My father's finances

[jakerm17]

I'm fairly new to the MMM community (about 2 years) and have embraced the philosophy with open arms. I am writing to ask for advice on my father's situation.

He is 74 years old, retired, and recently divorced (about 9 months ago). He has been taking the divorce hard and is mentally occupied with that and some other personal issues he is dealing with. He has asked me to make some pretty big financial decisions for him and decide where to invest his money.

The details:
-He has 850 K in assets (825 in an IRA, 25 in a ROTH). The money is all currently un-invested and sitting with a small financial advisory group.
-10K in checking account
-He receives 2200/mo. in social security
-Total monthly expenses are approx. 2500/mo. (This includes a 1200/mo. mortgage)

Beyond the mortgage, he has no debt. 

The Plan:
I am looking at several options for him.

1. Leaving the money with the financial advisor group - they charge 1% fees and are pushing some annuities pretty hard.
2. Financial advisory services with Vanguard (appointment set for Monday so will see what they offer)
3. One of the robo-services (Betterment, Wealthfront, etc.)
4. Finding a fiduciary and seeing what kind of plan they would offer.

My father my nature is frugal and conservative.
As for me, I am in my early 30s, young professional, and am comfortable with my own investing in the tens of thousands but to have to make a decision that will affect hundreds of thousands and my father's financial future feels like jumping into the deep end.

Thoughts?

Much appreciated!!

 


 

[Khan]

Looks like you're taking the right tack with things. Make sure he does have a will done, if somehow that's not something he has. A living will as well I believe, which is something all of us, even us young'uns need(ask somebody in the healthcare industry if they have a DNR, and why). Since he doesn't need the assets, whenever you do get around to investing the 850k, you can take a bit riskier of an allocation, no need for something like 70% bonds/30% equity, somewhere between 50/50 to 70/30 equitys/bonds, or something like the Wellington Fund(Vanguard), or a mixture of strategies.

I don't think he'd benefit from robo-advisors, but I could be totally wrong on that. The benefits that I can think of mostly revolve around tax treatments and such.

Somebody else might have more advanced strategies for converting the IRA money into Roth and cash, which something something, might be better for you and any other siblings on the back end of things.

It looks like he's in great shape financially though, and you're asking the right questions!

[mxt0133]

Agree with the advice of getting his estate plan in place as a priority since he is asking you to take over his finances.  Will, power of attorney, health care directives, list of accounts, and what to do with personal property should be document properly with the help of a lawyer.  No time trying to save a buck when time is of the essence.

Since he doesn't need the assets

That is a big assumption.  What if his dad's goal is to not run out of money in the even he needs long-term care or to donate most of it to a charity?  Point being since we do not know what his dad's goals are then it's hard to make recommendations on what it should be invested in.

I agree that since his social security mostly covers his living expenses then the assets even if left in a CD will most likely cover his living expense for the rest of his life.  So now it becomes what else does he want to do with it, leave it as an inheritance, donate it to charity, or spend it on coke and hookers to get over his divorce.

OP, I think it's great that you are doing this for you dad. 

[DrF]

It's just numbers. Investing with 1,000 is the same as investing with 1,000,000. Get an asset allocation your dad and you are comfortable with and stick with it. You pay 1% advisory fees, and your dad's assets aren't even invested???!!!

[GizmoTX]

At his age, he should be withdrawing RMDs from his IRA to avoid IRS penalties.
Lose the 1% fee advisory firm.
Do not do an annuity.
Cash at his age is not bad. Put it in an online bank earning 1%+ while you decide (transfer it as an IRA). The goal now is preservation of capital & income, not growth.

[ooeei]

I'm going to go against the grain here and suggest an annuity might be a decent option for a small chunk of the account.  If he has almost $1 million sitting in a cash account where he's paying a 1% fee, there's a good chance he isn't interested in risking anything.  My suggestion is first, move it to Vanguard.  Simply moving it into cash at a place without an annual fee will save him $8500/year, enough to cover his living expense shortfall.  Second, talk to Vanguard's annuity department to see about getting an annuity that will pay out whatever he needs in addition to social security in a typical month with a bit to spare.  Getting an extra $500-1000/month risk free might be worth it to him, and is likely better than keeping it cash.  I'm not sure at all about what annuities cost, but I find it hard to believe such a product would cost more than $150k.

The reason I suggest that is because then the rest of the money is essentially "extra," so you may be able to get him on board with investing it in some stocks and bonds to eventually donate to a charity or whatever he wants it to go towards. 

A 75 year old who has a $300/month shortfall in his income and $850k in the bank doesn't NEED any sort of high returns.  Yes he'd most likely end up with more money when he dies if you invest it all in stocks and bonds, but based on his current investments I'm betting a small annuity would help him sleep at night.  Even if the small annuity underperforms $50k compared to regular investments over his life, I think that would be worth it if it improves his quality of life.  It might also encourage him to spend a bit on himself, which isn't necessarily a bad thing.  Basically have that extra annuity money as fun money that he doesn't need to save.  Encourage him to donate to a local charity he likes, or pick up a hobby or some projects to start around the house.



 

[SeattleCPA]

I'm surprised no one has  mentioned paying off his mortgage.

That's easy (looks like he maybe has $200K balance?) and a way to rather easily and with low risk reduce both his financial management work and dial down his monthly expenses.

[jakerm17]

It's just numbers. Investing with 1,000 is the same as investing with 1,000,000. Get an asset allocation your dad and you are comfortable with and stick with it. You pay 1% advisory fees, and your dad's assets aren't even invested???!!!

The 1% fees are only for assets under management so since the money is un-invested he hasn't had to pay fees. However it's been sitting like that for awhile so he is losing money to inflation.

I am partial to Vanguard, either with an all-in-one fund or through their advisory services (0.3% fees).
I will respond with a post on what the Vanguard PAS suggest.

Thanks!

[Financial.Velociraptor]

The annuity is not a bad idea for someone who is very conservative (you mention he is?)  -  I put my father 100% in an annuity that was compatible with RMD.  His number one concern was "it can't go down; it's everything I've worked for all my life".  Annuity it was.

A bond ladder could be a good choice for a portion of the portfolio. (He's conservative!) 

I'd be looking for a large cap fund for the rest.  He's clearly not interested in taking a swing for the fences.


Some questions:

What is the interest rate on the mortgage?

Do you have a plan for RMD cash in excess of his needs?  Sounds like he'll have more income than he needs in retirement.

Does he by any chance have a whole life insurance policy to tap?  A lot of people his age have old policies that have been on "autopilot" for years and are largely forgotten about.

What is his RMD requirement/does this lead to taxable income?

[jakerm17]

The annuity is not a bad idea for someone who is very conservative (you mention he is?)  -  I put my father 100% in an annuity that was compatible with RMD.  His number one concern was "it can't go down; it's everything I've worked for all my life".  Annuity it was.

A bond ladder could be a good choice for a portion of the portfolio. (He's conservative!) 

I'd be looking for a large cap fund for the rest.  He's clearly not interested in taking a swing for the fences.


Some questions:

What is the interest rate on the mortgage?

Do you have a plan for RMD cash in excess of his needs?  Sounds like he'll have more income than he needs in retirement.

Does he by any chance have a whole life insurance policy to tap?  A lot of people his age have old policies that have been on "autopilot" for years and are largely forgotten about.

What is his RMD requirement/does this lead to taxable income?

I am not sure what has been happening with his RMDs or if there is a life insurance policy. These are good questions and I will look into them asap. Thank you.

[ChpBstrd]

I agree with the earlier poster who said it depends on his goals. Given his state of mind, he may not even know what those are. Probably what you're being asked to do is guide him along this path. Poor fellow can expect to live another 5-10 years but could die at any moment, has had his life upended, and doesn't know what to do next. It must be hard to get excited about a big goal at that stage. Here are some options to discuss.

1) Charitable / Inheritance priority:
He's frugal and not likely to run out of money, so if this is the priority, growth is the objective. Set aside enough for his living expenses in a mostly bond AA ($200k @ 3%?) and invest the inheritance portion in VTI ($650k?). Hire a lawyer make a plan so everything goes smoothly.

2) Safety / Absolute Avoidance of Worry:
Invest everything in bonds. "Hell no" on annuities. Ask about the underlying causes of the anxiety. His assets are enough he will never outlive them, so that's not the issue unless he's bad at math. Would a counseler help him get the anxiety down and enjoy his golden years? Does he need to face death and deal with it? Accomplishing these things might change the priority.

3) Tax Avoidance:
Gift $14k/year to beneficiaries.
Hire a CPA.
Not much else to do since he's mostly in an IRA and is spending relatively little. Asset allocation doesn't really matter from a tax perspective because he's in an IRA and has to take RMDs anyway.

4) Quality of life:
Spend some money on the following: fitness/gym/classes, travel, preventative healthcare, a personal coach, social club dues, etc. Hire people to do taxes, use passive investments, etc. Interview some officers at charitable organizations and get excited about the legacy. Invest at any AA, but I'd recommend adding some risk to keep up with the higher expenses.

[AlmstRtrd]

I'm puzzled that some are recommending annuities. That 850K is all in retirement accounts. Are you suggesting it might be a good idea to annuitize money within an IRA? Pull out a big chunk and then get an annuity?

To the OP, I would just say sitting in cash or cash equivalents for a while is not a bad idea. Inflation is low at the moment. Low to moderate inflation only really erodes wealth significantly over longer time periods.

[Goldielocks]

I'm puzzled that some are recommending annuities. That 850K is all in retirement accounts. Are you suggesting it might be a good idea to annuitize money within an IRA? Pull out a big chunk and then get an annuity?

To the OP, I would just say sitting in cash or cash equivalents for a while is not a bad idea. Inflation is low at the moment. Low to moderate inflation only really erodes wealth significantly over longer time periods.

Not sure about USA but here, you can convert your retirement funds into a taxable annuity at pretty much any time (except that you can't undo it later easily).  Not like you withdraw then buy an annuity -- you convert from within the retirement fund

[Financial.Velociraptor]

I'm puzzled that some are recommending annuities. That 850K is all in retirement accounts. Are you suggesting it might be a good idea to annuitize money within an IRA? Pull out a big chunk and then get an annuity?

To the OP, I would just say sitting in cash or cash equivalents for a while is not a bad idea. Inflation is low at the moment. Low to moderate inflation only really erodes wealth significantly over longer time periods.

My father's annuity is within a tIRA.  He takes RMD as taxable income in the current year.

[ooeei]

I'm puzzled that some are recommending annuities. That 850K is all in retirement accounts. Are you suggesting it might be a good idea to annuitize money within an IRA? Pull out a big chunk and then get an annuity?

To the OP, I would just say sitting in cash or cash equivalents for a while is not a bad idea. Inflation is low at the moment. Low to moderate inflation only really erodes wealth significantly over longer time periods.

I just helped set up an annuity for my girlfriend's parents within their IRA.  It was to help with Medicaid eligibility but they aren't uncommon.  An IRA is just a tax treatment bucket, there's nothing preventing you from holding an annuity within one.