First off, thanks for reading my long post.Recently, my 45 year old mother received $850,000 as her share of a 20 year marriage that ended in divorce. She spent most of her marriage working on the family farm. She did not pay out any in social security or build her resume and now is working for a local fire department for around 25k a year. I am trying to help her with her financial situation and retirement and would appreciate some honest advice.I currently work in the finance industry, have my series 7/66, and have a strong interest in personal investing. I think I would be able to manage her finances effectively and am currently weighing her options. She would like to be able to retire on the money in about 10 years. As for withdrawals: taking out about 10k yearly for a standard of living increase and also taking out 250-300k in a year or two for a house.I have been thinking about the portfolio below as a possibility. Rebalancing and maxing out a traditional IRA yearly.33% - Investment Grade Bond funds (4 – 5 year duration)33% - TIPS16% - Large Cap Equity (Index funds) 6% - Small Cap Equity5% - International Equity4% - REITs3% - Precious MetalsObviously she is very risk averse, will be needing income during her retired years, and could probably use some growth over the next decade. 30% of the money needs to be liquid enough to buy a house in a year or two.She just recently tucked about 400k into 7 month CDs for about 4% annual return. Although these are safe investments, I feel like she could get a better return on her money.My questions:Recommendations on a brokerage firm?Is this a decent portfolio?Should we consider paying a fee-based advisor instead?Any specific funds or products worth mentioning?Any general advice?Thanks for any help. Let me know if you have any questions that would help clarify the situation.-K
Your mom is 45? If so, I sure wouldn't want so much in fixed assets. You've got 66% of her portfolio in fixed assets. I wouldn't put more than 10% to 15% at most. I also wouldn't get so fancy about precious metals and international. If it were my mom, I would divide 85% of the $850K between Vanguard Windsor II and Wellington, both of which spin off a nice level of annual income via distributions (which almost always would exceed the distributions from equivalent value TIPS and bonds), plus they get reasonably good capital appreciation that increases the size of her pie. The other 15% I would place in short-term fixed, divided between money market and short-term corporate bonds. If she doesn't need the income right now, I would reinvest the distributions from Windsor II and Wellington. If you want more growth, I would put a portion of the Windsor II and Wellington money into Primecap or CapOp. This way everything would be in one fund family, with a single monthly statement. The money market also would provide checking. I wouldn't go near any financial planner or stock broker, because almost all of them are completely worthless. When she retires, I really wouldn't change anything.
kbrunson2005: "Recently, my 45 year old mother received $850,000 as her share of a 20 year marriage that ended in divorce. She spent most of her marriage working on the family farm. She did not pay out any in social security or build her resume and now is working for a local fire department for around 25k a year. I am trying to help her with her financial situation and retirement and would appreciate some honest advice."Good luck."She would like to be able to retire on the money in about 10 years. As for withdrawals: taking out about 10k yearly for a standard of living increase and also taking out 250-300k in a year or two for a house."I do not think that she can afford all that, unless she has other sources of income that are not disclosed.250-300k would be roughly 1/3 of the portfolio. I am assuming that she would be paying all cash. You do not mention the state where she lives, but assuming 2% for taxes and insurance and 1% for upkeep, a 300k house would cost her 9000/year or nearly 1/4 of her 25k salary and 10 ke supplement from the portfolio. Utility bills, furnishings for a new house, etc.Also, after using 250-300k for the house, the portfolio is more like 550k-600k. If she retires in 10 years, she will barely have the 40 quarters necessary to qualify for SS (unless she qualfies on her ex-husband's earnings), and on her own the monthly payments will not be that large because it calculation uses the 35 years of highest earnings, so there would be alot of zero years in her record.In addition, if she retires at 55, medical insurance will be a big issue, too. She will not be eligible for Medicare for another 10 years thereafter.I am also unsure whether you have any familiarity with any of the "safe withdrawal rate" studies, but generally speaking, assuming a diversified portfolio of roughly 70-75% equities, one should be able to witdraw 4% of the portfolio and then adjust for inflation every year thereafter and have the portfolio survive for 30 years. You do not mention any family history of longevity, but if you mother retires at 55, I would probably want to use a 40 year SWR, which off the top of my hear is probably more like 3-3.5%.If she is aiming for 35k for first year retirement income from the portfolio, she likely needs a portfolio of between $1M (@ 3.5%) and $1.167M (@ 3%), and you are not likely to grow a 600k portfolio to a million dollars using the portfolio you referenced, especially if you are pulling 10k/year to supplement her salary.If you inflate the 35k assuming just 3% inflation, then today's 35k is more like 48k in 10 years, and the requisite portfolio size increases more.As another poster has already noted, the portfolio you referenced is very, very conservative for 45 year old person. It is unlikely to generate the growth that is required to fulfill the targets for which you are aiming.Regards, JAFO(who dislikes being the bearer of bad news, but thinks knowledge is important, especially while there is plenty of time to act.)
Thank you for your very informative responses Ressnullius and JAF031. My mom lives in Oregon.One of my mother's major concerns is the safety of her investment. That is the reason for the heavy allocation in fixed income, but as you have outlined it doesn't seem that that will provide adequate growth for her needs. It will be difficult to explain to her that she can sleep at night with her money in equity (her ex-husbands idea of investing was short-term cds in seperate banks to ensure FDIC coverage). It is also quite possible that the retirement and housing goals aren't as feasible as I had originally hoped. These are the kinds of considerations I was looking for when posting in the discussion board. So JAFO, don't worry about being the bearer of bad news. I will look into some of the things you have mentioned and see what is still possible. I won't be taking any action until I know exactly what I am doing. Any suggestions on where this investment account should be opened?
I second everything JAFO said, with some additional thoughts:One of my mother's major concerns is the safety of her investment. That is the reason for the heavy allocation in fixed income, but as you have outlined it doesn't seem that that will provide adequate growth for her needs. I'm 10 years older than your mom and would like to retire in 6-7 years. Although my current nest egg is not as large as your mom's, I do not have to drawdown anything until I retire, so 100% is invested and will stay that way. In addition, I'm adding $50K each year in contributions to my nest egg.I only have 15% invested in 'fixed income' because I feel I need my portfolio to grow more than a large portion in fixed income will do. Although this is 'riskier', as I see it, there is little choice, unless I want to work until I'm well over 70!It is also quite possible that the retirement and housing goals aren't as feasible as I had originally hoped. I fear I will be in this same predicament when I retire--not able to afford a comfortable house in an area where I'd like to live. When the time comes for me, I will compare the costs/benefits of renting versus ownership. I think this is what your mom should do. Although renting will most likely cost as much as ongoing annual costs of maintaining home ownership, if she rents, she can keep that $250-300K in her portfolio. If she earns 5% on $300K, it should be more than enough to fund her rental costs. If she buys a home, her much smaller portfolio (after house purchase), has to generate almost the same dollars to maintain the home, in addition to generating living expenses. Unfortunately, it's not likely to do that.I will also take into account the possibility of a 'reverse mortgage' on the home ownership side. However, reverse mortgages do not yield as much in monthly income as most people believe and they are quite costly to initiate. Also, they are not available until you're over 62, so your mom's portfolio would still have to generate those home carrying costs for about 15 years (47-62), only after that might a reverse mortgage help out.Any suggestions on where this investment account should be opened? I would suggest either Fidelity or Vanguard. I'm partial to Fidelity, but that's just my personal preference, and has little to do with factual comparisons.2old
It is also quite possible that the retirement and housing goals aren't as feasible as I had originally hoped. I didn't realize there was another paragraph to your original message. JAF is quite right about the house. I don't know your market, but I sure wouldn't consider putting that much into a house, not with the portfolio she'll have. I would downsize to the lowest level she can live with, assuming her mind is made up about buying a house as opposed to renting. Keep in mind that around a 4% withdrawal rate is all she can truly count on over time, so she needs to maximize what she has in the stock market in order to get her the long-term growth and security she'll need over the next 40 or more years. She should continue to work, at least part-time, for as long as she can stand it, because that will postpone the day she starts taking more money out to live. The $850K she has should be sufficient to take care of her needs, assuming it's managed properly and she watches her budget, also assuming she qualifies for a decent level of SS at age 62. She should focus now on making sure she puts enough into SS (or via her ex)to qualify her for a good monthly SS check.
You need to explain to your mother the risk of inflation eating away the spending power of her assets. Without endorsing the Coffeehouse approach to investing, Page 45 of the book, Coffeehouse Investor by Bill Schultheis, has a succinct definition of investment risk that I want my 93 yeal old mother to read: 'Investment risk is the risk that the money you are counting on to purchase something important or sustain your lifestyle at some point in the future won't be there when you need it." The value of a portfolio can vary, and that's one kind of more or less transitory risk, but the effective value of a portfolio can be eaten away by inflation, and that's a permanant risk. Follow the advice Russ gave you, with the caveat that dividends be reinvested until retirement. In 10 years, her $850K is likely to grow enough to be adequate for her needs. If you want an easy to read no nonsense guide, I highly recommend the Bogleheads' Guide to Investing by Larimore, Lindauer, and LeBoeuf, especially Chapter 8 on asset allocation with sample allocations on pages 104-105, and Chapter 20 on withdrawal rates. Chapter 1 on financial lifestyle and Chapter 15 on managing a windfall would seem particulaly relevant to your mother. db
2old,At a 4% withdrawal rate, $300K generates $1000 a month before taxes. Is that sufficient for rent in your area? It would be insufficient in many parts of the country.db
At a 4% withdrawal rate, $300K generates $1000 a month before taxes. Is that sufficient for rent in your area? It would be insufficient in many parts of the country.db, what am I missing? Why are we talking about a 4% withdrawal rate when we're talking about renting?At a 5% interest income rate, $300K generates about $1250/month, which is sufficient to rent a 1 bedroom apartment here in Queens County, NYC. And I know for sure that in other (less metro) areas you can rent a 2 or 3 bedroom apartment for that amount, as I know folks who do it. Most apartment rents also usually include heat, hot water, and maintenance, including trash collection, water usage and landscaping, but not gas for cooking, or electric.2old
...Any general advice?...Don't get bummed out by some of the posts pointing out some of the challenges she will be facing with funding up to 40+ years of retirement. Realistically she is in better financial shape than at least 95%+ of the people her age, married or not. She did not pay out any in social security or build her resume and now is working for a local fire department for around 25k a year.She should double check with her divorce lawyer to be completely clear as to where she stands on getting any social security benefits. A farm is basically just a small business and I have never heard anything about farmers being exempt even it was under the ex-husbands name. As to her job, she probably has more skills than she thinks. Even with a small farm, in some ways she may have been a co(or assistant) manager of a small business with hundreds of thousands of dollars(if not more) in cash flow each year. She should also look into any of the firefighter organizations to see if working in the fire department, even if she is an office worker, makes her eligible to join and get group heath coverage when she retires early. ...Recommendations on a brokerage firm?...I recently went with Fidelity for mutual funds in an IRA because I was having some problems with Vanguards customer service on the phone and I decided I wanted to be able to go into an office if I needed to. I am mainly using index funds and Fidelity has some good low cost ones, as does Vanguard. ..Is this a decent portfolio?...Nope, in addition to being very heavy in fixed income. If she is investing in order to be able to support herself until she is 95(which is very possible), then she has up to a 50 year investing timeframe, with the majority of it being spent over 20 years from now. For the asset allocation you might think of the money as four separate portfolios and use the time frame involved to determine the appreciate mix of stocks and bonds. You will want to crunch the number yourself to see what looks reasonable to you but here very quick and dirty starting point of how I would look at it1) Emergency and pre-retirement( Next ten years.) $300K (mostly conservative)2) Early retirement(55 to age 65, that's 10 to 20 years from now) $250K 80%/20% stocks/bonds3) Mid-retirement(age 65 to 80, that's 20 to 35 years from now) $200K 90%/10% stocks/bonds4) Late-retirement, over age 80( that's 35 to 50+ years from now) $100K 100% stocks.Should we consider paying a fee-based advisor instead?Maybe, if you can find one that charges by the hour. When they start talking about "only" charging 1% of your portfolio per year, remember that you can only safely withdrawal 4% or so of your portfolio per year, they are really asking for 25% of your annual income. That is way to expensive to pay every year. If an "advisor" recommends an annuity then it is very likely you have a bad one that is just saying that to get a commission in addition to what you are paying him/her.Any specific funds or products worth mentioning?For stocks you only need a few index funds. The low costs are the key. ..Obviously she is very risk averse,...There is a saying that goes something like "In investing you can't avoid risk, you can only choose which type of risk to take." The suggested portfolio is heavy in fixed income investments, which exposes it to the risk of getting hurt by increasing interest rates or inflation so in addition to having a lower expected return. Both of these are still low compared to recent history so my gut feel is that they may be a problem in the near future and almost certainly will be a problem sometime over the few decades. Your Mom is probably just a bit too young to clearly remember the high inflation of the 1970's as an adult but try to get her to talk about what the inflation was like back then with some of her older relatives or friends especially for retired people.One fear the people have is that they will invest a new lump sum just before the market declines. While it may not be statistically the best way, moving a portion of funds from fixed income to stocks each month over the next two years or so could get the benefit of dollar cost averaging and help avoid investing at exactly the wrong time....buying a house...I am not as negative as some of the prior posts on buying a moderate house because it is a great hedge against inflation. Even with moderate inflation, at some point in the future, owning will be less expensive than renting. One of the benefits of owning a home is that it reduces the amount of money that must be withdrawn from the stock market accounts in down years. The tradeoff of course is that she will have less to invest and might end up not being able to retire as early. Admittedly, renting a shack in Montana like the Unabomber did would leave her better financially than buying a nice modest home, but it might be a tradeoff that is worth while to her. This is assuming that you are not in one of the areas that have gone up a lot over the last few years that might suffer a big setback. I used to live in Portland so I am sort of familiar with the way that it has gone up, but I would assume that the rural areas have been more reasonable. ... some honest advice....While it might seem a remote possibility now, the majority of the people that I have known that divorced around that age have eventually remarried. I didn't look it up but I would guess that her life expectancy is probably less than 80, which means that half of people in her situation won't live past 80. If you put those together, it means that the probability of her becoming a lonely 90-year-old divorcee is probably one of the least likely outcomes. While this possibility should to be taken into account as a contingency, it shouldn't be the main game plan. Sometimes people get too conservative in their planning and don't spend enough to live comfortably. Any planning that is done now should probably kept fairly general to prevent big mistakes(like too much fixed income for a long time) and to get a feel as to if things are going in the right direction. Greg
2old4bs:<<<<At a 4% withdrawal rate, $300K generates $1000 a month before taxes. Is that sufficient for rent in your area? It would be insufficient in many parts of the country.>>>>"db, what am I missing?"Inflation risk."Why are we talking about a 4% withdrawal rate when we're talking about renting?"Because she still wants to grow the portfolio."At a 5% interest income rate, $300K generates about $1250/month, which is sufficient to rent a 1 bedroom apartment here in Queens County, NYC."For now, what about 10-15 years from now when inflation turns the 300k into the equivalent of say 200k in purchasing power in 2006 dollars?Regards, JAFO
kbrunson2005: "Thank you for your very informative responses Ressnullius and JAF031."Your welcome. "My mom lives in Oregon."A market about which I no little. Pricey in Portland and Eugene? Prices driven higher by flush former Calfornians moving north???"One of my mother's major concerns is the safety of her investment. That is the reason for the heavy allocation in fixed income, but as you have outlined it doesn't seem that that will provide adequate growth for her needs."You are covering market risk but not inflation risk, as another poster has already noted.Here are some inflation calculators I have saved:http://www.bls.gov/cpi/#data(especially http://data.bls.gov/cgi-bin/cpicalc.pl )http://www1.jsc.nasa.gov/bu2/inflateCPI.htmlhttp://www.westegg.com/inflation/IIRC, columnist Scott Burns has written about this topic, but I cannot seem to locate his archives with registering (free) with his Dallas Newspaper publisher.You should investigate."It will be difficult to explain to her that she can sleep at night with her money in equity (her ex-husbands idea of investing was short-term cds in seperate banks to ensure FDIC coverage). It is also quite possible that the retirement and housing goals aren't as feasible as I had originally hoped. These are the kinds of considerations I was looking for when posting in the discussion board. So JAFO, don't worry about being the bearer of bad news."There is a Retire Early Home Page here at TMF: http://boards.fool.com/Messages.asp?bid=112992and while most current posts are OT, the FAQ ( http://boards.fool.com/Message.asp?mid=20740602 )and archives are extremely valuable and include the link to intercst's REHP at http://www.retireearlyhomepage.com/ . The board regulars are good at responding to questions, but only infrequently generate new on-topic posts.As another poster noted, in general, your mother's assets are substantial, easily better than 75% or of most people in the USA. See e.g., http://boards.fool.com/Message.asp?mid=19580545and probably top 5% for her age decile.The follownig is a dry, Census Bureau report, somewhat dated, but the most recent that I could find:http://www.census.gov/prod/2003pubs/p70-88.pdf "The median household net worth in 2000 was $55,000, higher than in 1998, when it was $49,932." P. 4Table B on P. 6 is interesting.From the highlights page"The distribution of wealth in the United States has a large positive skew, with relatively few households holding a large proportion of the wealth."You can research GINI index of co-efficient if you want to learn more about the distribution.See also: http://www.practicalmoneyskills.com/english/at_home/consumers/debt/worth/net.phpI could not find in my files much in the way of net worth data not broken down by age (or some other category).The real issue will be growing the portfolio and preserving its purchasing power (not gross dollars) for your mother's lifetime.Where you invest will depend upon your investment strategy. If you stay with mutual funds, Vanguard or Fidelity seem to be the most common suggestions. I have also had T Rowe Price funds through a 401-k plan and they were fine, too. If you will buy stocks, then you may want more of stock broker (even though I know that Fidelity offers brokerage services). While I have never had any particular problem with Vanguard, I still like that Fidelity has an office(s) in Houston and that I can easily go the office to see and speak to a live person directly (probably on the wrong side of the generational divide).Good Luck.Regards, JAFO
Where you invest will depend upon your investment strategy. If you stay with mutual funds, Vanguard or Fidelity seem to be the most common suggestions. I have also had T Rowe Price funds through a 401-k plan and they were fine, too. If you will buy stocks, then you may want more of stock broker (even though I know that Fidelity offers brokerage services). While I have never had any particular problem with Vanguard, I still like that Fidelity has an office(s) in Houston and that I can easily go the office to see and speak to a live person directly (probably on the wrong side of the generational divide).Look, all of these fund companies are excellent. I use Vanguard, but that's because I'm comfortable with them, plus I've got all Admiral accounts. Fidelity is good, as is T Rowe. I would pick one and stick with it.
Just a thought from a Mom - money and relatives don't mix. At 45 your best advice would be for her to educate herself more about managing her finances.
...money and relatives don't mix. At 45 your best advice would be for her to educate herself more about managing her finances.This is absolutely the best advice so far.As far as I can see, the portfolio is much too conservative. It is almost certainly going to fail, due to inflation.I suspect you are in a no-win situation. Your mom is not going accept a more age-appropriate portfolio with 75-80% equities, but I suspect that if the portfolio does not provide the buying power she expects in the future she will blame you for its failure. If she wants to "park" the money in mostly bonds while she educates herself, that is OK for a year or so, but she really needs to take control of her own life.
Thanks for all of your excellent advice. I suspect that GalinAZ and OldOne may be right in that I should make sure she has a much more active role in decision making. In the short term I will pick up a beginning investing book for her and try to explain some of the topics that have been discussed. I will show her how inflation will affect her portfolio and let her make the decision to move into 75%+ equities. I will also look into the VanguardAdvantage account.I will probably have more questions once I have a chance to talk to her. Again, thanks for the advice.
I happened to think back on this and had a "well duh" moment.Most of the major mutual fund families have targeted retirement funds like the Fidelity Freedom 2010, 2020, etc funds. These funds invest with the goal of appropriately allocation the funds based on the projected retirement date. Normally I am not a big fan of these since (in my opinion) they are excessively conservative because there is no way that the fund manager can take into account to the rest of you financial situation(like renting vs. mortgage vs. having a paid off house) so they tend to default to a very conservative investment strategy. In you Moms case this may be what she wants and it would help mitigate your responsibility if her investments don't do well.There are a few pitfalls to avoid with these. 1) If the retirement date is say 2015 but the funds are set up for 2010 and 2020, sometimes people will decide to split their retirement money equally between them because of the different date. This is incorrect since the vast majority of the retirement will be after 2020, Doing something like 15% in the 2010 fund and 85% in the 2020 would be better.2) Not paying enough attention to your other asset allocation. For example if someone put 50% of their retirement money into a 2020 fund and put the rest into bonds, they would likely have way to much money in fixed income. There isn't anything wrong with using the rest of the money to weight your total more towards bonds or stocks depending on your situation but you need to do this intentionally.Greg
Excellent new book for a new investor. Make it an early Mother's Day gift.MKThttp://www.amazon.com/gp/product/0471730335/ref=sr_11_1/102-1119773-5792131?%5Fencoding=UTF8
Ironically, I had just ordered this and sent it to her house yesterday!
I'm 10 years older than your mom and would like to retire in 6-7 years. Although my current nest egg is not as large as your mom's, I do not have to drawdown anything until I retire, so 100% is invested and will stay that way. In addition, I'm adding $50K each year in contributions to my nest egg.I only have 15% invested in 'fixed income' because I feel I need my portfolio to grow more than a large portion in fixed income will do. Although this is 'riskier', as I see it, there is little choice, unless I want to work until I'm well over 70!6-7 years is not very long... If the market turns down, you could be working past 70 as well...And I'd say the odds of another recession and stock market drop in the next 6-7 years are better than average.People don't seem to recognize that "risk", when dealing with short time horizons, is quite real.Just recognize that you are gambling somewhat now... good luck!
Good that is a great place to start.Some great advice for your mother would be to discuss her situation with a fee-only planner.In fact, Kiplinger and NAPFA are sponsoring "Jump Start Your Retirement" next Friday-get her to call in for basic advice.Your mother likely would benefit from professional advice. www.NAPFA.orgwww.GarrettPlanningNetwork.combuzmanMember, NAPFAMember, GPN
1) With $850,000 expenses are not chump change. 0.5% is $4,250. For that reason actually owning shares directly can work out cheaper. Vanguard has 'admiral' shares for big $ clients with 0.09% expenses (still $765/yr).2) Mixing small, medium and large cap idicies results in a total market index. If that is what you want go with one total market fund.3)I suggest you diversify the fixed income to include foreign bonds. You might consider a foreign currency account at everbank.com4) Precious metals. If you are talking mining stocks I suggest you go with a natural resources fund that invests in energy, basemetals ect.If you are talking about actual gold silver ect. in case of a financial crises you might consider physical posession of the assets. 5) If you are considering a "die broke" strategy you will need to convert the capital into annuities over time, consider: http://www.brkdirect.com/6) US$ CDs are paying 4+%, which seems ok."needing income during her retired years," That typically means dividend paying stocks, bonds and annuities. Note that reaching for yield is a good way to lose alot of money.Right now I think the big decision as to allocation is % energy stocks. If you can get that right it will not matter what else you do. Sadly nobody knows that for sure.
She did not pay out any in social security or build her resume and now is working for a local fire department for around 25k a year. The marriage was longer than 10 years. Unless she remarries, she will be eligible to draw Social Security based on her ex-husband's earnings. Debra
6-7 years is not very long... If the market turns down, you could be working past 70 as well...Yes, I understand that risk, but the risk is a matter of probability, whereas, if I invest more like 30-40% in fixed, it's a sure thing that I'd have to work longer.People don't seem to recognize that "risk", when dealing with short time horizons, is quite real.I'm one of those folks who is consistently harping on the 'timing effects' of market downturns when it comes to retirement. I agree that most folks who use an average annual return to forecast their nestegg don't realize that if a market downturn of ~20% + occurs just as/after they retire, they might very well be in hot water.Just recognize that you are gambling somewhat now... good luck!Oh boy, do I ever recognize the risk. Thanks for the luck sentiment--I need it. ;-)2old
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