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Author: mwansley Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: 82 year old Date: 8/7/2001 5:41 PM
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should an 82 year old with an expected lifespan of 10 years or less and enough savings ($570,000)to general almost enough income in fixed income investments (4.5% return) with a small withdawal of principal every year (he needs 32,000 per year to cover expenses after soc. sec)put anything at all in stocks or just stick to fixed income? A financial planner in suggesting 40% stocks. It seems unwise to me (the daugher in law) to subject him to stock markek risk if it is unlikely he could outlive his money. What do you think?
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Author: JimB100 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31202 of 74759
Subject: Re: 82 year old Date: 8/7/2001 5:47 PM
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IMO - NO!...and I would stay clear of that 'financial planner'. Stay out of the market - and particularly THIS market if you are set like he is at 82.

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Author: Dogpile99 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31203 of 74759
Subject: Re: 82 year old Date: 8/7/2001 5:52 PM
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should an 82 year old with an expected lifespan of 10 years or less and enough savings ($570,000)to general almost enough income in fixed income investments (4.5% return) with a small withdawal of principal every year (he needs 32,000 per year to cover expenses after soc. sec)put anything at all in stocks or just stick to fixed income? A financial planner in suggesting 40% stocks. It seems unwise to me (the daugher in law) to subject him to stock markek risk if it is unlikely he could outlive his money. What do you think?

Now I have heard everything. Don't listen to this guy. It goes against all logic.

Your father-in-law has enough money to cover his expenses for the next 18 years just on the principal. If he gets 4.5% per year, this comes to $25,650 so he needs another $6,350 from the principal. At this rate, of course not counting inflation, he has enough money to last him 90 years. Then he will be broke.

So, if he thinks he will live another 90 years, he might want to get into stocks.

I hope he is not being pressured by this "planner" (planning for a nice vacation").

Good luck,

Dogpile :-P






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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31208 of 74759
Subject: Re: 82 year old Date: 8/7/2001 8:32 PM
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Author: mwansley Date: 8/7/01 5:41 PM Number: 31201
should an 82 year old with an expected lifespan of 10 years or less and enough savings ($570,000)to general almost enough income in fixed income investments (4.5% return) with a small withdawal of principal every year (he needs 32,000 per year to cover expenses after soc. sec)put anything at all in stocks or just stick to fixed income? A financial planner in suggesting 40% stocks. It seems unwise to me (the daugher in law) to subject him to stock markek risk if it is unlikely he could outlive his money. What do you think?

Compared to a pure bond portfolio, adding a small percentage of stock actually decreases the portfolio volatility and increases its gains. Read William Bernstein's, 'The Intelligent Asset Allocator' and you will see that a pure bond portfolio (ladder of 20 year treasuries) will generate historical gains of about 5.2% with a volatility (standard deviation) of about 9%. If you change the mix to 25% stocks and 75% bonds, the historical gains increase to about 7.5% and yet the volatility stays at about 9%.

The reason for this is that the movement in the bond market and the stock market are somewhat uncorrelated. Other investments, like REITs, and foreign stocks, can increase the returns even farther while keeping the volatility about the same. It gets very complex, though, when you start adding more types of investments. This type of account mangement is usually done with the help of a financial planner. A good planner, working with a large account, and using modern asset allocation principles should be able to make more than a straight index fund.

So, I think your planner may have been a little high with the 40% stock figure, but the advice is not all that bad.

Also, this all assumes that you rebalance each year back to your chosen allocation mix after withdrawing the $32,000 living expenses.

Russ

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Author: wisenlucky One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31209 of 74759
Subject: Re: 82 year old Date: 8/7/2001 10:37 PM
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mwansley,

Ditto to what rkmacdonald wrote. I know it doesn't make sense, but people tend to forget that bonds suffer volitility as a result of interest rate changes. A small stock position (20% or less) actually reduces risk while increasing returns in an otherwise 100% bond portfolio.

Of course, the amount of money he now has will more than last his lifetime, even at very low return rates. If he has no desire to pass anything on to his heirs or to a charity, then let it be.

WiseNLucky

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31210 of 74759
Subject: Re: 82 year old Date: 8/7/2001 10:54 PM
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should an 82 year old with an expected lifespan of 10 years or less and enough savings ($570,000)to general almost enough income in fixed income investments (4.5% return) with a small withdawal of principal every year (he needs 32,000 per year to cover expenses after soc. sec)put anything at all in stocks or just stick to fixed income? A financial planner in suggesting 40% stocks. It seems unwise to me (the daugher in law) to subject him to stock markek risk if it is unlikely he could outlive his money. What do you think?

I think the correct answer is: "It depends."

$540,000/$32,000 per year = 17.8 years, but that isn't accounting for inflation nor interest one could earn in even a money market fund or money market fund. Could your father-in-law live to be 101? (A few years ago Willard Scott was announcing birthdays and one mentioned was a 110-year-old in our community college district. Being in IT at the community college and, at that time, being concerned about the so-called "Millinium Bug"--and, yes, we had a few hits even after all our preparation, but our preparation did manage to keep us from getting adverse publicity in the local paper--that 110-year-old came to mind and the next day I checked with one of the programmers to make sure the routine we were using for age would return something reasonable.) Yes, a number of people do outlive their life expectancies, and a number of people don't live that long, so the "life expectancy" shouldn't be used as the absolute end of one's life and one should be prepared to handle the contingency of living longer than planned on.

Even $342,000/$32,000 per year = 10.7 years, so if 40% of that $570,000 is in stocks and they go all the way down to zero (unlikely if the investments are diversified), that is still 10.7 years, enough to handle the "expected lifespan of 10 years or less" but maybe not enough for the contingency of living longer than planned after a 1929-1934-style market crash.

Anyway, some of the "it depends" issues are:

1. Is there a reasonable chance that your father-in-law would outlive that money if it were sitting in a MMA, MMF, or bonds? (The answer could very well be No, and that is apparently how you see the situation.) If there is a reasonable chance that he might outlive his money if conservatively invested, either a guaranteed lifetime cash stream (an immediate annuity, but be sure to shop around for rates before deciding on a fixed annuity) or taking on some stock exposure may be good. You may want to try some Asset Allocation calculators at http://www.smartmoney.com (look for the "One Asset Allocator" calculator, last time I saw it on a pull-down menu) and at http://www.vanguard.com (their retirement planner--but plan on at least 20 minutes for that, but it seems to be fairly thorough) to see if the numbers it cranks out seem reasonable if you put in numbers you see for your father-in-law. I think 40% equities may be a little high if the intent is just to reduce the risk of out-living one's savings. but running the numbers through an asset allocation calculator or a retirement planner will give you an area of discussion with your father-in-law and/or his financial planner.

2. Does your father-in-law want to maximize the amount of money going to heirs, charities, or others specified by his will or Transfer-On-Death provisions? If so, he may decide to take on more risk to potentially maximize benefits to the beneficiaries.

3. Does your father-in-law want to increase the amount he can safely access so he can do things he wouldn't otherwise be able to do (e.g., travel costs more than just staying at home) or add excitement by having some stock market exposure? (One way to get one's heart really beating is to watch some of one's hard earn money ... vaporize in an old-fashioned market correction. Oops!)

4. Or could he be making provisions for when medical expenses typically go way up, usually during the last year of life, when he may need far more than $32K for that last year?

You might want to find out first if your father-in-law is open to discussion on the topic with you (that may end your discussions on that topic right there--parents often view their children as children for the rest of their lives), and then find out what specific objective he is planning on accomplishing by having some stock-based investments. It is possible that you may end up learning something by listening to him or by having a consultation between him, his financial planner and yourself. Or you may have a different perspective that he may benefit from. In any case, I wouldn't immediately conclude that the financial planner is all wrong without finding out more on your father-in-law's intentions.

Yes, I know there is a lot of bias against especially commission-paid financial advisors here on FOOL.COM, but that doesn't automatically mean that they aren't suitable for many people.

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Author: JimB100 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31217 of 74759
Subject: Re: 82 year old Date: 8/8/2001 11:26 AM
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I still disagree with the idea that an 82 year old with this much money 'needs' to be in the market. Come on, he is very, very secure and to try an increase his net worth a few thousand is just plain foolish.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31231 of 74759
Subject: Re: 82 year old Date: 8/8/2001 8:56 PM
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<<<should an 82 year old with an expected lifespan of 10 years or less and enough savings ($570,000)to general almost enough income in fixed income investments (4.5% return) with a small withdawal of principal every year (he needs 32,000 per year to cover expenses after soc. sec)put anything at all in stocks or just stick to fixed income? A financial planner in suggesting 40% stocks. It seems unwise to me (the daugher in law) to subject him to stock markek risk if it is unlikely he could outlive his money. What do you think?>>>

I agree with an earlier post....it all depends.

Assume a life expectancy of 15 years (I know that the "expected" is 10 years but most things of this nature are S.W.A.G.s--Scientific Wild Ass Guesses). I would take 5 years living expenses ($160k) and place in a MMF, 10 years ($320k) and place in bonds, and the remaining ($90k) and place in stocks.

How did I come up with that? Sounds like you want to be conservative yet protect against inflation and unexpected events. Five years cash gives a rock solid base. The ten years of bonds, laddered and diversified, should cover the rest of life expectancy and then some. The rest, only 15%, in stocks helps fight inflation and would provide growth should he be 3+ sigma on the life expectancy curve.

JLC

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Author: donbellphd Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31389 of 74759
Subject: Re: 82 year old Date: 8/15/2001 10:27 PM
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My parents are 81 & 88 with a somewhat larger portfolio than the 82 year old gentleman. But one of mom's brothers is 100, a sister 96, and another brother 95. Although my parents are in good health, they worry about a major illness eating up their funds. They wouldn't count on $32K a year as a long-term limit on payout. By the way, doesn't $32K + social security seems like a high burn rate for an 82 year old? I know my parents live on much less than that. Of course, they have not had a mortage for decades, their property taxes are limited by California's Prop 13, and they squeeze each penny until Abe squeals. But they are worried.

db

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Author: wench500 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31391 of 74759
Subject: Re: 82 year old Date: 8/15/2001 10:52 PM
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By the way, doesn't $32K + social security seems like a high burn rate for an 82 year old? I know my parents live on much less than that. Of course, they have not had a mortage for decades, their property taxes are limited by California's Prop 13, and they squeeze each penny until Abe squeals. But they are worried.

Did they live through the Depression? That experience is probably what guides them through money matters...the fear of reliving that experience. Check their mattress for money--I bet there's some there.

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31420 of 74759
Subject: Re: 82 year old Date: 8/17/2001 8:49 AM
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Although my parents are in good health, they worry about a major illness eating up their funds.

Your parents sound like good candidates for long-term-care insurance. It will be expensive, since they're old. Be sure you get one that has a clear and concise description of which conditions they'll pay for and which they won't, and how to get benefits to start.

Check the insurance board for more information.

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Author: donbellphd Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 31440 of 74759
Subject: Re: 82 year old Date: 8/17/2001 5:56 PM
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I agree about the insurance, but I don't know if it's available at age 88. The sheet I received from TIAA doesn't go up that high.

Unfortunately, as an aspect of their penny pinching, they don't want to spend the money on such insurance, preferring to cover any future medical need out of savings. But they still worry about it.

I suppose a prolonged medical problem can eat through a million dollars, but it may not be common. Any horror stories out there?

db

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