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Author: shiningr Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75402  
Subject: Parents' Retirement Planning Date: 2/9/2004 6:47 PM
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I am a 22 year old just finishing up college and my parents (knowing that I have been doing a lot of investment reading in the last year) approached me about helping them allocate retirement investments. My basic struggle is that I have only been researching investment strategies for myself and am therefore 100% in equities. I think for their age they need to seek some preservation of capital. Here is their basic situation...

My mother is 48 and my father is 52 and it is probably safe to say that they are 12-15 years from retirement. They are excellent savers but uninformed investors. They each have 401K's that they have been contributing to for many years and they just opened Roth IRA's a few years ago. The IRA's were with a local credit union which only have one investment option- a very low fixed interest rate. I immediately helped them set up an IRA with Ameritrade and had all of their IRA assets trasferred. I suggested 50% equities and 50% in something more secure, so I put 50% in VFINX and the rest is still sitting in the money market. I'm thinking the rest should go into some sort of bond fund, but I don't even know where to begin with that and I'm having difficulties finding information on the Fool. Did I make a good choice with 50% in VFINX and are there any suggestions on what to do with the other half?

In addition, due to an aquisition of my mother's employer she is being forced to reallocate her 401K. I sifted through her new investment options and was unimpressed with the exception of a low cost S&P 500 index fund. Her employer matches up to 6% and she has been contributing far beyond that. I suggested that she contribute only 6% (100% in the S&P index), max out her IRA, then put any additional savings into a general trading account. I figure that if her 401K is too risky with 100% equities, she can balance her Roth IRA such that she's 50/50 overall.

Finally, they have a significant amount of money sitting in a low interest savings account that they don't plan on using anytime in the near future. I was thinking of opening a general trading account and using a similar allocation as mentioned above. Is this a good idea or should I suggest that they put it elsewhere?

Keep in mind that they are not the type that are going to spend a lot of time tracking their investments. I plan to help them review their positions from time to time, maybe on a yearly basis. Other than that it would be good if it was hands off. Any advice would be greatly appreciated.
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Author: ortman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39066 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/9/2004 7:42 PM
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Her employer matches up to 6% and she has been contributing far beyond that. I suggested that she contribute only 6% (100% in the S&P index), max out her IRA, then put any additional savings into a general trading account. I figure that if her 401K is too risky with 100% equities, she can balance her Roth IRA such that she's 50/50 overall.

Why not contribute the 6%, max out the IRA, contribute the other 9% into the 401k, *then* contributed to a taxable account. Don't pass up on that deferred growth in the 401k.

Finally, they have a significant amount of money sitting in a low interest savings account that they don't plan on using anytime in the near future. I was thinking of opening a general trading account and using a similar allocation as mentioned above. Is this a good idea or should I suggest that they put it elsewhere?

What is significant? I have enough funds in money market accounts and US savings bonds to pay our living expenses for 6 months. I'm assuming you are implying that these funds exceed any safety net which they may require?

-Ortman

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Author: shiningr Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39067 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/9/2004 8:25 PM
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Why not contribute the 6%, max out the IRA, contribute the other 9% into the 401k, *then* contributed to a taxable account. Don't pass up on that deferred growth in the 401k.

The 401k is unappealing due to the lack of investment options but you make a very good point. Is putting 100% of 401k contributions into an S&P 500 index fund a bad idea? I do remember one other fund (a bond fund, I believe) that had a very consistent 6% return. Would that be a good vehicle for 50% allocation?

What is significant? I have enough funds in money market accounts and US savings bonds to pay our living expenses for 6 months. I'm assuming you are implying that these funds exceed any safety net which they may require?

I do not know the exact amount since it is dispersed among several accounts but I am fairly confident that it is at least 1 year worth of living expenses (and probably several) especially considering that they have very minimal financial obligations. They own their home, vehicles, have no debt and therefore are only obligated to pay property taxes and general living expenses.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39069 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/9/2004 8:57 PM
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I think you are doing fine, shiningr. If your parents don't want to spend much time managing their funds, then you would like them to be mostly in mutual funds. VFINX is an excellent one. It is diversied over 500 stocks. That is enough diversification for me. Others might like more diversification (total market index fund for example), but S&P 500 is great.

Money markets pay such low rates that it is tempting to do something that pays better interest. Bond funds in the long run could be best, but they will lose NAV when interest rates start to rise. Its better to own CDs or the bonds themselves (at least until rates rise and stabilize). They have maturity dates, and even though market value may be down if interest rates rise, they will still pay face value when they mature. Hence, you get better yield and less interest rate risk. A laddered maturity portfolio is the best way to do this.

At retirement, they would like to have something like five years of living expenses in fixed income securities. Traditionally Fooldom recommended T-Bills for this, but now days people use CDs or bonds or any fixed income security. This five years provides a buffer in case the market goes through a correction. If stocks are down you live off of the bond that matures and the interest from your bonds. Otherwise, you sell stocks sufficient to buy a new 5 yr bond every year.

So Fools would suggest that they keep far more than 50% of their assets in stocks. But that is up to them and depends on their risk tolerance.

And by the way, they should have an emergency fund somewhere to cover the unexpected. Putting that into CDs and arranging for one to mature every year is one way to manage.

Taxable investing is fine. LTBH (long term buy and hold) can be as good as IRA investing from the point of view of income taxes if you do it right.

Best of luck to you.

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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39073 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/9/2004 9:58 PM
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Your parents raised a smart kid. Let's talk.

I am a 22 year old just finishing up college and my parents (knowing that I have been doing a lot of investment reading in the last year) approached me about helping them allocate retirement investments. My basic struggle is that I have only been researching investment strategies for myself and am therefore 100% in equities. I think for their age they need to seek some preservation of capital. Here is their basic situation...

Even in your situation, I would not recommend 100% equities but at least 5-10% bonds.

My mother is 48 and my father is 52 and it is probably safe to say that they are 12-15 years from retirement. They are excellent savers but uninformed investors. They each have 401K's that they have been contributing to for many years and they just opened Roth IRA's a few years ago. The IRA's were with a local credit union which only have one investment option- a very low fixed interest rate. I immediately helped them set up an IRA with Ameritrade and had all of their IRA assets trasferred. I suggested 50% equities and 50% in something more secure, so I put 50% in VFINX and the rest is still sitting in the money market. I'm thinking the rest should go into some sort of bond fund, but I don't even know where to begin with that and I'm having difficulties finding information on the Fool. Did I make a good choice with 50% in VFINX and are there any suggestions on what to do with the other half?

OK. First up is that Dad is elligible to contribute an extra $500 to his Roth IRA under the catchup rule. Mom will be able to do so when she turns 50. As good as Ameritrade is, my preferance is Scottrade, where you have no account maintenance fee, no mutual fund transaction fees, and a few dollars less for your equity trades. But that's just me.

I guess before I could offer an opinion on your allocation I would need to know your current status and target. For example, have you calculated how much retirement assets they need to accumulate for retirement (retirement income * years live in retirement + extras)?

Take that, subtract the current market value of their portfolio, and that will tell you how much it needs to grow over the next 12-15 years. This will lead to a better picture of what kind of contributions they need to make and what rate of return will be necessary to reach their retirement goals.

In addition, due to an aquisition of my mother's employer she is being forced to reallocate her 401K. I sifted through her new investment options and was unimpressed with the exception of a low cost S&P 500 index fund. Her employer matches up to 6% and she has been contributing far beyond that. I suggested that she contribute only 6% (100% in the S&P index), max out her IRA, then put any additional savings into a general trading account. I figure that if her 401K is too risky with 100% equities, she can balance her Roth IRA such that she's 50/50 overall.

A Foolish approach is to contribute to the 401k up to the match, then contribute $250/month (or $115/paycheck if paid biweekly) to your Roth, and then return to max out your 401k. Note that Dad's RIRA contributions would be different if he is contributing $3500 per year.

If your Mom and Dad are tight and trust each other (grin) then consider their individual retirement counts as a whole, with asset allocation stretched across both 401k's, Roths and retail investments. This way, if your Mom's 401k has a strong S&P500 index fund and your Dad's 401k has a good small cap component, and you can find the equities or bond funds in the Roth accounts that you like, you have a larger canvas on which to paint your investment picture.

Finally, they have a significant amount of money sitting in a low interest savings account that they don't plan on using anytime in the near future. I was thinking of opening a general trading account and using a similar allocation as mentioned above. Is this a good idea or should I suggest that they put it elsewhere?

There are a couple of considerations. First, you might consider tax free mutual funds for your retail accounts. Second, If you want to put it away for a few years and not think about it, a 5 yr CD is earning 3.5% (Bankrate.Com avg), and the interest would not be taxable until maturation. The risk with CD's however (and you thought they were completely safe) is with the road not taken. Rates are bottomed out now, but may rise if the Fed raises rates and you could be locked in long term to a lower rate.

Keep in mind that they are not the type that are going to spend a lot of time tracking their investments. I plan to help them review their positions from time to time, maybe on a yearly basis. Other than that it would be good if it was hands off. Any advice would be greatly appreciated.

You probably will want to keep an eye on their accounts on-line; I recommend quarterly, but I would not rebalance more than once a year. Two other things to consider. First, mutual funds and stockes with big dividend yields can be great income generators, but I would put them in a RIRA so as to render their gains tax free. Second, if you do go with bond funds, consider longer term, high yield bonds. These tend to have greater returns, but also a higher risk factor. Still, although they stray a little from the norm, they can be an acceptable part of a conservative portfolio.

Fuskie
Who must disclaim he ususally speaks in toungues and should not be dishing out advice without salt...

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39076 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/9/2004 10:06 PM
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I was in the same situation last June. After a divorce settlement and a home sale, my mother (age 53, with 12 years more to work) needed investment help.

I immediately helped them set up an IRA with Ameritrade and had all of their IRA assets trasferred.

Nice move.

Did I make a good choice with 50% in VFINX and are there any suggestions on what to do with the other half?

Suggest you shift toward equities. My mother's money is 80% equities, 5% REITs, and 10% bonds. With 15 years til retirement, much of your parent's assets will remain invested for 30 years or more. In that timeframe, stocks always outperform bonds, and are in fact less risky (volatile) over the long term. For bonds, Vanguard's total bond market index is fine.

Her employer matches up to 6% and she has been contributing far beyond that. I suggested that she contribute only 6% (100% in the S&P index),

The S&P Index funds are fine investments. Recommend she max out her 401k, not shy away from it. The 401k is far better than a taxable account.

Finally, they have a significant amount of money sitting in a low interest savings account that they don't plan on using anytime in the near future. I was thinking of opening a general trading account and using a similar allocation as mentioned above

Yes, open a taxable account, and invest in (preferably tax effecient) equities. Try Vanguard's Tax-Managed Capital Appreciation Fund.

And don't forget to invest some in international funds, like Vanguard's Total Intl. Stock Index.

Nick












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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39078 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/9/2004 10:09 PM
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funkie: Second, If you want to put it away for a few years and not think about it, a 5 yr CD is earning 3.5% (Bankrate.Com avg), and the interest would not be taxable until maturation. The risk with CD's however (and you thought they were completely safe) is with the road not taken. Rates are bottomed out now, but may rise if the Fed raises rates and you could be locked in long term to a lower rate.


You can get over 4% on a 5 year CD, and the interest is taxable every year. Don't go with the 'average'. Send your money to the one with the highest rate that is FDIC insured. If you try to set up a five year ladder, you might get 3-3.5 average with 1,2,3,4 ,5 year maturity.

You might be thinking of Series E bonds, or I-bonds, which defer the interest until cashed in.

You also need to understand and educate your parents about risk/reward. You need to understand their risk tolerance..they may have that money in MMF because the are 'upset' at stock market volatility.....or future growth.

I suggest you digest William Bernstein's excellent book, the Four Pillars of Investing..and educate yourself about risk minimization through diversification,and then educate your parents so they are comfortable with the choices.

And so you are comfy with the choices. Just think if you were a financial planner in 1998, telling your parents how to allocate their resources...and you had them 95% in stock come the crash...and they saw their nest egg drop 40%????? how would you feel?? how would they feel???

You might have missed that if you weren't looking, or not studied up on it, but some folks have real indigestion with volatity.

If you had a Couch Potato portfolio, you would have seen only a few percent drop in 2000....and a much faster recovery... www.scottburns.com

t.



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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39082 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/9/2004 11:16 PM
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Just think if you were a financial planner in 1998, telling your parents how to allocate their resources...and you had them 95% in stock come the crash...and they saw their nest egg drop 40%????? how would you feel?? how would they feel???

The key here is the parents are not retired. Those who were fully invested in stocks and kept investing new money during and after the crash have done quite well. I certainly did with an all stock portfolio (and home equity to balance things out).

If you're retired and are living off your investments, you should have a healthy bond allocation. If you have 20-30 years til withdrawal, and are investmenting new money, stocks are the safest bet.

You have to look at what's statistically likely. Bonds have never outperformed stocks over the long term. In fact after taxes (bonds are taxed unfavorably vs stocks) and inflation, you'll be lucky if your bond investment grows at all over the long term.

Here's some info on why you should choose stocks from Tmfpixy, who wrote most of The Motley Fool's articles on investing and is retired himself:

http://www.fool.com/Retirement/RetirementStep5.htm







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Author: thomasr0 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39090 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/10/2004 2:56 AM
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It may be a bit off your and your parents' radar screen right now but fairly soon they should evaluate whether long term care insurance should be a part of their retirement plan.

As a single father and at age 55, I began paying premiums on a long term care insurance policy with GE Financial so that my son would not be placed in the position of having to care for me in my old age should the need for long term care arise. I began my LTC policy in my mid-50's because the premiums were affordable ($1200/yr) and I knew my health was then good enough to make me insurable. Both my mother and father are now in their early 80's and they wish they had acquired a LTC policy when they were younger. In their 80's their health precludes them getting such a policy and they couldn't afford the premiums in any case.

A husband and wife can get a combined LTC policy that offers advantages that are not available in the single person policy that I have. Such a policy would help your mother care for your father should he need long term care which is probably the most likely senerio. It also offers protection for your father or the children when and if she needs long term care.

Tom

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39097 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/10/2004 10:12 AM
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yobria: The key here is the parents are not retired. Those who were fully invested in stocks and kept investing new money during and after the crash have done quite well. I certainly did with an all stock portfolio (and home equity to balance things out).

The key is that the parents will retire in 10 years or so. Even as TMFpixy article notes, in 5-10 years, you can't expect 'positive' returns from stock in that short period. THe parent(s) will start to need income from that portfolio in 10 years. Being all in stock is not a wise decision, in my book, nor in most financial planners guidelines when you are in your mid 50s headed toward retirement.

If you read your Bernstein (The Four Pillars of Investing), or ROger Gibson AAsset Allocation you will see they don't recommend 100% stock allocation for ris minimization.

Your parents need at least 1/2 in stock funds, but putting all is playing with their retirement. It could be a repeat of 1966-82, where stocks DID not recover in 18-36 months, but tood 16 years! You have no clue what the future will be.

The parent(s) don't have time to rebuild a nest egg.


If you're retired and are living off your investments, you should have a healthy bond allocation. If you have 20-30 years til withdrawal, and are investmenting new money, stocks are the safest bet.

YEs, but the thread is about YOUR parent(s) portfolio, and they don't have 20-30 years to withdrawal. THat is the key. YOu are not investing for yourself at age 22, but for someone in their 50s/60s who don't have 20-30 years till retirement!.


You have to look at what's statistically likely. Bonds have never outperformed stocks over the long term. In fact after taxes (bonds are taxed unfavorably vs stocks) and inflation, you'll be lucky if your bond investment grows at all over the long term.<?ik>

Let's look at 1966-82. The worst time in the past 130 years to retire was 1966. Especially if you had all stocks!.....those with half bonds did better.

If you look at the traditional studies on portfolio management, which spurred the modern portfolio theory analysis, such as the Trinity STudy, you will find that the one that minimized risk was roughly half stock/half bond.


Here's some info on why you should choose stocks from Tmfpixy, who wrote most of The Motley Fool's articles on investing and is retired himself:

There are dozens of folks retired early over on the retire early homepage board here....and who don't have 100% stock allocation...

Even TmfPixy's article said DON"T be all in stock as you approach retirement.

You read into it the recommendations for someone with 20-30 years to retirement and apply them to someone with 10 years.



t.

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39098 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/10/2004 10:16 AM
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It may be a bit off your and your parents' radar screen right now but fairly soon they should evaluate whether long term care insurance should be a part of their retirement plan.

See below for a discussion on LTC insurance:

http://boards.fool.com/Message.asp?mid=20187317


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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39123 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/10/2004 6:20 PM
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... My mother is 48 and my father is 52...

There is a very good chance that at least one of them will live into their 90's or beyond which means that part of their money will be invested for 40+ years. Encourage them to not be too conservative. It is not an outrageous assumption to think that sometime in the next 40 years inflation will hurt fixed investments as badly at it did in the 1970's and 1980's.

Somewhere (I can't remember where) I saw a strategy of looking at your retirement assets allocation by when you expect to spend it. For example you can pretend you have at three separate retirements funds to invest and look at how long they have to invest;

1) Late retirement fund, from age 85+ (35+ year)
2) Mid retirement fund, from age 70 to 85 (20 to 25 years)
3) Early retirement fund, Up to age 70 (about 10 to 20 years)

When you think of it this way, keeping much money in low yielding fixed investments for decades does not look very sensible.

When you are evaluating what percent of their current portfolio is “conservative” and don't neglect to include some allowance for social security or fixed pensions which can be basically treated like an annuity for asset allocation. For example if they are expecting $1000 per month from social security, then this should be treated as a fairly large annuity when you are looking at their total asset allocation.

Right now interests rates and inflation are about as low has they have been in a generation. For what it is worth I am about their age and I am underweighting fixed investments, especially in taxable accounts.

Greg


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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39124 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/10/2004 6:28 PM
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I suggested 50% equities and 50% in something more secure, so I put 50% in VFINX and the rest is still sitting in the money market. I'm thinking the rest should go into some sort of bond fund, but I don't even know where to begin with that and I'm having difficulties finding information on the Fool.

I have already read "Four Pillars" by Bernstein, and this is the equity/bond allocation I have in my portfolio right now: 80%/20%. I am in the same age neighborhood as your folks. I would suggest at least 20%-25% in bonds at this time, at their age. Now for the not-so-good news: Most people would agree that interest rates will rise from here on in. That means that the price of long term bonds will drop in the future, and they will be 'locked-in' to a low interest rate. Laddering T-Bills can be effective, but I find that a hassle. If they buy a bond fund, long-term bond funds will also lose value in their share price--you don't want that. Basically you want to go with bonds that have less than a 5 year maturity. I am going with short and "limited-term" bond funds. I am holding them in taxable accounts, but you don't have to go with non-taxable funds since they'll be in a retirement account. You should be able to find short-term bond funds in any of the fund families you're familiar with (i.e. Vanguard). If interest rates rise in the next 10 years or so, you can start moving incrementally from short-term bond funds to long-term to take advantage of the higher rates.

Finally, they have a significant amount of money sitting in a low interest savings account that they don't plan on using anytime in the near future. I was thinking of opening a general trading account and using a similar allocation as mentioned above. Is this a good idea or should I suggest that they put it elsewhere?

I would first make sure that they have an emergency fund of at least 12 months expenses (as you get older, you tend to remain unemployed for longer periods of time, and there's more likelihood that an 'emergency', such as an illness or disability might arise).

After the efund is established, I would ask your parents how much money they are willing to devote to 'playing'. I 'play' with a trading account, but not with more than 5% of my total portfolio. Are your parents willing to devote the time and attention it requires to trade in individual securities? If not, then a trading account is not for them. They would probably be better off opening a brokerage account with Fidelity and using it to purchase mutual funds, or opening several mutual fund accounts at Vanguard (since Vanguard treats each mutual fund position as an 'account').

The MOST IMPORTANT thing is that you must treat all of these accounts, whether held by your mom or dad, as if they were ONE portfolio. Your portfolio allocations should be made from that perspective. It will be more difficult due to the constraints of the 401K investment choices, but it can be done. It will require 'spreadsheet' expertise (probably by you). ;-)

They are lucky they have someone like you who has their best interests in mind to help them. Good luck!

2old



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Author: Belgoboy Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39420 of 75402
Subject: Re: Parents' Retirement Planning Date: 2/25/2004 2:58 AM
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If you want them to really feel comfortable you might do what I'm considering for my parents as well. It is a fairly new option at Vanguards called the Target Retirement Funds. I'm sure people will have plenty of bad (and hopefully good) things to say but seeing that you're about my age (I'm 24) and you're parents are slightly younger (My mom is 52, my dad is 56) the 2025 one might be more adapted, even for my parents though I'm probably looking at the 2015 as my final suggestion.

Here's the link. Enjoy

http://www.vanguard.com/jumppage/retire/?Entry=spotlighton02

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