Advice for Father-in-Law

[Good_Life]

Hi All,

Much appreciate all the input I've received from the forums. My father-in-law recently asked me for investment advice. Made me happy that our relationship had grown that he actually trusted and thought enough of me to ask me. He had quite a hodge podge of assets and wanted to simplify it as he was closer to getting to retirement. He wanted to talk to me as he knew I had an interest in financial planning and he has a mistrust in general of the financial industry (probably good for him). As such he has always described himself as a conservative investor so I had always worried he was too conservative.
The other reason he wants to simplify is that he has recently been engaged and before he gets hitched wants to simplify his investment assets so he has a clear picture he can bring to his attorney to ensure that if he dies (or divorces) that his assets are protected and they would go to his kids and not his future spouse. His future spouse is on board with this plan and from my understanding is doing just fine financially.

Here are his stats:

Age: 57
Divorced 20 years ago, but now engaged
Makes around $80k/year
We didn't go too much into spending, but he is very frugal
Maxes out 401k now with catchup provision
Has 1 daughter my wife, we are very financially independent from him

Assets:
#1 - Misc 401ks with previous employers
$365k - 75/25 equity/bond mix - VERY long list of index/active managed mutual funds and stocks from previous companies he has worked for.

#2 - Short-Term Cds. Mix of Roth and taxable
$200k

#3 - 401k with current employer
$125k - Balanced Fund 60/40 equity/bond mix

#4 - Variable Annuity bought in 2001 (NOOO! wish I knew him then!)
$76k surrender value - invested aggressively in high fee funds

#5 - Current Primary Home
$250k-$300k - Plans to sell in 3-5 years. Payed Off. High cost of living area.

#6 - Retirement Home
$200k - Plans to live in retirement. Payed Off. Low cost of living area.

Overall Asset Allocation on the little over $1 million in assets (not counting retirement home which will be future permanent residence)

42% equities
33% bond/cds
25% saleable real estate

My initial advice to him was:

1. Move all those 401ks from previous employers and short-term cds to Vanguard or another low cost broker and simplify it all by purchasing 4-5 index funds (Large Cap/Small Cap/Int'l/Fixed Inc).
2. When sell house reinvest keeping in mind benefits of using different investment asset types for taxable vs. tax advantaged accounts.
3. Likely want to look into cashing out of that Variable annuity although admitted I'm no expert on variable annuities other than to know to generally stay clear from them. I believe it is in an IRA because states it is subject to 10% penalty if surrendered before age 59 ½.

Would be interested to know what people think the general asset mix would be for a person of this age, probably hoping to retire at 60, currently 57 and the temperament of a fairly risk averse investor. He would not have any trouble living on 40k a year with a fully owned home before taxes. He is also eligible for social security which would just be gravy at 65 or whenever determines he should take it. Would love any additional advice you might all have ?

[heeyy_joe]

Is the future wife homeless or would that make three houses? Someone is likely about to get a windfall. That said, at 57, his equity percentage is too low, should be more like 65%.

[2B]

Just because there is an 10% penalty doesn't mean the VA is in an IRA. That's a common trick to make withdrawing the funds more painful. At 57 he's about 2 years from being able to avoid the penalty. Add up all of the fees and see if it's cheaper to pay the penalty rather than fees. The other thing to consider is how well the funds are performing.

The biggest risk is his getting married. The new wife will suddenly change the investing dynamics if she is bringing a lot of debt into the marriage. If he doesn't get a pre-nup your wife will probably find herself cut out of any inheritance. What assets will she bring (or take) from you FILs stash?

As for asset allocation, I'd drop the real estate from the equation and have him target for either a 40% or 50% equities. You didn't list any pensions so he'll have a hard time replacing his income on his nominal $1 MM in investable assets.

[Bestwifeever]

Where is the $40k a year going to come from that he can live comfortably on, so that "Social Security would just be gravy"?

Remember no good deed goes unpunished--you will be the bad guy when there's another correction and your risk averse FIL sells the equity funds (that you suggested to him) low and his portfolio never recovers. You could give him Vanguard's phone number and let him work with them directly on an appropriate asset allocation for his roll over 401(k)s.

Agree on prenup or something that will ensure his estate goes where he wants it to. His daughter should be the one to discuss that directly with him imo.

[travelover]

Quote:

Originally Posted by Bestwifeever ...........Remember no good deed goes unpunished--you will be the bad guy when there's another correction and your risk averse FIL sells the equity funds (that you suggested to him) low and his portfolio never recovers. You could give him Vanguard's phone number and let him work with them directly on an appropriate asset allocation for his roll over 401(k)s............

+1 Been der, done dat.

[athena53]

One possible way to mitigate the effects of major ups and downs in the market would be to sell the current funds and buy new ones in stages- maybe 10% or 20% at a time. If I were looking at a decision to sell right now I'd feel pretty confident that it was a good time to sell, but I might keep 80% in a money market fund and gradually put that in, in chunks of $20K, every 2 months. Or, I'd sell 20% of the highest-cost (i.e. least desirable) investments now, put them in an index fund, etc. These are options you could present to your FIL and he could make the decision as to how he times his sales and purchases.

I agree with not making specific recommendations of "Buy X", other than the obvious ones of consolidating old 401(k)s and getting rid of high-cost funds.

[pb4uski]

I think your plan generally makes sense. I retired at 56 and have a 60% equities/34% bonds/6% cash target that I still use (I'm 59 now).

For now, I would consider his main home equity to be equities so his current AA isn't too bad. I agree that I would consolidate the old 401ks with Vanguard UNLESS any of those old 401ks have a stable value fund that pays a reasonable rate of interest in which case I would park that money in the SV fund and count it towards the fixed income component.

You'll have to find out more on the VA but he might be best off to just annuitize it or wait until the surrender charges expire and roll it into the IRA if it is in an IRA or roll it into a fixed annuity with Vanguard or cash it in.

And a pre-nup is a must.

If he retires, sells the main house and reinvests the proceeds he'll have a WR of abut 4% and it will get smaller once his SS starts. He may want to wait on SS until he is 70 depending on his fiance's SS situation.

[haha]

By far the biggest ? is the impending marriage. I'd tell him to figure it out for himself, or with his wifey to be. There is no bigger threat to a man's solvency than a wife. I am sure a prenup helps, but how much is tbd in each case in the litigation. Won't his mother allow him to cohabit with his inamorata without marriage?


Also there is no bigger threat to your relationship with your father-in-law than telling him to crank up the risk in his investments. It may right, it may be wrong, but as a previous poster said, when something does go wrong, it will be your fault. And you can take that to the bank.

Ha

[gauss]

New wife risk could also include an uptick in the spending level.

-gauss

[freebird5825]

Quote:

Originally Posted by gauss New wife risk could also include an uptick in the spending level. -gauss

Quote:

Originally Posted by haha By far the biggest ? is the impending marriage. I'd tell him to figure it out for himself, or with his wifey to be. There is no bigger threat to a man's solvency than a wife. I am sure a prenup helps, but how much is tbd in each case in the litigation... Ha

Now, gentlemen, this can go both ways. tsk tsk tsk

The sad part is you are both right, in some cases. I've seen several of my guy friends end up on the wrong end of this very sharp pointy stick.

After I was widowed, my trust attorney had "the talk" with me. I'm not rich, but I am doing very well financially between pension, paid off house, and retirement assets. And have no children.

My attorney's words to me ? A woman in my position should stay single.

And so I shall.


For the OP, I do believe direct beneficiary designations on accounts overrule any marital contracts/pre-nups. Please consult an attorney in your FIL's state of residence.

[Walt34]

Quote:

Originally Posted by freebird5825 Now, gentlemen, this can go both ways. tsk tsk tsk

Freebird is quite right of course. My younger sister is in that position as well. Not wealthy, but comfortable and independent. She fully intends to stay that way.

[freebird5825]

Quote:

Originally Posted by Walt34 Freebird is quite right of course. My younger sister is in that position as well. Not wealthy, but comfortable and independent. She fully intends to stay that way.

[athena53]

Quote:

Originally Posted by freebird5825 Now, gentlemen, this can go both ways. tsk tsk tsk

I was about to comment on this but I see others have beaten me to it! I got lucky with my second marriage- DH had minimal savings and made less than I did but he'd taken care of his elderly mother her last few years and propped up a financially clueless GF before that. Still, he lived on less than he made, paid his bills promptly and had a nice chunk of equity in his house. We've been married 11 wonderful years. He's very low-maintenance, which is one reason we were able to save enough for me to retire earlier than expected. So, not all "new" wives area financial drain and a marriage between people of unequal financial status can succeed.

I do think that if I survive DH (he's 15 years older and has health issues) I'm unlikely to marry again. Even if I found a partner who had as much as I did (or more), I wouldn't want all the legal entanglements that entails.

[Amethyst]

I'm with the "stay single" ladies. Never mind FIL - somebody should put a word in the future wife's ear. There can be no greater threat to an independent woman's pride and contentment, than adult children who perceive her as a threat to "their inheritance" instead of an addition to their family and their father's happiness. Apparently, this is not uncommon.

Amethyst

[Lsbcal]

Maybe check with Vanguard and see how much free advice he would qualify for if he consolidates assets there. They have people trained to do this sort of thing. They have simple questionnaires to determine AA. As Ha says that is probably best for him to do and keep your relationship on a solid footing.

[fritz]

Quote:

Originally Posted by freebird5825 Now, gentlemen, this can go both ways. tsk tsk tsk The sad part is you are both right, in some cases. I've seen several of my guy friends end up on the wrong end of this very sharp pointy stick. After I was widowed, my trust attorney had "the talk" with me. I'm not rich, but I am doing very well financially between pension, paid off house, and retirement assets. And have no children. My attorney's words to me ? A woman in my position should stay single. And so I shall. For the OP, I do believe direct beneficiary designations on accounts overrule any marital contracts/pre-nups. Please consult an attorney in your FIL's state of residence.

+1 and can be changed anytime.

[harley]

Just a word on the variable annuity. I also picked up a couple of these back before I started getting educated. If he bought it back in 2001 he's probably beyond the penalty stage, but cashing it out could still be a problem due to tax considerations or whatever. I was able to transfer one of mine to Vanguard, which at least allowed me to invest it in low cost funds. Before that the funds it was invested in were charging 2+%. Vanguard's people were very nice, and did most of the work and walked me through the rest.


I've got a time delayed email set to be sent to me when I can move the other one, just so I don't forget.