retirement COL covered by SS/DB, what to do with rest

[someguy]

I am helping a friend couple with some of their life planning and could use the collective wisdom of this group. The key points are that both are retired and old enough for Medicare and that various guaranteed payments (SS, DB pension, etc) cover living expenses including COLA. There is an additional pot of mid six figures, about 3/4 in 401(k) and 1/4 in IRA/other. They dip into this for ocassional big expenses, mostly vacations that can't be covered from SS/DBP cash flow. They've been paying between 1.5 and 2% to some kind of "money manager" and I'm talking them into getting away from that. They don't have (and don't want to gain) any level of investment sophistication. So, where would you park this money for full autopilot?

 

[Gotadimple]

What do they plan on doing with this money after they pass away? Do they intend to spend it all, or leave it for others?

Answer those questions and you have a potential road map for how to invest it.

-- Rita

 

[Animorph]

My Mom is in the same situation, though she hardly touches her portfolio. She's in all stock, figuring it's for the kids when she passes.

Something like Wellesley would be appropriate. Depends a bit on how much they need to take out on average. A target retirement income fund might be OK if they spend a moderate amount. A "total stock" fund might be good if they are relatively young, have hardly any withdrawals, and want to maximize their estate. With RMD's, they might try an income fund inside the retirement accounts and a tax-efficient stock fund inside the taxable accounts. Add in cash or a fixed income fund in the taxable account to allow some spending.

Keep in mind that if you make changes and they lose money it'll be your fault. Hope they are good and realistic friends!

 

[Mulligan]

My Mom is in the same situation, though she hardly touches her portfolio. She's in all stock, figuring it's for the kids when she passes.

Something like Wellesley would be appropriate. Depends a bit on how much they need to take out on average. A target retirement income fund might be OK if they spend a moderate amount. A "total stock" fund might be good if they are relatively young, have hardly any withdrawals, and want to maximize their estate. With RMD's, they might try an income fund inside the retirement accounts and a tax-efficient stock fund inside the taxable accounts. Add in cash or a fixed income fund in the taxable account to allow some spending.

Keep in mind that if you make changes and they lose money it'll be your fault. Hope they are good and realistic friends!

Your last sentence Animorph, was my initial thought. They do not understand or want to, so a downturn could cause problems. Now I am a DIY person, and wouldn't answer the door from a CFP if it was free, but in this case I don't know if I would get involved since they are doing fine despite the enormous fees.

 

[samclem]

Your last sentence Animorph, was my initial thought. They do not understand or want to, so a downturn could cause problems. Now I am a DIY person, and wouldn't answer the door from a CFP if it was free, but in this case I don't know if I would get involved since they are doing fine despite the enormous fees.

Amen. The farthest I'd go is to point them toward a book or two (Swedrow, Bogleheads, Bernstein, Clyatt, etc --the usual suspects). If they ask further questions and seem to be taking action, then I'd be happy to offer input. 2% in fees is crazy, but they apparently think they are getting their money's worth, and it sounds like it won't leave them eating dog food.
After you've told them that there are alternatives and showed them how to fish, I think you are done. "Talking them into" anything is very unlikely to result in a happy outcome.

 

[pb4uski]

.....So, where would you park this money for full autopilot?

I guess to me it would depend on what the 401k investment options were. If there was a stable value fund available in the 401k, I would go with that for fixed income and then go with a mix of Total Stock Market Index/International Stock Market Index for equities.

Since all their investment nestegg is in tax-deferred, there would be not tax efficiency issues to worry about.

If there is no stable value fund in the 401k and no other attractive 401k options, I might consolidate the whole thing in some tIRAs and buy Wellesley, Wellington or Star or a target date retirement fund that reflects their appetite for risk (or what matches up reasonably well with their current AA).

 

[travelover]

..........
Keep in mind that if you make changes and they lose money it'll be your fault. Hope they are good and realistic friends!

Bingo! No good deed goes unpunished. Agree with samclem's advice.

 

[someguy]

Thanks for all the replies so far. I was thinking of one of the Vanguard W-funds. I agree with everyone on the danger of blame, which is why I would only suggest moving to one of those funds and being no more involved than that.

 

[pb4uski]

Or better yet, turn them over to Vanguard's financial planning people and let them make the fund recommendations - if you are concerned about being blamed then you can just plant a seed of the W-funds and let them and Vanguard figure it out from there.

 

[omni550]

someguy,

Some people simply like the attention and strokes they get from interacting with their service providers. You may want to consider this before suggesting that your friends do anything (as they don't seem dissatisfied with their current situation, but you do).

omni

 

[clifp]

It seems me the big question is what do they need the money for during their lives and what about heirs. If they have no kids,and enough money to cover a couple of years at a nice nursing home, then they don't need to have their money working that hard for them. Financial advisers need to eat and put their kids through college also. So suggest they look at the W-funds and find a simple book for them to read is probably all you should do.

BTW, I suspect if the money is actually in a 401K they aren't really paying the FA 1.5-2% to manage it, but it would be good to verify that.

If on the other hand, they have kids who could benefit from a larger inheritance, or charity they are passionate about then I think pointing out the difference in amount of money they leave to their heirs if they can reduce investment expenses by 1%+ is I think something a friend should do. Followup with a nudge to fire their FA and start moving stuff to Vanguard.

 

[donheff]

I have good friends in a similar situation. Their advisor gives them a lot of comfort. They know what DW and I do but are uncomfortable DIYing it. I would never give them direct advice on investing for the reasons other mentioned. I want to remain friends.

 

[pb4uski]

If I ever give advice to friends/family, it is generally generic. If it is specific advice, I generally frame it in terms of "this is what I do that may work well for you". I rarely give specific advice that is outside what I do.

 

[someguy]

I guess they previously were with an advisor or company who really screwed them over. I don't know those details, but they thought 1.5-2% was a deal versus the previous! They were curious/concerned enough that they mentioned the situation to me. When I pointed out that they were effectively writing this new "guy" a $10K (+/-) check every year and asked if they thought they were getting 100 hours a year of his time (@ $100/hour) they turned white. That fee represents about a quarter of their annual expense needs. They just aren't that sophisticated and are another victim of AUM.

I found out a little more and they apparently are with "The Mutual Fund Store". Is anyone familiar with this?

Also, yes, there are adult kids in the picture and yes, they are the type who have charitable causes that matter to them. One of them is a veteran, so apparently that includes free or very low cost nursing home care if/when needed?

 

[urn2bfree]

I guess they previously were with an advisor or company who really screwed them over. I don't know those details, but they thought 1.5-2% was a deal versus the previous! They were curious/concerned enough that they mentioned the situation to me. When I pointed out that they were effectively writing this new "guy" a $10K (+/-) check every year and asked if they thought they were getting 100 hours a year of his time (@ $100/hour) they turned white. That fee represents about a quarter of their annual expense needs. They just aren't that sophisticated and are another victim of AUM.

I found out a little more and they apparently are with "The Mutual Fund Store". Is anyone familiar with this?

Also, yes, there are adult kids in the picture and yes, they are the type who have charitable causes that matter to them. One of them is a veteran, so apparently that includes free or very low cost nursing home care if/when needed?

Sounds like they need some help and won't be managing things well themselves. Still,they are overpaying big time.
I would suggests to them that they can shop and find much more affordable financial advice and then let the professionals advise them. Give them a list of lower cost options like Rick Ferri at Porfolio Solutions (?0.35%?) or flat rate portfolio options like Cardiff Park or Evanson Asset Management. The latter charge flat rates that shrink as a percentage as your money grows, but at smaller portfolio amounts might be close to what Rick Ferri charges. All of them provide access to DFA funds and sound management without the ridiculous mark up of these 1% +AUM operators.

 

[MRG]

I know a guy that uses The Mutual Fund store to manage his wife's IRA. He should understand about fees but does this anyway. The only positive I've heard from him is they reviewed his choices in his 401k and gave him "free" advice!

MRG

 

[Meadbh]

I would give them the information (preferably with data), make a recommendation that they take a look at a low cost fund, and leave it to them. If they feel pressured, your good intentions may backfire and you will have lost a couple of friends. Also consider that they may lose face by admitting to themselves that they are wasting money.

 

[Mulligan]

I guess they previously were with an advisor or company who really screwed them over. I don't know those details, but they thought 1.5-2% was a deal versus the previous! They were curious/concerned enough that they mentioned the situation to me. When I pointed out that they were effectively writing this new "guy" a $10K (+/-) check every year and asked if they thought they were getting 100 hours a year of his time (@ $100/hour) they turned white. That fee represents about a quarter of their annual expense needs. They just aren't that sophisticated and are another victim of AUM.

I found out a little more and they apparently are with "The Mutual Fund Store". Is anyone familiar with this?

Also, yes, there are adult kids in the picture and yes, they are the type who have charitable causes that matter to them. One of them is a veteran, so apparently that includes free or very low cost nursing home care if/when needed?

They have a weekly radio program that goes nationally, with call ins, and such. When I am in the car on a Saturday I catch some of it. Their show talks about mutual funds like Cramer does about stocks. I am sure they cost more due to their national chain set up. They are always promoting their business but have never mentioned their expense fees. I never have heard the terms "Bogleheads", "low expense ratios", or "index funds" used on the show. They definitely are of the philosophy that they can find the mutual funds across different fund families that will outperform the market. Just yesterday they got off track for a few minutes with annuities and were very much against the use of them due to safety of the companies, and people buying amounts way over the limits of states laws to protect them.

 

[youbet]

I am helping a friend couple with some of their life planning and could use the collective wisdom of this group. The key points are that both are retired and old enough for Medicare and that various guaranteed payments (SS, DB pension, etc) cover living expenses including COLA. There is an additional pot of mid six figures, about 3/4 in 401(k) and 1/4 in IRA/other. They dip into this for ocassional big expenses, mostly vacations that can't be covered from SS/DBP cash flow. They've been paying between 1.5 and 2% to some kind of "money manager" and I'm talking them into getting away from that. They don't have (and don't want to gain) any level of investment sophistication. So, where would you park this money for full autopilot?

Somehow, "talking them into" leaving their advisor when "they don't have (and don't want to gain)any level of investment sophistication" sounds like you're sticking your neck out.

I'm a dyed in the wool DIY'er so while I cringe at paying someone else to do basic investing and tax work for me, I'd never, not once, not ever, NEVER, "talk someone into" leaving an advisor when they are determined not to acquire some investment/tax/gov't rules knowledge. Especially folks getting up in age as these folks are.

Try to determine if the advisor has the right credentials and a good reputation. Perhaps he/she is employed by a respected investment firm? As long as your fiends don't seem to be victims of a "shark attack" or significantly overpriced advisor, I'd let things roll along as they are. If you really think the advisor is suspect, investigate programs available at major investment houses like Schwab or Fidelity. They would still pay fees, but the chances of being ripped off or placed in inappropriate situations would be small.

If these folks were younger, I might be more aggressive with my suggestions. But talking SS age folks, with an adversion to investments/taxes, into becoming DIY'ers could be starting them on a difficult path.