Parent's Retirement

[COD]

I suspect this is something other Young Dreamer's are going to have to deal with...parent's who have thought far less about retirement that we already have.

My mother was visiting this weekend and mentioned she was confused about her 401K / pension plan and didn't know anyone to help. So she faxed me her printout this morning...80% of her money is in company stock. Yikes!

She is 55 - works for a big bank, her investment choices are limited to about 20 funds. I think I'm going to recommend that she re-allocate to 50% Vanguard TSM Index and 50% to a total bond fund. She has nowhere near enough to live on in retirement, so I'd like to see her at least average 7% over the next 10 years and double her existing nest egg (plus continuing contributions of course). My father died a few years ago - so I think she gets 1/2 of his SS in a few years too?

We might need to edit the Gen X retirement calculator to account for elderly parental care!

My question - is the 50 / 50 allocation reasonable given her age? One thing I need to find out is if she has a traditional pension plan. She talks about being fully vested in the pension plan in 2-1/2 years, but I don't see anything to indicvate that she has an old school defined benefit plan. She faxed me two sheets - one labled 401K, one labled pension, but they look identical, except for the dollar amount in the balance.

 

[brewer12345]

50/50 seems reasonable, although I would consider adding either an international fund or a real estate fund in small measure (maybe 10%). Is the total bond market fund the only viable fixed income choice? Some plans offer access to a guaranteed income fund which offers fairly high yield plus a stable NAV. That would negate worries about getting killed as rates rise.

Before committing to this asset allocation plan, though, I would find out about the pension. If she is eligible for a DB plan and the plan is solvent (solvency isvery likely with a bank), this may alter your portfolio choice. My MIL just retired with a fat pension, and when I helped her structure an IRA portfolio, we went heavier on the equities because the pension meets pretty much all of her regular income needs.

 

[John Galt]

My parents are 87 and 85, solid middle class;
not wealthy. They own no stocks and would not
under any conditions. However, this has nothing to do with my decision not to hold any. What bugs me is
to stand by and watch my folks waste money.
Both very financially unsophisticated. I dare not get
involved though. My father is quite prickly. I have
one brother (estranged). It will be interesting to see
what happens when the 2 of us are forced into
their financial affairs. Good story for a future post?

John Galt

 

[Cut-Throat]

What bugs me is
to stand by and watch my folks waste money.

John,

I am curious how they are wasting money at this age. I am trying to picture them driving around in a New Corvette, drinking too much and hanging out at the Casino. Or are they just O.D.ing on Viagra and Geritol?

 

[mickeyd]

COD,

Your Mom is lucky to have your assistance. Many folks do not have someone to guide them.

The 50/50 mix sounds ok to me, and ok to you but what does Mom say?

You see the thing is, she should be encouraged by you to get herself educated on basic investments.  What if you are not around to assist then what?  She should understand why she is invested 50/50 maybe she likes 80/20! many books are outthere I can recommend "The Millionaire Next Door" by Drako and Stanley (?) but there are a number of good starter books.

The VG TSM/ TBM mix is pretty efficient but you may look at the Vanguard Target Retiremant 2015 Fund.  It has a 50/50 mix but 10% of the mix is in Euro and Pacific index.  A little more diversification this way may not be a bad idea and there is no rebalancing for her to do if she likes this combo.

 

[COD]

I've tried, I've tried. Went through all this 4 years ago when my father passed away, leaving her nothing but a bunch of debt. Can't get her to take control of anything. It took me 3 years to get her to sell the house and downsize her mortgage. I wanted her to just rent. However, she comes from that generation where home ownership means a lot more than just the tax break, equity, and associated headaches.

She has also ignored my other idea (so far) - marry again, but this time marry somebody rich

The only Intl option she has a Fidelity Intl Fund. I'd love to just point her to the Vanguard 2015 fund but it is not an option in her 401K. I think the simplicity of just two funds outweighs the marginal benefit she might get from a small allocation of the Intl fund. (If there is a benefit, I tend towards the Buffett camp on the intl issue)

No defined benefit plan either. Her pension is mearly an investment account completely funded by the company - it has the exact same investment options as the 401K.

I played around with Fools retirement calculators. With SS she looks like she will be ok for the southwest florida / low cost of living retirement that she wants.

 

[bow-tie]

COD,

I understand your pain. My mother and my wife's parents have the same problem. I guess we should count our blessings that they are doing SOMETHING, no matter how little it seems.

All we can do is try to educate them in how important it is to save. That.... and hope for the best.

 

[John Galt]

Hello Cut-throat! Re. your response to the post about my parents, cute!

Actually they live quite simply, but they kind of have to
as they only have a small pension and SS, not much else
income-wise. No debt of course. When I said wasting
money I meant that they do not maximize the return
on the little they have to invest. My Dad says he can't
go long term due to his age. What is that? Also, he might let 30 or 40K sit around in his checking account.
And, when they buy anything, they rarely shop around, never negotiate, etc. For example, they pay way too much for all of their insurance, and
Dad fills their 15 year old vehicles with premium gas.
Looking on the bright side, they live well within their
means. I just hate to see them throwing their money away. My mother's best friend had a very old coin
collection that had been in the family for years. Some
guy found out about it and convinced her to sell it for
$187.00. I think it was worth thousands. Her family went ballistic. At least my folks are not that clueless, at least not yet.

John Galt

 

[mickeyd]

COD...double pain. Sorry about your Dad also.  

Considering the additional info you have been gracious enough to share with us, I would agree that a 50/50 TSM/TBM mix would work well for Mom.

Keep in mind about the TR 2015.  When Mom retires from her current empoyer, just recommend that the 401(k) money be transfered to Vanguard.    Vanguard folks are great about assisting 401(k) to IRA RO accounts.

 

[charlie]

COD,

I think the rule on your mom's SS is that she will
get his full amount or her full amount, whichever
is greater, but not both. It would be worth a call
to SS to check this out.

Cheers,

Charlie

 

[BusyMom]

At least your parent(s) has/have some savings vehicles....mine anticipated my income to provide for all. Needless to say, my Christmas list is a few names shorter these days.

Sarcasm aside, my parental units engaged in zero planning, despite a generous income and below average expenses. I'm not trying to minimize your predicament, but it could be worse.

 

[COD]

In all honestly, it wasn't as bad as I expected. She had 80% of her 401K in company stock - but thankfully she didn't work for Worldcom She's reallocated now, and actually feeling pretty confident that she won't be moving into our guest room when she retires.

 

[mickeyd]

It's scarey to think about how many folks there are out there who are heavily invested in their company's stock in a 401(k) and have no idea how risky their situation is.
They think that if they have company stock they are sittin' pretty because they are on the inside.  

Ask the Enron folks about that deal.

 

[unclemick]

BUT, BUT -- MY COMPANT is going to be the next Microsoft -- NOT the next Enron - or so the thinking goes. OR since I'm on the inside 'I' will be smart enough to sell/diversify in time. And the very small number of cases where company stock works are much louder than the 'quiet' majority where it's not such a good idea.

 

[BigMoneyJim]

Back before the bubble burst there was someone on TMF's REHP board who was 100% in INTC (Intel). At the time it sounded almost reasonable to me, which is why I'm glad I never got away from mutual funds. I don't recall hearing from them after the crash so I'm not sure what they're in now.

My mother is thinking ahead a bit to retirement, but she's going to have to rely on Social Security and a postal pension. She has some savings in a 401(k) but not enough to rely on in 15 or so years when she hopes to retire.

I don't recall how she's invested, but we've spoken about it before and I remember deciding her decisions were reasonable if conservative.

One of my ongoing considerations after paying off my own debts (within a month or so) will be whether to use some of my after-tax money to help my mother. I figure I'll probably be helping her out sooner or later, and if I do it sooner I'm probably saving myself money. Not that the dollars-and-cents part is the only consideration, of course. Then again I have a younger brother and sister, and my sister now makes more than I do and is making rapid progress on her debt reduction, but she will still have sizable student loans to pay off after this year. My brother is 21 and doesn't have a career of the ground yet but is smart and will probably make decent money eventually.

I guess I should quit worrying about it. All of my family--while not as well off as we could be--have reasonable financial plans in place, so we should be okay.

 

[cute fuzzy bunny]

Being more than 20-25% in company stock is crazy. I know a lot of people who were 100% in INTC and others. When the stock kept doubling every year, I was an idiot for selling my shares when the options matured and diversifying.

In early 2000 I became a genius, by not doing anything different. As a case in point, my once before mentioned $7M ex-girlfriend is probably worth about 1.5-1.7M today.

I know theres a rationale that says you should support the company you work for by keeping the shares they give you as part of your tied in compensation. Up to a point.

Its also important to burst the notion that having your money in the company you know best is a good idea. I was about one step away from having to report my company stock sales to the SEC; I knew pretty much everything we would be announcing a week or two ahead of time; I knew our product plans and long term forecasts 5+ years out.

I learned pretty quick about the mass psycho/socialogical effect on the market and stock prices when the same information reported in the same investing and economic environments would produce two completely different results in buying and selling. And the line of "experts" who would explain it no matter which way it went.

 

[BigMoneyJim]

I know theres a rationale that says you should support the company you work for by keeping the shares they give you as part of your tied in compensation. Up to a point.

Screw that. (<--and that was edited for politeness) As an investor, our fellow investors would screw us over in an instant if it made them a few cents extra. And as employees the company would sell our organs if they could get away with it. Why should anyone as a miniscule minority investor and powerless peon maintain a large portion of their wealth in such a way to benefit those with more power over them?

Gee, and I used to be a loyal company guy.

I learned pretty quick about the mass psycho/socialogical effect on the market and stock prices when the same information reported in the same investing and economic environments would produce two completely different results in buying and selling. And the line of "experts" who would explain it no matter which way it went.

The different reactions to the same news baffles me, too. And I'm always tickled by the stock reports; as you say, they always have an explanation:

The market was down today due to (pick one):

• Computer sell programs
• Profit taking
• Poor economic outlook

The market was up today due to (pick one)

• Bargain hunters
• Short covering
• Poor economic outlook

If they knew why the market moved, then why didn't they know shortly beforehand and make some money off of it?

 

[cute fuzzy bunny]

You know why! Its because they didnt know, but its easy to look at things historically and create an explanation, find correlations, develop theories and systems that will help you game the market.

Of course they never work because what will happen wont be like what has happened, at least not in the same way, for the same durations, and/or with the same peaks and valleys.

In terms of less than 5 and maybe less than 10 years, things go where they go due to functions that have absolutely nothing to do with P/E's, valuations, prices, business plans, interest rates, etc.

Before your hands hit the keyboards...prices in these short to medium terms move on mass PERCEPTION of all of these things. As anyone who has ever played "the whisper game" will tell you, or someone who has ever done one of those exercises where 10 people watch something, describe it in their own terms, you read their descriptions and then look at a film of what really happened...perception from one person to the next or in the same person from one incident to the next...is amazingly variable, unpredictable, and unpatternable with regards to future reactions as each experience changes the future reaction in an equally unpredictable manner.

Over 10 years, and the closer to 30 you get, it all seems to come out in the wash...