Need help with parents

[Jags4186]

I need some investment advice for my parents and I am coming to you all for help.

My parents need a investment plan desperately. 

Short history:

Both parents are lawyers.  Mother 64, Father 63.  My father was forced into retirement several years ago due to health issues and is no longer capable of practicing.  He never made a lot of money.  My mother still practices but is looking to get out as she hates lawyering.  She is self employed.   

My mother gave me a "rundown" of what their assets are.  I am doing this from memory so I may be missing a few pieces.  It's not pretty.

190k cash
25k is a hodgepodge of blue chip stocks (GE, VZ, AT&T, etc.)
220k in municipal bonds paying anywhere between 4-6%
Some sort of annuity that will pay $900/month at age 66
100k in an IRA in my father's name...I do not know what it is invested in.
500k house with a HELOC that has a 25k balance.
A 50% stake in a gutted house on the jersey shore.  Land probably worth 200k so a 100k share.  Not sure what the plans are for this.
No other debt.

Part of me wants to tell her to just go 50% VTSAX and keep 50% in her municipal bonds but I'm afraid of telling her that because A) in 2008 she pulled out of whatever mutual fund she was invested in losing around 100k.  The 190k cash is the remainder sitting in a savings account. B) It's easy to invest when you have a long horizon, but my mother wants to retire by the time she's 66.  I am not sure she can handle a downswing.  Also, since her nest egg is small I'm worried about her losing more.

Good news is if they both can wait it out until they are 66, they'll probably collect around $4k/month in SS combined and the $900 from the annuity.

What would you do?  Telling my mother to go scorched earth and try to save an additional 200k over the next 2 years most likely is not going to happen.

[iamlindoro]

I think the key missing piece of information here is there expenses and debt... looking at this from my perspective, they have well over a million dollars worth of assets, as well as some sort of annuity that, when combined with Social Security, will give them $4K a month in a few years.

If their costs are low, or can become low, they're already ready to retire.  What are they spending a month?  If they are in a high cost of living area, can they retire to somewhere more affordable and live like royalty?  I sure would.

[Jags4186]

Well let me just preface this with my parents are not "MMM" approved.  They aren't flippant with money, but they do a lot of things that would be frowned upon around here.

Big cable and electric bills.
Car leases (not the BMW variety, the Honda Accord variety).
Eat out probably once a week.
Possibly relocate within NJ...but that won't really lower their COL.
No debt other than the 25k HELOC.
Don't vacation often.

Right now the biggest non business related expenses are $2300/mo for health insurance and $13k/yr for property taxes.  Health insurance will solve itself with medicare (drop to a few $100/mo for supplemental).

I'm not really looking for a referendum on their lifestyle, I'm more concerned about how I should advise her on what to do with the money she does have.  The issues I'm facing are I am somewhat uncomfortable asking my mother for "full disclosure" of what she has/spends.  Its more me being uncomfortable vs her I think.

[Chrissy]

Depending on their expenses, your mother might be able to retire now.

What the heck are they doing with half of a gutted house?  That's the big question!  Including their own home, they've got 51% of their worth in real estate.  Are they flipping it?  Renting it?  Is it a vacation home shared with the other owners?   

You don't mention if the cash is earning any interest.  If it's not, something should be done with it.  Leave 6 months of expenses in checking, and $25,000 goes to paying off the HELOC.  The rest either goes toward the gutted Jersey Shore house, or into a CD ladder, and/or is partially reallocated. 

To get to a 50/50 stock-bond split of their current investments, they'd need to trade $47,500 from bonds for stocks.  Or, if you count the bonds and cash as the same asset class, then, after the $25,000 HELOC is paid, $130,000 would get them to a 50/50 split.  It just depends on what amount they're comfortable seeing in stocks, and I would suggest re-balancing gradually, a little every month, over the course of the next two years, after which they'll receive SS and feel more secure.

They/you can switch over anything that's already in stocks to VTSAX without feeling nervous about it, since it's just trading stocks for stocks, and you're probably getting them more diversity at a lower cost.  Find out how your father's IRA is invested. 

[Jags4186]

Depending on their expenses, your mother might be able to retire now.

What the heck are they doing with half of a gutted house?  That's the big question!  Including their own home, they've got 51% of their worth in real estate.  Are they flipping it?  Renting it?  Is it a vacation home shared with the other owners?   

You don't mention if the cash is earning any interest.  If it's not, something should be done with it.  Leave 6 months of expenses in checking, and $25,000 goes to paying off the HELOC.  The rest either goes toward the gutted Jersey Shore house, or into a CD ladder, and/or is partially reallocated. 

To get to a 50/50 stock-bond split of their current investments, they'd need to trade $47,500 from bonds for stocks.  Or, if you count the bonds and cash as the same asset class, then, after the $25,000 HELOC is paid, $130,000 would get them to a 50/50 split.  It just depends on what amount they're comfortable seeing in stocks, and I would suggest re-balancing gradually, a little every month, over the course of the next two years, after which they'll receive SS and feel more secure.

They/you can switch over anything that's already in stocks to VTSAX without feeling nervous about it, since it's just trading stocks for stocks, and you're probably getting them more diversity at a lower cost.  Find out how your father's IRA is invested.

Chrissy,

Thank you for the advice.

The shore house has been in our family for 50 years and is owned half by my mother half by my aunt.  It was destroyed in Hurricane Sandy and since we didn't have flood insurance any repair work would have to be paid for out of pocket.  It was estimated it would cost $100k to put it back to where it was, so 50k from my parents and 50k from my Aunt.  I think right now they are holding on to it to see if the land becomes more valuable and then sell it.

The cash is probably earning .1% or whatever the prevailing rate is now.  It is literally sitting in a savings account at Valley National Bank.

They want to keep 90k in cash (as my mother uses that money as an emergency fund for work) and I will suggest she DCA into VTSAX.  I have access to her trading account I will convert everything to VTSAX.

[nereo]

I'm not really looking for a referendum on their lifestyle, I'm more concerned about how I should advise her on what to do with the money she does have.  The issues I'm facing are I am somewhat uncomfortable asking my mother for "full disclosure" of what she has/spends.  Its more me being uncomfortable vs her I think.

Talking to parents about their money and retirement is one of the harder social things to do, but in many cases it needs to be done. Just try to keep an open dialog, be respectful, and see if there's anything you can do to help (or if they ever want your help).

I concur with iamlindoro, from what you have said they don't appear to be in horrible shape.  Sure, some adjustments could make everything much rosier, but $900/mo from an annuity plus SS plus ~$500k in bonds (at at 4-6%?  awesome!), stocks and cash is a good position to be starting from, even if they aren't "mustachian" in their spending.

My advice is to see if your parents would be open to sharing more information with you, and if they would allow you to formulate a financial plan that is a bit more secure.  The cash and the gutted house are the biggest concerns to me.  Ask what their plans are for that house - would they be open to selling it?  Perhaps they'd allow you to manage it in exchange for either a percentage of the profits or the  with the understanding that it will be passed on to you.

As for investments, since your mother panicked and sold all her mutual funds in 2008 at a loss of ~$100k, the biggest obstacle is to make sure they don't do that again.  Consider the Vanguard Target Retirement 2015 fund - it's about 40% bonds, 55% equities and some short-holdings.  It should be less volatile than stocks.  THe key would be to get them to believe that they can withdraw ~3%/yr and to not worry too much about the balance (with such a high holding of bonds, you imght want to go with something even more conservative than 4%).  As the bonds mature they won't be able to get 4-6% yields again, so I'd recommend they roll those over into their target fund.

[Another Reader]

I would not be in such a hurry to put everything into Vanguard total market.  At their age, income will be a priority and there needs to be some consideration of volatility.

The $25k in stocks - is that in a taxable account?  Looks like your mom picked up some dividend stocks along the way.  Maybe letting those roll might be a better choice, at least for now.  That's especially true if there would be capital gains if the shares were sold.  Harvest or re-invest the income until the big picture is clear.  The $220k in municipal bonds - are they individual bonds or is that the balance in a bond fund?  I would be in no hurry to dump tax free bonds at those interest rates when they need income.

Any chance your father would give you info on his IRA?  That money should be part of a larger asset allocation for both of them.

Is your father collecting SSI or any other form of disability?    It does not sound like it, but it's part of the income picture if he is.  Social Security is complicated for couples.  This might be a situation where the higher earning spouse does a "file and suspend" strategy or employs another strategy to maximize the Social Security income.  Getting the earnings and benefit statements for both of them now would give you and them some concrete numbers to work with.  A copy of the annuity document would also help.

The cash is the real issue.  Unlike you, their investment horizon is not 30 years.  They will need the money much sooner than that.  It would be devastating to your parents to put it all in the market and then have a 30 to 50 percent correction.  Your mom also needs some of the cash for her business.  I would not do much with the cash other than move the amount not currently needed to a higher interest on-line account.  Once I had sorted out the rest of the assets, then I would consider what to do with the cash and when.  What is the reason for the HELOC?  If there isn't a good one, it might be better to pay it off.

The Jersey shore house is something that your mother and your aunt will have to decide.  What's your aunt's financial position?  Any chance she could buy your mom out, if your mom were agreeable to that?

Again, the key issues here are their time horizon and their need for income.  The right choices for them are completely different than they are for a young person just starting out. 

[Jags4186]

Thank you all for the advice.  I might try to have a sit down with my mother to get a real accurate account of things, not just a "I have this and this" conversation that we had this weekend.

My mother sought advice from me, I did not pressure her so I don't believe it is awkward on her end to have a big conversation with me...I just feel a little awkward telling her "you should cut back a little here and there" and I also would feel awful if I told her to do something and she lost money--even if it was the right thing to do.

To add a few pieces of info.  The HELOC was originally 50k and it was a gift to my sister for when she got married.  I told my mom to pay it off with the 190k she has sitting in cash but she hasn't done it.  It makes no sense to pay 4% interest when you have money earning 0.1%.

The house is as much an emotional thing as it is a financial thing.  My Aunt isn't going to buy her out, I think she's wanted to sell it for a long time, my mother didn't want to so that was that.  Now it's a $2000/yr property tax bill split two ways with the hopes it increases in value to sell.  I'm reluctant to take over and manage anything as I have a sister and if all of a sudden I "got" something (regardless of whether or not I did the leg work) it would create extra family stress.

My father is not on SSI--he won't apply even though we all think he definitely should (he has had a stroke and heart bypass surgery...he can't really handle working for someone and his memory is not very good).  He's about as stubborn as they get. 

The municipal bonds are all individual bonds.  Some of them have long maturity dates (2040, 2050) but I learned that a lot of them have been called early and are being invested into more bonds whenever she can get her hands on them.

The big concern is the medical...$2300/month for health insurance + a $5000 deductible which my father has met the last 4 years.  Social Security is still 2 years away for her and 3 years away from him.  Also--and I don't know how true this is--apparently the health insurance would go up if my mom closed shop and let go of her secretary as she would no longer qualify for a "small business" health plan.  I don't really buy this but it's something I might look into for her.

[Chrissy]

See if you can get your mother to commit to a plan for the gutted house.  The simplest one is, "If the land hasn't risen in value in X amount of time, I'll agree to sell."  It's unusable and, every year, costing her money.

Has your father explained why he won't apply for Disability?  Could it be that he's overwhelmed at the thought of the process?  If someone put together the materials for him, would he agree to it?

My folks sought out a Social Security adviser, and were just thrilled with the help they received.  You might arrange the same for your parents, and sit in on the meeting.

The medical options for anybody these days are complicated.  The way you've described your parents, they're having a hard time processing new information and making decisions.  You're going to have to do the research for your mother, and probably push her toward what you think is the best option.

If you end up "getting" something your sister doesn't, you can always cut her a cheque to keep the peace.  That's what my father did when he found his sister was left out of the will.