Opinions on AA for elderly couple with 4 year max horizon

[RunningBum]

My parents have only enough money to last about 4 years. Neither is likely to outlive that money, though it is possible. What would you say their AA should be? Children are not concerned about getting any inheritance and would help with shortfall if they do live longer than 4 years. Dad is one year into a terminal cancer diagnosis of two years of life, plus his heart may not make it that long. Mom is in memory care, not very mobile due to arthritis and not likely to survive an illness, but if she doesn't catch anything who knows?

Current allocation is about 33% in equities. My thought is that should be 0%, or very close to it. They don't have time to weather any kind of prolonged downturn. Am I being overly cautious? IMO avoiding a downturn that cuts their funds to 2 or 3 years is more important than trying to hope the market can stretch their money to 5 or 6 years. And growing our inheritance is not a priority.

My brother is POA and their investments are with an FA they have been with for 25 years. Both are local to my parents. I am not looking to take over either POA or control of investments. It just won't happen, and would cause a lot of family strife where there is little of that today. The FA isn't gouging them with fees, though some of the non-equity funds have higher expense ratios than I like. My brother has asked for advice on an ongoing basis, and my Dad knows this and is grateful, but they are not moving away from the FA. I thought I had my brother convinced to reduce equities but when he and Dad met with the FA yesterday, no changes were made. FA says the equities are there for "growth". He is well aware of their health changes and expenses.

So I'm only looking for advice on their AA. It would be helpful to give some justification for your opinion. I know there are other aspects people might want to chime in on, like Medicaid options (not good at all in their town) and losing the FA (not going to happen), so I ask that we stick with the AA question. Thanks.

 

[KCGeezer]

DM was in a similar situation (dementia, not cancer) and we went to 100% CDs for her 5-6 years before she passed. No FA involved. She ended up outliving her funds by about a year but we had made sure the facility she was in accepted the medicaid payments and she had no disruption in care. It was more about making sure she was safe and comfortable and there was peace in the family. Those would have been her concerns.

 

[mpeirce]

Current allocation is about 33% in equities. My thought is that should be 0%, or very close to it. They don't have time to weather any kind of prolonged downturn. Am I being overly cautious? IMO avoiding a downturn that cuts their funds to 2 or 3 years is more important than trying to hope the market can stretch their money to 5 or 6 years. And growing our inheritance is not a priority.

You said "growing our inheritance is not a priority”, so I’d agree that they shouldn’t be in the stock market. Why gamble at all? There is no need.

Put it all in a very short term bond fund or simply CDs and money market accounts.

With no real supporting evidence, I’d guess the FA wants to continue to make a few bucks from the account. Cash isn’t going to do that.

 

[aja8888]

We are in our late 70's and DW has advanced COPD (4 years on O2 now). She is very fragile and not too far from more care than I can give. I'm the oldest at 78, but in very good health. We are 30% equities and the balance in CD's, preferred stocks (not a high percentage), and cash.

If DW has to go into a "facility", our cash and fixed income can last the cost a very long time. We don't want to risk being a high percentage of equities and having a melt down when we need the funds.

In your case, I would just be in cash with the four years funds or maybe 25% in equities.

 

[RunningBum]

With no real supporting evidence, I’d guess the FA wants to continue to make a few bucks from the account. Cash isn’t going to do that.

I thought of that too, but I'm not seeing where they would be making money. The stock funds are all indexes, with expense of 0.03% to 0.07%. Maybe it's incompetence or neglect. For example, the stock funds are in their tIRA rather than their taxable account, where cap gains would be 0% taxed for them.

 

[OldShooter]

... They don't have time to weather any kind of prolonged downturn. ...

Exactly. IMO a minimum equity investment horizon is 5 years. Short of that, fixed income and cash is king. Maybe some $$ in a 3-year MYGA to wring a few more basis points out of the investments.

Does your dad know in dollars what the FA is costing him? If so, I guess you're right that the FA is not going anywhere. Too bad.

Some FAs charge a lower rate for fixed income vs equities. If that is the case here, then the FA may be tryhing to keep the higher fee income from the 33%. That is arguably a breach of fiduciary responsibility. If your brother or you approached the FA or his compliance officer with this point, the recommendation may change. Long shot of course, but it doesn't cost anything to check the fee schedule and maybe try this.

 

[mpeirce]

I thought of that too, but I'm not seeing where they would be making money. The stock funds are all indexes, with expense of 0.03% to 0.07%. Maybe it's incompetence or neglect.

Or maybe it’s “If all you have is a hammer, everything looks like a nail.”

 

[ERD50]

You could try putting a 4~6 year horizon in FIRECalc and 'investigate' for AA. Pretty sure it will come up 100% fixed...

Well, I tried it, and was somewhat surprised. For 6 years I used $1M portfolio and $166.666K spending (1/6th of the portfolio).Pretty lumpy, but also a pretty narrow range of success from 67% to 75%, but 50/50 ~100/0 equities was better.

Hmmm, but going to $140K spend gives 91% to 96.5% success, and that looks more like expected, 30/70 ~ 55/45 AA pretty flat ~ 96% success, a little boost to 97.5% around 15/85 AA.

If it were me, I'd probably have zero equities for that time frame.

-ERD50

 

[Sunset]

I thought of that too, but I'm not seeing where they would be making money. The stock funds are all indexes, with expense of 0.03% to 0.07%. Maybe it's incompetence or neglect. For example, the stock funds are in their tIRA rather than their taxable account, where cap gains would be 0% taxed for them.

I'm surprised they aren't charging a flat 2% management fee on top of the normal index fees. It's usually hidden in the once a year report.

Chase was doing that for my DFIL, until I moved him to Vanguard on a small account.

As for the asset allocation, I went with 10% stocks for a person with just a few years of life left. Included some preferred stocks but at this time, I wouldn't go that route as I think they will lose value when interest rates rise.

 

[Magus]

I think something in equities is probably helpful as a hedge against a hyper-inflation event - maybe 15-25% - but otherwise short duration bonds, CDs or money markets seems the best given what you said (maybe some I bonds if don't need it all in year 1)

 

[easysurfer]

How about the 100 - age rule of thumb as the amount in equities?

That's what I use to keep myself honest .

 

[RunningBum]

A little more about the fees, so you know why I'm not pursuing this. I see what's pretty clearly a 1% advisory fee in the taxable account, and perhaps 0.5% in the IRA (though I don't have the full picture of that account). They also have a variable annuity, so there's certainly been a lot of money flushed away in expenses there, but it now pays 3% fixed and no surrender fee anymore. Other than a death benefit rider that amounts to about 0.002% now, I don't see any other fees, but maybe more are hidden where I can't find them.

What little appreciation my dad would have for me showing how much he has paid in fees, and what he'd save now (maybe $3K annually) if he'd let me manage his money at Vanguard, it would be dwarfed by his anger and regret about how they ripped him off. It simply isn't productive at this point, and in fact with his health conditions could be fatal. When he retired 25 years ago he started off managing his money but had so many doubts and lost a lot of sleep until he turned it over to this FA. So maybe it has worked out best overall with this FA, even if not financially. Until my mom started memory care they really had no money worries. Besides, even though he knows how well I'm doing, I'll bet he figures I can't possibly do better or know more than his professionals. But lack of a medical background doesn't stop him from constantly criticizing his doctors' treatment plans.

So I'm not going after the FA. He's probably a little better than average so I'm not going to spend anytime reporting him even after Dad goes.

I appreciate all the other remarks so far, mostly in agreement with my position. I'd like to see maybe half of what they don't need in the next year in a TIPS fund and the rest in a MYGA, but I'll just be happy enough to get most or all out of the stock market before a major correction happens than worrying about squeezing a little better return out of non-equity options.

Still listening if others want to chime in on AA options.

 

[SecondCor521]

I would do something similar to what @ERD50 outlined. The following is what I do for myself, and for my 85 year old Dad who is in average health:

I put into FIREcalc all my actuals: actual FIRE stash, actual spending, actual planning horizon, actual SS, and actual portfolio composition and fees.

I then check survivability. In my and my Dad's case, this is 100% currently.

I then go to the investigate tab and solve for 95% survivability spending. The thought here is to imagine stressing the portfolio with some heavy spending. In your parent's case, maybe this is additional costs of care if, say, your Mom needs more ADLs or whatever.

I then put that 95% survivability spending in as my spending, leaving everything else the same. I then use the stocks/bonds AA option on the investigate tab and look at the curve. I then pick an AA on that curve.

For me, that AA is 90/10. For my Dad, the sweet spot is about 50/50.

I also do one other thing, but this may not apply in your parent's case. I figure out how much of my FIRE stash I am actually going to spend, and I have my 90/10 AA on that part. The rest I keep at 100% because that will go to my kids hopefully in 30 years or so. My Dad is similar - we're both only likely to spend about 1/3 of what we each have.

In your parents' case, it sounds like your goal is portfolio survivability, it's just that the timeframe is shorter than what is normally thought of.

...

Other thoughts:

Aside from AA, I'd pay attention to your parent's medical care and medical insurance, especially trying to stay ahead of the game if they need progressively more care. Probably a given.

If they're still of sound mind, I think it'd be good to make sure they have their wills, medical power of attorney, DNR/POST stuff in place and up to date with their wishes.

Another general comment is of course to make sure you and your brother work together. I'm local to my Dad and my sisters are out of state, so I try very hard to make sure they know what's going on and are involved in and have input on any even moderately significant decision with our Dad and that stuff is documented in emails.

And of course, if you end up making changes in a taxable account keep taxes in mind.

 

[Doingitwrong]

I managed Mom’s little cash between Dad’s passing in 2013 and her death this year.
They never owned stocks, she had survivors social security and a smallish enlisted military pension.
With two of four kids able to pay the balance of assisted living, I put 20% of her cash in SCHD.
We just got lucky.
Balance was in CDs and online savings.

 

[RunningBum]

I'm working on FIRECALC now. I have moderate faith in FIRECALC, but it's worth running. Their numbers are roughly $290K in assets, and $84K in expenses that aren't covered by SS and one annuity. There is no fat, other than moving them to a less expensive facility, which isn't under consideration.

...

Other thoughts:

Aside from AA, I'd pay attention to your parent's medical care and medical insurance, especially trying to stay ahead of the game if they need progressively more care. Probably a given.

My brother and two sisters, all local to them, handle this. There's a lot less my other brother and I can do, or should do with limited visibility to them. My oldest brother came into town and tried taking charge once and there were a lot of hard feelings, so I'm really careful here. I'll ask questions, but that's about it.

If they're still of sound mind, I think it'd be good to make sure they have their wills, medical power of attorney, DNR/POST stuff in place and up to date with their wishes.

All set.

Another general comment is of course to make sure you and your brother work together. I'm local to my Dad and my sisters are out of state, so I try very hard to make sure they know what's going on and are involved in and have input on any even moderately significant decision with our Dad and that stuff is documented in emails.

We do. My brother has been very open about all of the information. He'll get me anything I ask for. He's done a great job with a spreadsheet showing their accounts and their monthly expenses, projected out a year or so. All five siblings seem up to date but the other three just aren't interested in dealing with financial stuff, and they trust us to handle it.

My brother says he is really impressed at how I've been able to dig into their investments and see what they really have. But even though I'm 60 there are still times (not just on this) where I think he still sees me as the kid brother. I won't bother telling stories that prove it but it is definitely true. When he met with the FA yesterday, I said he could conference call me in if he wanted but he didn't take me up on it. And my strong suggestions to lower the stock exposure were ignored. So I'm trying to figure out how to make it happen without causing strife. But first I want to make sure what I'm pushing for is right.

And of course, if you end up making changes in a taxable account keep taxes in mind.

Their taxable income is very low after taking the medical deduction for memory care and other carefully documented medical expenses, so any cap gains are at 0%. And like I said, most of their stock funds (and cap gains), are in a tIRA.

 

[SnowballCamper]

How much Social Security are they drawing compared to what they're spending? If SS is like 70% + of the spend, then some stock allocation is fine to me. If there is nothing but the investment account, then it should almost all be fixed income.

 

[RunningBum]

How much Social Security are they drawing compared to what they're spending? If SS is like 70% + of the spend, then some stock allocation is fine to me. If there is nothing but the investment account, then it should almost all be fixed income.

SS (after medicare is subtracted) covers 16% of spending.

 

[mountainsoft]

My parents have only enough money to last about 4 years. Neither is likely to outlive that money, though it is possible. What would you say their AA should be?

I had a similar situation when my mom had her stroke. She had about $250K saved up after the sale of her house. While she will probably outlive her money, it was only going to last about 5-7 years with her expenses.

I calculated the difference between a .5% return on a high interest savings account, and an 8% return if I invested it. The difference was only a few months of expenses at most, and that assumed no major downturn in the markets. If investments tanked 2-3 years in she would be in a bad position.

In the end I figured it wasn't worth the risk and opted just to put all her money in a high interest savings. She had a CD already, but it didn't earn anymore than savings. So I put the CD balance in savings when it matured so it is accessible when she needs it.

This calculator might help play around with numbers.
https://www.calcxml.com/calculators/how-long-will-my-money-last?skn=

 

[mystang52]

I'm no FA, but it appears to me that keeping the money in cash, vs a small % in equities, will have little difference for the life of the assets. Presuming that to be the case, I see no reason to risk losing some to a market correction. Flip side is likely no significant difference in a market upturn. I don't think it's worth the aggravation of stressing over market going the wrong way.

 

[anethum]

Their taxable income is very low after taking the medical deduction for memory care and other carefully documented medical expenses, so any cap gains are at 0%. And like I said, most of their stock funds (and cap gains), are in a tIRA.

I've had to handle my parents' finances for many years now. The situation has similarities to your parents, but there are substantial differences. They had greater assets, but they've also had extremely high medical expenses, plus household expenses, in order to remain in their home. Dad needed skilled nursing care for 8 months before he died over 6 years ago. Mom has had ongoing caregivers due to dementia for the past 5 years. She also had several falls and fractures. She's 100 years old now and is very frail, so I think she'll probably outlive her assets.

When I started selling their financial assets, they were about 50/50 stocks & bonds in a mutual fund. There's not much left in stocks now. The very first assets I sold to pay my mom's caregiver expenses were in her inherited tIRA, which was all in stocks. Her medical deductions have been so great that she doesn't owe any income taxes, and that included the tIRA withdrawals. I ran this by a CPA beforehand, and he confirmed it would make sense for me to sell those assets first. So the tIRA account was liquidated with no taxes owed.

 

[Retired Expat]

Or maybe it’s “If all you have is a hammer, everything looks like a nail.”

Without real numbers how can we say? I know FAs who promote equities because in the long run and for quite some time now the short run equity has generated more money for their clients to live on. Is it growth if you sell appreciated stock or income versus a bond paying interest?

My sister who was in charge of my father’s affairs pulled him out of the markets following a crash and put it all in fixed income. His assets were quickly depleted and I had to step in and cover his bills. Had she left him in the market it would have been much better

 

[RunningBum]

I'm no FA, but it appears to me that keeping the money in cash, vs a small % in equities, will have little difference for the life of the assets. Presuming that to be the case, I see no reason to risk losing some to a market correction. Flip side is likely no significant difference in a market upturn. I don't think it's worth the aggravation of stressing over market going the wrong way.

That's pretty accurate, according to FIRECALC.

I ran a few different scenarios, of 3, 4, and 5 years, with stock allocation 0%, 30%, and 100%.

At 5 years, only 100% stocks had non-zero successes, but of course larger failures. This isn't pass/fail. I will be covering any shortages, so I'm not going to put their money on red at the roulette table to try to give them a 50/50 success rate.

Limited success at 4 years, high success at 3. In all cases, more stock meant more successes, but bigger failures. Not by a lot though, especially comparing 30% stock to none. The lines seem to angle downward fairly similarly, and only the 100% stock Y axis scale is noticeably different.

Then I tried a fixed 1% return, with 3% inflation. That lasted about 3.75 years. Actually it's kind of confusing, if I put 4 years it definitely fails somewhere between 3 and 4 years, but 3.90 doesn't. Maybe firecalc doesn't handle fractional years well. In any case, it might be possible to lock in a 1% return, but this ignores runaway inflation. A couple % higher isn't a big deal, there's always a chance it could get worse.

I don't know how realistic firecalc is for 3-5 year periods but I suppose I shouldn't be surprised that 30% stocks is not very volatile. Maybe I shouldn't raise a stink. Maybe keep it how it is, but pull from stocks while the market is high and pull from other is the market drops.

And then there's market timing. I don't worry about this for myself, because I've got a long enough horizon to recover. But if I had to predict the next 3 years, given what valuations are at now, I'd probably say guess it'll be somewhere around -10% to +10%, which is much lower than historical data that firecalc is based on.

 

[RunningBum]

My sister who was in charge of my father’s affairs pulled him out of the markets following a crash and put it all in fixed income. His assets were quickly depleted and I had to step in and cover his bills. Had she left him in the market it would have been much better

If nothing else this is where I'll take a hard stand, not to panic sell in a crash.

 

[SecondCor521]

An easy win might be to shift any bond-like stuff into the traditional IRA and growth-type stuff into the Roth IRA, keeping the AA the same.

This way your parents will get better tax treatment but don't have to argue with anyone probably.

I have had my own accounts this way for years, and finally realized that my Dad should do the same. Over the past year or two since we made that switch, it's been nicer to get tax-free growth in the Roth rather than tax-deferred in the traditional.

Of course, you or they may have already done this, or they might not have Roths, or whatever. But it is an idea anyway.

 

[RunningBum]

No Roth. The stocks should be in taxable though, for better tax treatment.