I know, it's bad to time the market, but...

[WM]

... my 62-yr-old mother in law has had a complete rearrangement of her finances due to the recent death of my FIL (see a number of other threads). The bottom line is that she has no debt at all, and about 60K in cash from life insurance. No other savings, although she is getting a pension from FIL's employer, which, combined with her pension in a few years, plus SS, should be enough for her to live on. Till then she's happy working and her health is good.

The plan I put together for her calls for putting most of the 60K into a 500 index and an international index (we already did a rollover IRA into a bond fund for part of the pension), keeping some in a money market for emergencies.

Her expenses seem stable and about what we expected, so she is starting to ask about moving the money into the funds, which is the last item on her financial to-do list. But now that the market is getting shaky and there's increasing talk of a recession, I'm getting chicken about moving the money. It's not like DH and I, who have decades (knock on wood) to recover if something drastic happens.

Is there some point at which it makes sense to revise her plan? I was going to go with 60/40 stocks/bonds.

 

[haha]

... my 62-yr-old mother in law has had a complete rearrangement of her finances due to the recent death of my FIL (see a number of other threads). The bottom line is that she has no debt at all, and about 60K in cash from life insurance. No other savings, although she is getting a pension from FIL's employer, which, combined with her pension in a few years, plus SS, should be enough for her to live on. Till then she's happy working and her health is good.

The plan I put together for her calls for putting most of the 60K into a 500 index and an international index (we already did a rollover IRA into a bond fund for part of the pension), keeping some in a money market for emergencies.

Her expenses seem stable and about what we expected, so she is starting to ask about moving the money into the funds, which is the last item on her financial to-do list. But now that the market is getting shaky and there's increasing talk of a recession, I'm getting chicken about moving the money. It's not like DH and I, who have decades (knock on wood) to recover if something drastic happens.

Is there some point at which it makes sense to revise her plan? I was going to go with 60/40 stocks/bonds.

Are you sure you wouldn't rather put this money in T-Bills? Or in a CD ladder? I mean, you did say that she has no other savings. IMO this has nothing whatsoever to do with market timing, only simple prudence. Also, do you want to risk becoming the son-in-law that lost all of Mom's money?

Ha

 

[MasterBlaster]

Take a look at asset allocation(s) for some of the lifecycle funds...

here is one example. There are others

If I eyeball this chart correctly a 62 year old could have around 40 percent stocks and falling off fast as she ages. Your 60 percent stock allocation seems way too high for a 62 year old.

 

[Moemg]

[Are you sure you wouldn't rather put this money in T-Bills? Or in a CD ladder? ]


I totally agree with Ha !

 

[AltaRed]

I would suggest at least $10k (perhaps $15k) of the $60k should be kept in MMF or high interest savings for emergencies (vehicle change, roof replacement, etc).

A 60/40 equity/FI split for the $60k could be reasonable if the pensions cover virtually all of her living expenses. I got the impression that FIL pension, her pension and SS would cover living expenses. If that is not true, then the asset allocation curve provided from lifecycle funds makes sense.

 

[OAG]

You are, of course, aware she can qualify for a "widows" SS Benefit at 60 years of age or older?

 

[WM]

Thanks for the suggestions.

Yes, as far as we can tell, after she retires (65 or 66, maybe 67) the pensions and SS will cover her living expenses. Our projections don't actually show her needing the investment $ at all, or at least not for a number of years. She will be able to add to it while she's working, as well, between 5-10k per year.

The pensions are non-cola, and her mom lived into her 90's at home with only minor assistance. I'm worried that with no other savings, she'll outlive her money. DH and I (I'm the daughter-in-law who will have lost all the money ) plan to be in a position to help if needed, but obviously I'm trying to make the best decision we can for now.

Probably I'd feel better moving the allocation to 50/50 or 40/60 stocks to bonds.

R Wood - we did get a one-time $250 benefit from them - is that the one you mean? For regular SS, her earnings were higher than FIL so she is better off taking her own benefits when the time comes.

 

[al_bundy]

there is no way i would put money in the stock market right now, not until a few months out at the minimum. probably not till next year until this credit thing has it's run. if the ARM resets from now and october are going to foreclose, it's not going to be till next year.

the economic numbers this morning weren't very good either. it's the time of year to stock up for the christmas season and imports are down

 

[laurence]

Hmm, it seems I remember from "4 Pillars" that when everybody is running for the exits you should buy. If she has a family history of living into the 90's, then she has a 30 year time horizon. I would have the portion in cash mentioned above for emergency roof repairs etc. and about 40% in an S&P index. DCA into it over six months if you are concerned about catching a falling knife. Put the balance in a bond fund Brewer recommends.

EDIT: this is said with the assumption that the pensions/SS will cover all living expenses.

 

[Moemg]

A widow can collect social security survivor benefit at 60 based on her husbands Social security .She can then switch to hers later on .You are limited by how much you can make (around $12,400 )while on this benefit .

 

[al_bundy]

Hmm, it seems I remember from "4 Pillars" that when everybody is running for the exits you should buy. If she has a family history of living into the 90's, then she has a 30 year time horizon. I would have the portion in cash mentioned above for emergency roof repairs etc. and about 40% in an S&P index. DCA into it over six months if you are concerned about catching a falling knife. Put the balance in a bond fund Brewer recommends.

EDIT: this is said with the assumption that the pensions/SS will cover all living expenses.

back in 2000 - 2003 Suzy Orman was saying that you need to give stocks something like 15 years to make money. Last few years they have done pretty well.

yes you buy when there is blood on the street, but you have to be careful. nasdaq dropped 30% in the summer of 2000 and it was a terrible time to buy. even in late 2001 after the post 9/11 thing had stabilized it was a bad time to buy.

For a 62 year old woman you have to tell her that her investment can hypothetically drop by 20% to 50% and not including dividends it won't recover to break even for 5 to 15 years.

 

[laurence]

So like I said, a portion of the portfolio, 30 year time horizon, S&P 500 index, not NASDAQ. We have to be careful not to compare a tech stock index with the broader market.

Let's say the S&P index drops 20% a year after she buys in. If she's holding 40% in S&P, then she's lost 8% of her total portfolio, in the portion she does not need to touch for some time. The problem with T-bills etc. for someone who could live for 30 more years is the risk of inflation.

 

[haha]

The problem with T-bills etc. for someone who could live for 30 more years is the risk of inflation.

This is an excellent theory, but IMO flawed by reality. The only strong lasting USA inflation of my lifetime happened in the 70s. Take a look at the performance of the S&P during that time. Then take a look at T-Bills.

Which would you prefer to own?

It's one thing for a young faimily to bet on stocks; maybe even a good idea. But this older woman is not in that position.

In my opinion the emphasis on equities for retirees, regardless of valuation levels, comes largely from people who stand to benefit from pushing stocks. They get something off the top- the eventual performance of the asset is really not part of their concern.

Ha

 

[al_bundy]

risk with t-bills is that if there is a stampede out of the dollar, guess what will tank? i think the china will rule the world stories will end up in the same pile of garbage with the japan will rule the world stories from the 1980's. but Europe is not a bombed out ruin that cost over 50 million dead. even if putin becomes a dictator don't think we'll be back to the old USSR where nothing was done.

I think the Euro will increase relative to the dollar and Russia will grow into an economic power as well with it's commodity business. At least until Craig Venter finishes his research and a product comes out of it lessening our dependence on fossil fuels

i would also scrutinize any bond funds to make sure they hold only fannie or freddie bonds. no wall street i bank mortgage bonds even if they are AAA rated. you can't trust S&P and Moody's

 

[OAG]

[/quote]R Wood - we did get a one-time $250 benefit from them - is that the one you mean? For regular SS, her earnings were higher than FIL so she is better off taking her own benefits when the time comes.[/quote]

I did not realize that fact (her individual benefits being higher) but I think she can still take the Widows benefit until she would reach 62, 66, 70 at which time she could draw on her own record. I would really suggest you talk to SS via phone. If she agrees to let you talk for her to the SS specifically about her records she would have to be present to allow you to do that. Also, now that you mentioned the $255 burial benefit, was the FIL a veteran? If so you may want to contact the VA regarding another small burial benefit available for survivors of qualified veterans.

 

[ats5g]

WM,

Since your MIL has pension and SS income that will represent the bulk of her needed retirement income, you should consider [and also discuss with her] that this money being saved may not alter her standard of living all that much. See this article by Scott Burns and Larry Kotlikoff Risking a standard of living

Also realize that neither T-bills, CD's, long term bonds, or stocks are risk-free investments for your MIL. This is because she is investing and consuming over a long-time frame. Stocks are neither risk free over short or long periods of time. The major risks you face with T-bills and CD's are inflation and "income risk", meaning that the income/coupons from T-bills and CD's is extremely variable. With long term [nominal] bonds, you don't face much "income risk," but you face the same inflation risk. Long term TIPS are really the only long-term risk free asset for those of us that face long term real liabilities. Hence, very risk-adverse investors should hold a buttload of TIPS.

btw, with expected future returns on stocks only forecasted in the 2-4% real range [depending on who you talk to], 2.5% TIPS don't look all that bad.

- Alec

 

[laurence]

This is an excellent theory, but IMO flawed by reality. The only strong lasting USA inflation of my lifetime happened in the 70s. Take a look at the performance of the S&P during that time. Then take a look at T-Bills.

Which would you prefer to own?

It's one thing for a young faimily to bet on stocks; maybe even a good idea. But this older woman is not in that position.

In my opinion the emphasis on equities for retirees, regardless of valuation levels, comes largely from people who stand to benefit from pushing stocks. They get something off the top- the eventual performance of the asset is really not part of their concern.

Ha

What is your current equity position? Are you all bonds/cash at this point? You said it might be a good idea for someone like me to hold equities (thus implying it might not be), are you saying it T-bills may outperform stocks over the next few decades? That is grim!

But on another note, we are talking about 60k, when she has pensions and SS. Obviously the 60k is not a big factor in her retirement income, any way you slice it. What about another take - does she own her home outright? Is she carrying any debt? Paying off a mortgage at 7% and car loans or credit cards at a little (or a lot more) is the surefire investement to take. There is no risk this investment will blow up on you ( credit card company forgive your debt? Not bloody likely!).

 

[haha]

What is your current equity position? Are you all bonds/cash at this point? You said it might be a good idea for someone like me to hold equities (thus implying it might not be), are you saying it T-bills may outperform stocks over the next few decades? That is grim!

But on another note, we are talking about 60k, when she has pensions and SS. Obviously the 60k is not a big factor in her retirement income, any way you slice it. What about another take - does she own her home outright? Is she carrying any debt? Paying off a mortgage at 7% and car loans or credit cards at a little (or a lot more) is the surefire investement to take. There is no risk this investment will blow up on you ( credit card company forgive your debt? Not bloody likely!).

LOL! I’m not implying anything! Of course in this world there is always a distribution of outcomes for anything.

Until recently I was about 40% equities. I might have sold down further but for accrued gains. The last few days I have bought some more equities- I am sure I am over 50% equities now, plus a lot of TIPS and a good hunk of T-bills that will likely mostly go into equities if the attractive opportunities continue to show up. Main thing I am happy about now is that I have not gotten killed by jumping into distressed sectors too early. I spent a few days looking back to see where I had really gotten my a$$ kicked. Only two bankruptcies, one take-under. The bankruptcies were both financial companies in liquidity distress with good assets but refunding trouble. Some insiders went down with me, as they had bought just weeks before they filed.

The take-under was an oil company that got grabbed by a majority owner in a cash deal in the mid-80s. That wasn't so bad, 'cause many other companies were similarly distressed, so I could just re-invest in a similar situation at a similar if not necessarily identical discount to its long term value.

I really don't know what might be best for you. Certainly equities have been a very successful holding for many people for a long time. Likely will continue this way. I know I wouldn’t want to bet against this outcome! Still, the last few days might suggest that possibilities are pretty broad!

Now, back to the woman in question. Yes, your suggestions might be great, especially as to credit card debt. IMO the mortgage is not so clear. I don’t have that information.

However, I think the argument that this is only $60,000 so it isn't going to make much difference is weak. If it isn't important, put it into a CD. At least you gain one thing that could be important, depending on events in her life-liquidity. Say she needs a treatment that she can't get her lousy blood sucking insurance company to cover. With that $50,000 she has choices- Thailand, India, etc. So conceivably this money could buy her health.

Anyway, I am glad I am not making the decision. These are just things I think of. Actually, if it were me I would pass and let someone else go over the top.

Ha

 

[laurence]

So I overlooked the need for a pad of cash for emergencies in my last post - definitely needed. Maybe split the difference on debt paydown and emergency fund in emigrantdirect, 30k each.

 

[WM]

Thank you all again for the thoughtful replies.

Let me see if I can provide a clearer picture:

- mortgage is paid off (same house for 30+ years) and no other debts, aside from a modest car lease, which she's very happy with and I'm not going to touch.

- assets are 22K in a rollover IRA (partial payout from FIL's pension) in Vanguard's bond index, plus the 60K that we need to decide what to do with. She will also be able to add to this pot between 5-10K per year while she's working (at least 3 more years). Probably 10K will sit in a MM for emergencies.

- when she's 66, she can retire from her job and collect a pension. In combination with FIL's pension and SS, we expect this will be enough to cover her expenses and there may even be some left over. She lives very modestly and is all about LBYM.

Initially, I was thinking that if she doesn't need any of the invested money for at least 10 years, and in the meantime she can add to it, then it will accumulate to a decent amount by the time she'd start to tap it. But that didn't take into account a serious drop or slump in the market, not to mention that I don't personally have a grasp of what it means that the problem this go-around is too much debt - how does that affect stocks vs bonds? (I know, that's a whole other thing.)

Passing the decision to someone else would be my brother-in-law, who is a good guy but would have signed her up for a variable annuity per the advice of his in-laws and his financial advisor. After that near-miss, I'm ok with giving her advice even if it turns out to be less than optimal.

 

[laurence]

Put it in TIPS and tell her to enjoy the income (I think - do TIPS throw off income?). Wellesly is always an option, too.

What's the house worth? With a paid off house the need for capital growth is greatly lessened. Always have the reverse mortgage in case of emergency, or selling the house if long term care is needed.

EDIT: oops, TIPS are like zero coupon bonds, my bad.

 

[ats5g]

Put it in TIPS and tell her to enjoy the income (I think - do TIPS throw off income?). Wellesly is always an option, too.

What's the house worth? With a paid off house the need for capital growth is greatly lessened. Always have the reverse mortgage in case of emergency, or selling the house if long term care is needed.

EDIT: oops, TIPS are like zero coupon bonds, my bad.

fyi - TIPS both distribute coupon payments and have a zero coupon component. TIPS pay interest every six months based on the inflation adjusted value of the underlying bond, which is adjusted up [inflation] or down [deflation] depending on the changes in the CPI. The good thing about the zero coupon nature of the changes to the bond's value is that the inflation adjustments compound on top of each other [i.e. compound interest]. The bad thing is that if you hold individual TIPS in a taxable account, you've got to pay taxes on the increases in the bond's value even though you don't receive the increases until you sell the bond or the bond matures. TIPS mutual funds pay out both the coupons and increase in value of the underlying TIPS.

 

[ats5g]

Thank you all again for the thoughtful replies.

Let me see if I can provide a clearer picture:

- mortgage is paid off (same house for 30+ years) and no other debts, aside from a modest car lease, which she's very happy with and I'm not going to touch.

- assets are 22K in a rollover IRA (partial payout from FIL's pension) in Vanguard's bond index, plus the 60K that we need to decide what to do with. She will also be able to add to this pot between 5-10K per year while she's working (at least 3 more years). Probably 10K will sit in a MM for emergencies.

- when she's 66, she can retire from her job and collect a pension. In combination with FIL's pension and SS, we expect this will be enough to cover her expenses and there may even be some left over. She lives very modestly and is all about LBYM.

Initially, I was thinking that if she doesn't need any of the invested money for at least 10 years, and in the meantime she can add to it, then it will accumulate to a decent amount by the time she'd start to tap it. But that didn't take into account a serious drop or slump in the market, not to mention that I don't personally have a grasp of what it means that the problem this go-around is too much debt - how does that affect stocks vs bonds? (I know, that's a whole other thing.)

Passing the decision to someone else would be my brother-in-law, who is a good guy but would have signed her up for a variable annuity per the advice of his in-laws and his financial advisor. After that near-miss, I'm ok with giving her advice even if it turns out to be less than optimal.

WM,

Here's a good primer on asset allocation close to retirement from Rick Ferri. See also, Paul's Investing Essentials Blog, especially max equity exposure table:

Max Equity Exposure....... Max loss
20%.......................................5%
30%.....................................10%
40%.....................................15%
50%.....................................20%
60%.....................................25%
70%.....................................30%
80%.................................... 35%
90%.................................... 40%
100%........................... ...... 50%

I wouldn't concern yourself with how the subprime blowup is going to affect stocks and bonds because (1) you're not likely to understand much of it, (2) you're probably even less likely to know what do with MIL's portfolio if you did understand it, and (3) the market has likely already incorporated the subprime fiasco into the prices of stocks and bonds.

I would try to explain to your MIL that the main goal now is to try not to screw up too badly, or get too complicated - the simplest solution is probably going to be the best solution. For example, 100% stocks is probably not the best choice, as is 100% in a savings account. Keep your investing costs low - meaning brokage fees, taxes, and expense ratios. To quote Warren Buffet:

It's better to be approximately right than exactly wrong

-Alec

 

[haha]

the market has likely already incorporated the subprime fiasco into the prices of stocks and bonds.

If this is true, how does one explain these giant air pockets being hit every day by stocks thought to have no connection whatsoever to the trouble in the sub-prime markets?
Best to remember what Will said:

There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy.

Ha

 

[Spanky]

There are a lot of morons professed as investors reacting to news.