Where a couple can put a fairly large amount of cash today.

[ShokWaveRider]

As you all may know I am not a good source of stock and mutual fund advice. So here goes.

A family friend of ours came into some money. It is currently in cash in a bank. The total including all their other cash assets are ~$1.5m, very little is in a 401k or IRA in a guaranteed fund, maybe about $400k but I am not completely sure. They currently have no debt except for a small car loan as they paid off their home instead of saving the maximums for retirement in a tax deferred accounts. He and his DW want to retire permanently, they are 62 and 57 respectively. They are not working currently for a variety of reasons. They need about $40-50k a year to live comfortably. No kids are at home. He would get ~$1500 from SS if claimed now, she may get ~$700 when she reaches 62.

They have been getting by by taking money from their 401k so as to take full advantage of ACA subsidies. Their health is reasonable, no serious issues.

I am not sure what advice to offer them. I personally do not think putting ~$1m+ into the stock market now is a good idea. VG fund returns are reasonable at the moment, but how long will that last. I do not think they can afford to lose 20% of their money in a downturn. They probably need to go to a financial planner, but I thought I would ask here.

 

[Sunset]

How much is actual cash ?
Any more than 5 yrs worth ($250K) is in my mind a terrible waste as they will earn perhaps 1% and lose to inflation every year.

I think you will find (assuming it's $1M cash) putting $200K in the bank, and rest in broad ETF like VTI (pays 1.2% div, which is why just $200K in bank), is one long term plan.
Key is also what do they have the 401K/IRA - hopefully it's not all cash as well.

Them using a FA will get you off the hook, but endanger them to the possibility of being put into a 2% managed account with extra fees.

I'll be interested to hear what others think.

 

[ShokWaveRider]

How much is actual cash ?

All of the ~$1.1m

Key is also what do they have the 401K/IRA - hopefully it's not all cash as well.

A Guaranteed fund. Not sure of the return. No stocks or mutual funds.

 

[erkevin]

Might consider a portfolio of large cap value stocks from the Dividend Aristocrats. These are fairly stable and have paid and increased dividends for decades even through extreme market corrections. If they live off of the qualified dividends, they would greatly benefit from taxes at capital gains rate, not income. With a million dollar portfolio, they would collect anywhere from $30k to $40k yearly without touching principal. However, not sure how it would impact ACA subsidy.

 

[Sunset]

Since they have an estimated life span for at least 1 of them of 30+ years.

My feeling is they HAVE to invest about 50% minimum in stocks or they will run out of money and only have their low SS (planning to take early) payments.

Run it through firecalc, with only interest/cash as the investment and I'm guessing it will be a big fail.

 

[Aerides]

If they really have no background in self-investing, I'd recommend they spend a good few hour with a fiduciary to set up a plan that matches their risk appetite and needs.

That should probably include a fair sized chunk in low cost index funds, but whether that's 30% or 60% is the detail that is going to be based on their overall detailed financial position.

Or if they do go with an FA, then do so with the idea that it's a temporary solution so they aren't paying AUM fees for the long term. For that I'd say they should go to the nearest Fidelity office.

 

[FANOFJESUS]

One of these two
Vanguard LifeStrategy Conservative Growth
Vanguard LifeStrategy Moderate Growth

 

[USGrant1962]

For folks uncomfortable with large stock market exposure, I usually recommend something like Vanguard Target Retirement Income fund (VTINX). It is 30% stock, 70% fixed income throwing off about 1.6% dividends. It will fluctuate a little, but at only 30% stock, not very much.

https://investor.vanguard.com/mutual-funds/profile/overview/vtinx

In their case their regular income might look like:

VTINX $1,100,000 x 1.6% = $18K
GIC $400,000 x 1.0-2.0% = $4-8K guess based on Guaranteed funds I've seen
His Social Security @62 = $18K

Total = $40K-$44K/year without touching principal and will probably keep up with inflation pretty well. Occasional withdrawals for car replacement, roof replacement, etc. should be no problem with $1.5M working for them.

They could always dollar cost average into VTINX over a year, say $300K/quarter, if current market valuation is a concern.

 

[ERD50]

.... They need about $40-50k a year to live comfortably. No kids are at home. He would get ~$1500 from SS if claimed now, she may get ~$700 when she reaches 62.

... I do not think they can afford to lose 20% of their money in a downturn. They probably need to go to a financial planner, but I thought I would ask here.

But they could stand to lose 20% or more to inflation?

... I personally do not think putting ~$1m+ into the stock market now is a good idea. ...

OK, how about 60% of their $1.5M, that's only $900K!

Seriously, some people will always think that 'today' is a bad time to put money in the market.
edit - I have to review the data at that link that I just deleted, the numbers were based on growth after being invested since 2007... thought something looked funny

be right back

OK, try this link, more like $14~$15K annual divs:

https://www.portfoliovisualizer.com...ymbol2=BND&allocation2_2=100&allocation2_3=40

Or what USGrant1962 just posted...

-ERD50

 

[aaronc879]

I would keep $100-200K in cash and put the rest into a total stock market index. I would not worry about a 20% loss since they won't need most of the money for many years. Any loss will be short term and it will come back and be better long term than keeping it in cash.

 

[kevink]

Have to agree with USGrant1962's suggestion of VTINX as an excellent all-in-one option - or they could split the money 50:50 between VTINX and Wellesley (VWIAX).

OTOH you might indeed be wise to send them to a fixed fee (but definitely NOT a % of assets-under-management) financial advisor. One I particularly like and have had a lot of experience with is Evanson Asset Management. They charge a flat fee in the 3-4K a year range and are especially good at putting together defensive portfolios for risk-averse investors.

 

[FANOFJESUS]

I would keep $100-200K in cash and put the rest into a total stock market index. I would not worry about a 20% loss since they won't need most of the money for many years. Any loss will be short term and it will come back and be better long term than keeping it in cash.

All of these ideas are good but this one will give you the lowest income for the ACA which is good.

 

[mystang52]

I get the impression these friends will be very reluctant to put money in stocks, be it individual or any mutual fund. At a bare bones minimum, they should not have $1 million sitting in one bank. They need to spread it out to stay protected under FDIC. While they are deliberating how best to allocate their new-found money, they should at least do this step.

 

[ShokWaveRider]

All good advice thanks, I will pass it on as it comes. I am compiling a small spreadsheet for them. I think they should go to Fidelity or Schwab for some advice also.

 

[ShokWaveRider]

I get the impression these friends will be very reluctant to put money in stocks, be it individual or any mutual fund. At a bare bones minimum, they should not have $1 million sitting in one bank. They need to spread it out to stay protected under FDIC. While they are deliberating how best to allocate their new-found money, they should at least do this step.

I think so, as am I at these recent highs. As mentioned I am not the best advisor. But we have significantly more than they do to weather the current inflation storm.

 

[Jerry1]

I’d try to get them comfortable with at least 25% in an index fund. Not a lot but good to help them get in the market. I’d also consider an annuity. I have a 7 year annuity that does much better than cash in bank and after 7 years I get my principal back. I’d think in terms of around $300K to $400K depending on what rate I could get and what term I was comfortable with. I’d definitely split the remaining cash up to be under the FDIC limits.

That’s enough to work on for a year. After that, they’ll be more understanding of the market and their money in general.

 

[travelover]

I'm in the send them to an advisor that will set up a plan for a fixed, one time fee camp. They need to invest in stocks for the long term, but stocks are going to dip and when they do, you will be "the one who lost them all that money" when they panic and sell.


No good deed goes unpunished.

 

[timbervest]

Although I probably would agree with USGrant1962 or FANOFJESUS to invest conservatively, folks often have a difficulty plunking it all down on one day. Sometimes it is easier to average into the market and set up a programmatic transfer weekly or bi-weekly for the same amount over a prespecified times (DCA)- say a few months. Not the most efficient way of investing but it gets over the short term fear of "getting in at the top". Since they don't need the money right away probably will help to ease the psychic pain.

 

[RobbieB]

Sounds like they are extremely equity adverse.

I too think they should have 50% equities, but I'm certainly not going to tell them that.

 

[WhenIsItTime]

Head scratcher. It’s great they accumulated $1.5M. Guessing basis in that is pretty high and lost opportunity to date.

The fixed fee advisor makes sense, but they’ll be a difficult customer. Definitely keep them away from %ofAsset fees. At least seems like they won’t follow the first advisor that comes along cuz they have a nice office or fancy business cards.

Not sure if they have any interest/ability to learn finance.
1). Have them research length of historical stock market crashes. Most last less than 3 years.
2). Have them research how time in market beats timing the market.
3). Have them spend time in Firecalc or similar. Establish base case (CD’s?). Then play with different AA.
4). Have them research SP500 or total market equity returns over time.

I use top two as frequent reminders to stay in market.

 

[RetiredHappy]

Head scratcher. It’s great they accumulated $1.5M. Guessing basis in that is pretty high and lost opportunity to date.

Note: They came into money - not through accumulation.

 

[Go-NoGo]

Leave 3-4 years of living expenses in a bank or laddered CD so that they have liquidity. Since they are risk averse and think the market might go down, invest the rest at 10% of assets per month into VTSAX, S&P500 ETF or equivalent.

 

[RetireAge50]

Jam it into Wellington and then draw a fixed 4% of the whatever the balance is at the end of each year. Most years will enjoy getting a raise and occasionally will take a cut. No advisors or complicated financial plans needed.

 

[JT90505]

I would advise them to see a fee only financial planner. Under no circumstances would I offer investment advice even if they ask. They should be holding stocks, but do you *really* want to be the one offering that advice? At their age and no earned income its a very delicate situation.

The one exception I would consider is advise delaying SS til age 70 for the 'guaranteed' 8% return.

 

[calmloki]

While they dither maybe put some in Marcus at .6% after a .1% AARP interest bump. And/or Ally at .5%.