need that much), and move to a lower cost of living area.
« Last Edit: August 09, 2016, 10:22:15 AM by DrFunk »

tyleriam

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #21 on: August 09, 2016, 10:24:56 AM »
You are both right.  Getting rid of the expense of the big house would be an improvement regardless if they made much of anything on the money they took out.

I can show them the slides and talk with them about the market and it's performance.  My Dad is financially a really smart person which is why it surprises me that he would say "money in the bank does not earn anything".  I will dig in a little deeper at the appropriate time and see where that is coming from.

k9

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #22 on: August 09, 2016, 10:35:20 AM »
How does the MMM low cost index fund concept of investing apply to 65/70 year old's?  What would MMM say they should be in?  At this age is 4% still the accepted safe withdraw rate?
Actually, the original 4% SWR studies only focus on people retiring at 65/70, not to FIREd people. But at this age, and if they are scared by the stock market, they could buy annuities. They will earn even more than 4%, worry-free. The bad news, of course, is that there will be no money left for potential heirs (aka you, I guess).

Interest Compound

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #23 on: August 09, 2016, 12:35:21 PM »
To which they laughed and said "Yeah so we can watch it all disappear like everyone we know."

That is the attitude I am arguing against.

Which is why they should put their money in a Target Retirement for ages 69-72, which is composed of 30/70 stocks/bonds:

https://investor.vanguard.com/mutual-funds/target-retirement/#/mini/overview/0681

Or if even that is too much, LifeStrategy Income, which is composed of 20/80 stocks/bonds:

https://investor.vanguard.com/mutual-funds/lifestrategy/#/mini/holdings/0723

Here's a graph of 20/80 stocks/bonds vs 100/0 stocks bonds, during the 2001 and 2008 crashes:



And further back:



I hope you aren't discussing 100% stocks with your 65/70 year old parents...

steveo

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #24 on: August 10, 2016, 02:18:59 AM »
Interest Compound - I love your posts. Keep them coming.

k9

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #25 on: August 10, 2016, 04:12:46 AM »
Hmm, however, the SWR is lower than 4% for a 20/80 portfolio...

steveo

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #26 on: August 10, 2016, 05:02:35 AM »
Hmm, however, the SWR is lower than 4% for a 20/80 portfolio...

At that age they probably have a bit of leeway there.

k9

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #27 on: August 10, 2016, 06:39:33 AM »
Hmm, a 65-year-old has a low probability of living up to 95 (the 30-year timeframe of SWR studies) but it's close to 10%. 30 years at 20/80 has a success rate of 60%, and 30 years is enough only in 90% of the cases. We'd have to run a few simulations (probability of surviving x years and probability of the portfolio lasting at least x years, for different values of x), but it sounds like coin-tossing to me.

Interest Compound

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #28 on: August 10, 2016, 07:23:59 AM »
Hmm, a 65-year-old has a low probability of living up to 95 (the 30-year timeframe of SWR studies) but it's close to 10%. 30 years at 20/80 has a success rate of 60%, and 30 years is enough only in 90% of the cases. We'd have to run a few simulations (probability of surviving x years and probability of the portfolio lasting at least x years, for different values of x), but it sounds like coin-tossing to me.

Agreed. If they can't handle the volatility of more stocks, that's the price they'll have to pay. I fear inflation more than I fear volatility. Inflation is certain and permanent. It seems the safest inflation-adjusted rolling 10 year returns were from an 80/20 portfolio:

Money illusion: Why bonds? See S&P 500 & 10y T-bond returns, 1871-2015

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But if they can't be convinced of that, here are some quotes from Vanguard Annuity based on a $1 million deposit:



That's a 5.6% withdrawal if you don't go for inflation adjustments, a 4% withdrawal if you go for a static 3% annual increase for inflation, and a 3.7% withdrawal if you go for inflation adjustments based on CPI. If you're afraid they might do something stupid, this is likely their best option. Consider a mix, just enough money in an annuity to ensure a base level of spending, and the rest in a stock/bond portfolio.

DavidAnnArbor

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #29 on: August 14, 2016, 07:17:33 AM »


That's a 5.6% withdrawal if you don't go for inflation adjustments, a 4% withdrawal if you go for a static 3% annual increase for inflation, and a 3.7% withdrawal if you go for inflation adjustments based on CPI. If you're afraid they might do something stupid, this is likely their best option. Consider a mix, just enough money in an annuity to ensure a base level of spending, and the rest in a stock/bond portfolio.

Wow this is very sensible advice. You should work as a financial advisor!!!

tyleriam

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Re: How the MMM way of investing applies to 70/65 year old parents...
« Reply #30 on: August 16, 2016, 10:01:07 AM »
Interest Compound that is great advice, thank you!