Author Topic: How should my retired parents allocate their cash and investments? (U.S.)  (Read 3053 times)

Pangolin

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My parents are both retired and in their mid-sixties. Their daily expenses are covered by social security income plus dadís pension. They want to draw extra income from investments, without touching their principal. They (and I) are relatively ignorant about investing. I believe they have somewhere between $600-$800k in cash and investments. They own a home with no mortgage.

Currently they have a 5 figure amount in a cash account that they use for periodic large expenses like property taxes. They have nearly $300k in certificates of deposit. The rest is in stocks in just a few individual companies and one or two funds of some kind. I think they use Vanguard.

Conventional advice seems to be 70% bonds/30% stocks in retirement. Is this Vanguard fund, VTINX, a good idea? https://personal.vanguard.com/us/funds/snapshot?FundId=0308&FundIntExt=INT What else should they consider? Should they take the risk for growth with more than 30% in stock funds because their everyday spending is covered by other income sources?

matchewed

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Re: How should my retired parents allocate their cash and investments? (U.S.)
« Reply #1 on: December 12, 2014, 01:13:58 PM »
There isn't enough information to give sound advice. It all depends on what they want to do with that money. Once they figure that out then they can consider the appropriate investment for it.

mxt0133

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Re: How should my retired parents allocate their cash and investments? (U.S.)
« Reply #2 on: December 12, 2014, 02:04:16 PM »
It seems like it would make sense for them to go see a fee only financial planner, hopefully with a CFP designation.  Make sure they ask how the planner is paid, they have to tell them if they will get commission on any suggestion or products that they recommend.  I would not hire a planner that takes a percentage of their assets either.  That value of hiring a planner is to help them identify their goals and how best to achieve those goals.

For example if they want to leave a inheritance to their kids or grandchildren then they can plan on how best to grow and transition their assets in a efficient manner.  Also maybe get some type of insurance so if they need long-term care, ect, they don't significantly draw down their assets and not be able to leave anything behind.  Again, just examples of how a planner can help them achieve their goals.

GardenFun

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Re: How should my retired parents allocate their cash and investments? (U.S.)
« Reply #3 on: December 12, 2014, 02:29:33 PM »
It seems like it would make sense for them to go see a fee only financial planner, hopefully with a CFP designation.  Make sure they ask how the planner is paid, they have to tell them if they will get commission on any suggestion or products that they recommend.  I would not hire a planner that takes a percentage of their assets either.  That value of hiring a planner is to help them identify their goals and how best to achieve those goals.

For example if they want to leave a inheritance to their kids or grandchildren then they can plan on how best to grow and transition their assets in a efficient manner.  Also maybe get some type of insurance so if they need long-term care, ect, they don't significantly draw down their assets and not be able to leave anything behind.  Again, just examples of how a planner can help them achieve their goals.

+1.  My parents are in a similar situation so I understand your question. 

Here's a way to look at their financial picture:
- You need the clear definition of "day to day" living expenses covered by SS and pension.  For some people, that means 1) food and utility bills.  For others, it also includes 2) property taxes and minor home repairs.  For a fortunate few, it even means 3) major home repairs and vehicle replacement.

- If the answer is 1:  Your parents need to keep 3-5 years of property taxes, home repair and vehicle replacement money in a CD (or equivalent) account.  This is money that they will absolutely need in life.  Make sure they also add in anything that they want to do in the next 3-5 years - overseas travel, winter in Florida, start a woodcarving hobby. 

- If the answer is 2:  Same as #1, but the amount will be less (major home repair and vehicle replacement, no property taxes).

- If the answer is 3:  Your parents are in great financial shape and have numerous options available.

Once your parents understand their short term cash needs, then the conversations get interesting.  There are two schools of thought in this realm:

School #1:  Invest the rest of the money aggressively in stocks.  SS and Pension provide guaranteed cash flow.  CD gives them a 3-5 year cushion.  Therefore, put the majority of this money in US large and small caps, plus international stock mutual funds.

School #2:  Invest the rest of the money in a balance of stocks and bonds.  Since SS and Pension provide guaranteed cash flow and CD's cover 3-5 years of extras, there is no need to be that aggressive with the money.  Do a 60/40 split with stocks/bonds - or invest in a balanced fund which is typically 65/35. 

Here's the real question:  Will your parents believe that 3-5 years of cash is enough cushion?  Will they be watching TV and wringing their hands watching the yo-yo of the stock market?  If so, do not let anyone put their stock allocation anywhere near 100%.  But if they don't plan on touching that money, and they won't watch the stock market go up and down, they could be comfortable with a stock allocation at least 75% or higher. 

And Vanguard/index funds are your friends.  If a financial planner doesn't recommend either of these options, get a new planner.

If they want dividend income, they can get it from stocks or bonds. 




« Last Edit: December 16, 2014, 07:11:13 AM by GardenFun »

skunkfunk

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Re: How should my retired parents allocate their cash and investments? (U.S.)
« Reply #4 on: December 12, 2014, 02:56:41 PM »
I think they have a pretty old-school allocation there.

My grandparents-in-law have been retired early for some time with limited capital by juggling mortgages/sales on rental property. That 600-800k could possibly go much further with an active strategy like that.

Just throwing it out there, I'm no expert.

deborah

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Re: How should my retired parents allocate their cash and investments? (U.S.)
« Reply #5 on: December 12, 2014, 03:34:18 PM »
In Australia, we have a retirement standard budget see http://www.superannuation.asn.au/resources/retirement-standard for both modest and comfortable lifestyles - it also has a download which describes what is in each line of the budget. Your parents may want to review that with relation to their own expenses, and work out their needs.

Pangolin

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Re: How should my retired parents allocate their cash and investments? (U.S.)
« Reply #6 on: December 16, 2014, 06:42:13 AM »
Thank you for the tips on what they should consider. GardenFun, your advice is particularly helpful. Their situation is probably closest to #2. The extra income that they want to draw from their investments is to replenish their cash cushion in the event of vehicle replacement or major home repair, as well as for fun money such as travel.

OracleOfAtown

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Re: How should my retired parents allocate their cash and investments? (U.S.)
« Reply #7 on: December 16, 2014, 07:28:53 PM »
I would tell them to take about $400,000 and buy great American companies paying a strong dividend.  If they bought Altria (MO), AT&T (T), verizon (VZ), Pfizer (PFE) and Chevron (CVX) they would be well diversified in huge companies that have a huge barrier to entry.  If they averaged it so they were getting about 4.25% dividend yield they would rake in $17,000 a year.  The spread between the big dividends and savings account returns is very substantial right now. They could hold the other $200k for a rainy day.  Just buy the stocks and dont follow them on a daily basis.  Set it up so the dividends are sent to them by check.