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Friends are 65 and 66 and about to retire. They've paid almost no attention to their 401ks over the years and just got an inheritance and have sheepishly asked me for advice. They're a bit vague on amounts, I think a couple hundred thou apiece in 401ks (maybe $4-500,000 total) and a few hundred thou cash inheritance plus savings. Very small Roth accounts as they didn't know of them till a few years ago. Maybe $20k apiece. They're frightened by tales of nefarious investment advisors and don't want to go that route, and also want to do as little management themselves as possible.

I'm thinking roll over each 401k into an IRA and invest in Vanguard Wellesley and put most of the (taxable) cash into Vanguard Wellington. Maybe do something a little more out there with the Roths...the VG REIT fund? The rest of the cash into a 5-year CD ladder. The only work they'd have to do is roll over the expiring CD rung, and take all the interest & dividends they need (reinvest the rest in the fund in that account).

One wrinkle is that their 401ks are at Fidelity, and they feel more comfortable rolling over into IRAs there. Are there funds similar to Wellesly and Wellington at Fidelity? They do want/expect some income from investments to live on. No pensions but above-average SS benefits, about $3k/month put together. They'd like another $2k/month in income.

Does anyone have better ideas for these folks? Remember they want to do as little as possible and don't want to worry.
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No. of Recommendations: 1
Only thing I'd say is that REIT's need to be watched. As you know, if and when interest rates start to go up, those might not be the best place to be. (I have some in AGNC and NLY in my own, IRA.)

I know nothing about the Vanguard funds you mention, so cannot compare with Fidelity, but they should be able to find a place to get some reasonable return periodically.

Personally, I'd suggest some money in AT&T (T -- nice, steady dividends) and maybe a couple of other stable companies, too.

Vermonter
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I suggest reading this:

http://www.amazon.com/The-Investment-Answer-Daniel-Goldie/dp...

It's a short read, giving a easy to understand explanation about investing. I believe one of the authors was an investment banker who had cancer and wanted to provide a simple understanding of investments.

I've read it and it does a good job as it was a refresher for what I learned in school. It gives asset allocations so they'll be able to follow one with very little tweaking. Oh, they recommend index funds or ETFs.

My only reservation today, is the fixed income portion of your asset allocation. With interest rates so low for such a long time, I can't bring myself to invest in any FI fund. Instead, I'm substituting indexed dividend funds on the assumption they are established companies that while they may not gain much in value, they won't lose much value either. You're looking for the 3-5% dividend stream, which matches or even exceeds FI funds.
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Oh, I should add that I'm keeping a large cash portion in lieu of FI investments. Currently, my cash and projected dividends will cover 2 years of cash needs, so I won't be pressed to sell in a down market.

And once interest rates start rising, I'll shift into FI funds.
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No. of Recommendations: 6
No pensions but above-average SS benefits, about $3k/month put together. They'd like another $2k/month in income.

Two big things to settle first.

One, how much money do they have to invest will determine how much they have to generate to meet their requirements. If they have only $500k (the low end of your estimates) they need to generate 5% or more to get that $2k/month. If they have $800k (the high end), it is 3%. Different ball games, different risks.

Two (and the more important), they'd LIKE another $2k/month but what is really NEEDED? If SS is covering rent, utilities, food, etc., and that $2k is for trips, ballgames, spoiling grandkids, etc., it is totally different than if that $2k is keeping the power turned on. Make out a NEED budget and a WANTS budget. Make sure the NEEDS are covered and then some and the extra can then pay for the WANTS as the money becomes available.

After those things are settled, then worry about where to invest.

JLC
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Instead, I'm substituting indexed dividend funds on the assumption they are established companies that while they may not gain much in value, they won't lose much value either. You're looking for the 3-5% dividend stream, which matches or even exceeds FI funds.

Thx for your reply.

VIG (VG dividend appreciation fund) yields a little over 2%. Are there indexed dividend funds with yields in the 3-5% range you mentioned?
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They aren't comfortable giving me exact info, only approximate--I'm just a friend, not even a very close friend. Looks like one has about ~$200k in 401k and the other ~$250k. They both have $15k in their Roths. And taxable (currently all in the bank) of $200k. Total about $680k.

They say they need $4000/month for regular expenses ($3,000 from SS) and another $1000 for extras like travel and expensive occasional things like major maintenance on the house. Hence wanting to generate $24,000/year off $680,000, a little less than 4% so it seems doable.
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I'd suggest some money in AT&T (T -- nice, steady dividends) and maybe a couple of other stable companies, too.

They would be more comfortble with a mutual fund that had such stocks in it.
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"they want to do as little as possible and don't want to worry..." You can want anything at all, but that is totally unrealistic. Lots of luck.
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Total about $680k.

They say they need $4000/month for regular expenses ($3,000 from SS) and another $1000 for extras like travel and expensive occasional things like major maintenance on the house. Hence wanting to generate $24,000/year off $680,000, a little less than 4% so it seems doable.


Here is my take from the info.

Of the $680k, I'd place at least $72k (3 years expenses) in a money market fund. For more cushion, $120k (5 years expenses).

For ideas on simple portfolios check out this link. IIRC, most of these are as few as 3 funds to as much as 10, re-balance quarterly to yearly.

http://assetbuilder.com/lazy_portfolios/

Do note the standard deviation of returns, there is a significant chance that there will be a negative return in any given year. Thus the advice for a 5 year cushion in money market.

Or, it might be possible to build and dividend generating stock portfolio with about 10 stocks and all well known companies. These lists are of companies that have paid and increased their dividends yearly over the past 10-25 years.

http://long-term-investments.blogspot.com/p/dividend-champio...
http://long-term-investments.blogspot.com/p/dividend-contend...

Don't get hung up on yield alone. 5-10 years from now, after some of these companies have increased their payouts, the effective yield would be much higher.

If they have to have 4% plus now, you can mix in some higher yielding stocks.

http://long-term-investments.blogspot.com/p/high-yield-large...

(NOTE: I can't vouch for this site, it just has an easy to read format and is for illustration only).

The big risk as that a company cuts or stops its dividend. Good examples would be BAC (Bank America) and GE in 2008/09.

This is how I'm setting up my portfolio for retirement.

JLC
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No. of Recommendations: 3
Friends are 65 and 66 and about to retire. They've paid almost no attention to their 401ks over the years and just got an inheritance and have sheepishly asked me for advice. They're a bit vague on amounts, I think a couple hundred thou apiece in 401ks (maybe $4-500,000 total) and a few hundred thou cash inheritance plus savings. Very small Roth accounts as they didn't know of them till a few years ago. Maybe $20k apiece. They're frightened by tales of nefarious investment advisors and don't want to go that route, and also want to do as little management themselves as possible.

Sounds like they might want to look into one of Scott Burns' "Couch Potato" portfolios. http://assetbuilder.com/couch_potato/couch_potato_cookbook

AJ
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Astroe, if they are still working, they can continue to contribute to their Roth. I plan to, hopefully, contribute all of my net earnings this year to my Roth (if the FL house sells).

Donna (All of my accounts are at Fidelity - no mutual funds)
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RV, I agree on the AT&T (T). I am also receiving good dividends from K, COP, and a few others.

Donna
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With all respect to other responses to your question, this couple have no business going out on their own for the first time and buying this or that investment. They do not know why they are buying this or that...only that their friend recommends it. This, along with their SS, is all they have to get them to the judgement day. And we have no idea of the other parts of their lives that will place demands on their savings over the years ahead, such as healthcare, family needs, changes in living arrangements, changes in insurance needs, need for family travel, etc, etc.

They need to make an appointment with a Fee-Only Certified Financial Planner or CPA/PFS, preferably through the Garrett FP Network. They will pay this individual directly, usually on an hourly basis, for their analysis and advice. Many Garrett Planners will help them to set up their taxable accounts and IRAs, allocate investments and be there to answer questions and reassurance. Your friends cannot afford to make mistakes or to run the risk of listening to any of the multitude of sharks out there with their 'guaranteed' whatevers.

I'd suggest you have them Google to the Garrett Financial Planning Network and try to find a planner in their area.

BruceM
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RV, I agree on the AT&T (T). I am also receiving good dividends from K, COP, and a few others.




T's been very good to me ...but i've only held since jul-10 .... ie, i stumbled on it at a low.

looking at history: looks like dropped from 60 to 20 in crash of 99; from 40 to 20 in crash of 07 ....

suspect alstros friends would find that VERY scary ... though maybe shouldn't be since it's been reliably throwing off dividend through all the ups and downs
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T was one of my first investments. Then I sold for a profit, missing the crashes...repurchased in 9/11. Still happy.

Donna
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T was one of my first investments. Then I sold for a profit, missing the crashes...repurchased in 9/11. Still happy

I'm happy too.. just thinking too scary for some
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if they are still working, they can continue to contribute to their Roth

They are retiring this year and have already put $5k apiece into Roths (I mentioned they could put in another $1k apiece). They find it stressful to have even minimal contact with financial doings.

As for getting a fee-based advisor, they don't feel more comfortable about it than any other advisor--not going there.

As for couch potato rebalancing--they prefer something like a Wellington/Wellesley fund where the company takes care of it. All they want is $$ arriving in their checking account every year (or month or quarter). I also thought about retirement income funds, but they are so heavily into bonds, this seems like a bad time for that.

The truth is these people aren't unusual. A lot of people would be happier with a pension where $$ arrives like paychecks, if smaller.

They worked hard for decades and now have health issues (I think I detect possible signs of dementia in one of them), and they want SIMPLE. They NEED simple. Picking a fee-only adivsor and trusting him/her is too scary for them. Making decisions about rebalancing every year when one of them may not be compos mentis for many years is also scary for them. They know enough to know that whatever they read last is most persuasive--so when they read individual stocks are best, they think that's a good idea, or an advisor, or coffeehouse. But when they start into to actually committing, they simply can't do it. It will be hard enough to get them to roll over into IRAs and buy a couplefew mutual funds.

I thank all of you for your suggestions--they're applicable to most who read this board. Do continue the conversation, especially about what to invest their taxable funds into (aside from the $72+k in low-interest cash) vs Roths vs IRAs.

I think they trust me because I don't claim to have the one perfect answer, I don't sneer at their discomfort with financial matters, and I'm willing to take their need for simplicity into account as a major factor.
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No. of Recommendations: 11
As for getting a fee-based advisor, they don't feel more comfortable about it than any other advisor--not going there.

As for couch potato rebalancing--they prefer something like a Wellington/Wellesley fund where the company takes care of it.


So they aren't willing to trust a financial advisor that they can talk to and ask questions of, but they are willing to trust a company that manages a mutual fund bought on the suggestion of a friend whom they don't trust enough to give detailed financial information, rather than have to look at their accounts once a year?

All they want is $$ arriving in their checking account every year (or month or quarter).

They may want to look at Vanguard's Managed Payout Funds https://personal.vanguard.com/us/funds/vanguard/ManagedPayou...

Or, have they considered single premium immediate fixed annuities? Vanguard offers these, too https://investor.vanguard.com/what-we-offer/annuities/get-gu...

The truth is these people aren't unusual. A lot of people would be happier with a pension where $$ arrives like paychecks, if smaller.

That also suggests an annuity could be appropriate.

My concern would be, if they are looking to get an annuity, or anything else where they don't have to do anything to actively manage the money, they are effectively trusting someone else to manage the money for them. But they also have indicated that don't want to have someone manage the money for them. Sorry - they have conflicting goals, and they can't accomplish both.

If I were you, I would probably just give them the list of suggestions that you got here from your interweb friends, tell them what the source is and that the advice is worth what they paid for it, and then STEP AWAY. If you do anything more, you are putting yourself at risk, both from a friendship perspective and potentially, from a legal perspective.

AJ
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As for couch potato rebalancing--they prefer something like a Wellington/Wellesley fund where the company takes care of it. All they want is $$ arriving in their checking account every year (or month or quarter). ... A lot of people would be happier with a pension where $$ arrives like paychecks, if smaller.

I'll probably get lambasted for this, but it sounds to me like you're describing an annuity. Specifically, a Single Premium Immediate Annuity (SPIA). They're not my favorite choice, but they have their place, and this might be it.

Turn the money over to the insurance company, and they send a check every month/quarter/year for life. Given the health issues, I'd go with an annuity that pays for their joint lifetimes - so the payments continue until the second one passes away. And it might be worthwhile to look into some inflation adjustments.

An alternate way to get the inflation adjustments is to buy an annuity now with only part of their money. Then buy another in a few years. Their shorter actuarial life span would generate higher monthly payments then.

If they didn't want to leave any estate, they could put everything into annuities. (They'd need separate annuities for the after tax, traditional IRAs, and Roth IRAs. So that could be as many as 5.)

I don't know if that would provide the monthly income they need/want. But it's at least something to check out.

--Peter
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If they didn't want to leave any estate, they could put everything into annuities. (They'd need separate annuities for the after tax, traditional IRAs, and Roth IRAs. So that could be as many as 5.)

I don't know if that would provide the monthly income they need/want. But it's at least something to check out.



what do you all think/know about charitable annuities...
( their rates seem unrealisticly high
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ptheland writes,

I'll probably get lambasted for this, but it sounds to me like you're describing an annuity. Specifically, a Single Premium Immediate Annuity (SPIA). They're not my favorite choice, but they have their place, and this might be it.

The big problem with an SPIA is that 20%-30% of the purchase price is lost to the insurance company's various fees, expenses and costs. While they are heavily promoted by financial advisors, I wouldn't touch one with a proverbial 10 foot pole.

The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).
http://retireearlyhomepage.com/annuity_costs.html

You can estimate the costs embedded in a single premium immediate annuity by comparing the premium quote you get from the insurance agent to the expected present discounted value (EPDV) of an immediate life annuity. The EPDV is sometimes called an "actuarially-fair annuity" or "money's worth annuity". Economists define the ratio between the EPDV and the premium quote as the Money's Worth Ratio (MWR).(Note 1.)

For individuals of average mortality, Money's Worth Ratios as low as 0.70 are not uncommon, depending on the annuitant's age. That would indicate that 30% of the purchase price of the SPIA is siphoned off in the insurer's various costs and expenses. For retirees who are aquainted with low-cost index funds where one can assemble a diversified portfolio of stocks and fixed income securities for an annual cost of 15 basis points (0.15%) in fees, the embedded costs of an SPIA seem large enough to choke a crocodile. Even if you applied a 15 basis point annual fee over the entire 50 to 60-year life of the annuity pool, it would still amount to less than 2% of the purchase price.

</snip


intercst
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The big problem with an SPIA is that 20%-30% of the purchase price is lost to the insurance company's various fees, expenses and costs.

If one isn't willing to manage their own money, and one isn't willing to have a financial adviser manage their money, and one still wants monthly income, then, expensive as they are, annuities may be the best option available.

I suppose another available option would be 'money under the mattress' - at least until it runs out.

You pays your money and you takes your choice.

AJ
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No. of Recommendations: 10
The big problem with an SPIA is that 20%-30% of the purchase price is lost to the insurance company's various fees, expenses and costs.

Yep. That's why they're not my favorite choice.

But if you're not going to assume responsibility for learning about and managing your own money, you're going to pay someone to do that for you. These at least get you a pretty sure cash flow for life. Most other managers only guarantee to take your money, with little guarantee of results.

And it helps avoid the worst of the rip off artists who would take all of the money.

--Peter
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Any time someone wants to sell you something, it's because THEY plan to make a profit on it. Something I always keep in mind.

My elderly mother is retired real-estate with a good financial calculator. Some annuity guy tried to sell her one years ago, she whipped out the calculator, hit a few buttons and asked him how it would be a good deal since, after fees, she wouldn't even break even for 7 years...

GeezLouise. Tell them to leave it in a bank for at least a year till they've had time to self-educate a bit, then invest somewhere where nobody else is collecting a fee or a commission. They're not going to lose gobs of money leaving it in a bank for a little while.

Even rental properties could be an option. As long as they're not in a bubble-market area (CA, FLA, AZ, Nevada, Michigan...)
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VIG (VG dividend appreciation fund) yields a little over 2%. Are there indexed dividend funds with yields in the 3-5% range you mentioned?

Sorry, when I first invested in a couple, they were over 3% at the time. I see now that they are in the 2% range now. Look at VYM which is at 2.9%. I also invest in individual stocks with high dividends. One is GEF.B, which has a 5% dividend.
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