Need some situation analysis/advice

[upupandaway]

I've been asked to give advice on a friends situation. They are not overly skilled in the realm of finance and investing but have been dutiful savers their entire life. I have a summary of their situation and could get some more detail if necessary. I would appreciate any input you can provide.

The Question: Given the details listed below where would you suggest investing $500,000.

(I understand what a loaded question this can be but perhaps with some followups I can point them in the right direction.)

Details:

• Recently retired at 67.
  
• Retirement income consists of SS and a pension for 84K a year.
  
• Zero debt with a paid for house in a LCOL
  
• They do not have a detailed budget and do not show signs of wanting to create one. The 84k will fully fund their current lifestyle with plenty leftover I just wish I could get more detail on annual spend
  
• They are frugal but intend on traveling in retirement
  
• Significant other will receive Spousal Benefit from SS in a few years
  
• Retirement savings about 1MM in 401k but I'm not sure if the 500K is part of that or not.

So where do we go from here. Do you think an adviser would be the best avenue for them? Perhaps a robo-adviser? I don't think they want to be very hands on with the process. I get the impression a set it and forget it system would be what would make them happy. They also are fairly risk adverse. It's a bit of the story where they love to see those gains but when the market makes a correction they talk about how much they "lost". There is also a chance of them taking bad advice from someone on an investment "idea" that promises higher then average returns. I'm basing that on prior conversations about the subject.

I wanted to note that I don't want to be the sole person in charge of this. I want them to self manage or more likely have a middle man/adviser. I would like to offer them the best advice I can, vet the solution they go with, and of course leverage the collective wisdom of the group here to strengthen the decisions they make.

Thanks for all of your help and guidance it is always appreciated.

 

[Sojourner]

Yes to the robo-adviser idea, especially if they are reasonably competent and knowledgeable about their current asset allocation.

An even simpler idea might be to put the whole $500k in either Vanguard Wellesley (VWIAX) or Wellington (VWENX), or some combination thereof. The ratio of VWIAX to VWENX would depend on their current AA.

 

[jazz4cash]

I would inquire about custodian of the 401k. If it’s Fido, Vanguard, or one of several other large reputable brokers, they have a lot of guidance available tailored to various levels of cost and sophistication. I would NOT, NOT, NOT want to be on the hook for specific investment advice. There is a process in place to identify a plan for them. I agree with your desire to encourage and confirm the middle advisors solutions.

 

[upupandaway]

I would inquire about custodian of the 401k. If it’s Fido, Vanguard, or one of several other large reputable brokers, they have a lot of guidance available tailored to various levels of cost and sophistication. I would NOT, NOT, NOT want to be on the hook for specific investment advice. There is a process in place to identify a plan for them. I agree with your desire to encourage and confirm the middle advisors solutions.

I will find out the nature of the 500K and where it's located currently. That would make a difference as to what support is available to them from the institution. I will also find out how confident they are in their AA and who reviewed and created it for them and when it was last reviewed. I encouraged them to see an adviser before retirement which they did and I believe that was where the current AA came from. All great stuff.

 

[travelover]

I'm sticking with "no good deed goes unpunished". They probably need some inflation protection, but stocks will go down again at some point and you will have "lost them money" if you recommend any stocks in their AA.

 

[pb4uski]

Is the pension fixed or COLAed? Do they have heirs that they want to plan for?

There is no bad answer for them given that their spending is less than the pension and SS.... they are not relying on the $1m or $1.5m for their retirement. They could go 100% stocks or 100% fixed income and their success rate is still 100%.

If there are heirs to be considered, then I'd probably go with Wellington, otherwise with Wellesley.

 

[OldShooter]

Another important question: What fees are they paying in the 401K? Ideally none except for the mutual fund management fees, but I have seen 401Ks where the participants were charged 1.5% annually (!) in administrative fees.

I am on a nonprofit investment committee where we are using an FA, though several of us on the committee could handle the job. The reason, as fellow committee member Paul points out, is that the organization needs "a throat to choke." If we as committee members were not successful some year, dealing with the Board of Directors could become difficult as we would be seen as "amateur investors."

@upupandaway, you are wise in realizing that your friend also needs a throat to choke that is not yours. Even bogleheads.org would suffice. Your idea of a robo also works. Most of the robo offerings these days seem to have options that include a little bit of human contact. I would suggest looking at those.

Tell them also that they absolutely must decline all invitations to free steak dinners.

 

[capjak]

if it were me I would keep it simple use a balanced fund like Vanguard LifeStrategy Moderate Growth Fund (VSMGX) 60% stock 40% bond.

I think the bigger issue is having you as the person responsible for that decision.

 

[HI Bill]

At first blush, I would recommend Vanguard's 'fully diversified four ETF portfolio': BND, BNDX, VTI, and VXUS. In whatever AA they're comfortable with. But first...what's their end goal? Spending down the assets, or leaving a legacy? What WR do they desire? Too many unknowns to come up with a complete answer.

 

[Alexi]

I'm sticking with "no good deed goes unpunished". They probably need some inflation protection, but stocks will go down again at some point and you will have "lost them money" if you recommend any stocks in their AA.

Not everyone who has money to invest is willing to put it as risk in the stock market - especially those who have been frugal and saved it over their lifetime.

 

[HI Bill]

Not everyone who has money to invest is willing to put it as risk in the stock market - especially those who have been frugal and saved it over their lifetime.

The dilemma is how to ensure that the value of what they've saved keeps up with inflation. Right now, with super low interest rates, CDs don't pay enough, so bonds are the next best thing...

For those who simply put their money in a savings account, or bought CDs, they're unfortunately left with 1/3 to 1/4 of what they would have had if they had just invested in 'the market' or at least bought real estate rentals.

 

[Alexi]

When [not if] the stock market has a major correction, many will be wishing they only had to worry about inflation.

 

[HI Bill]

When [not if] the stock market has a major correction, many will be wishing they only had to worry about inflation.

Corrections come, then the market recovers. Remember 2008! That's why AA is important.

If you're concerned about never losing any of what you'll saved, you will, due to the persistent, erosive power of inflation. It really adds up over the decades. An the markets really go up over the decades (roughly 7.5% average, ABOVE inflation), if I recall correctly.

Assume you have $500K saved up for a 30-year retirement. You never spend any of it, nor do you have any earnings. It's purchasing power at the end of 30 years is eroded by a cumulative (historic) inflation rate of 107%, which means it would be worth about $241K.

Putting it another way, try putting the nest egg into FIRECALC, and inputting a 2% rate of return (money market account)....you'd need significantly more $ to RE, and a 4% withdrawal rate wouldn't be sustainable.

 

[Alexi]

Corrections come, then the market recovers. Remember 2008!

Remember the other "Roaring 20s" [oh, the irony] when even shoeshine boys were investing in the stock market. Many assumed stocks would always go up and bought on margin. Then came September 1929 the peak of the stock market, the 1929 stock market crash and the Great Depression. It took the stock market until 1954 [25 years] to reach its 1929 high. How long could a 67 year old wait to recoup from a major stock market crash ?

 

[REWahoo]

Remember the other "Roaring 20s" [oh, the irony] when even shoeshine boys were investing in the stock market. Many assumed stocks would always go up and bought on margin. Then came September 1929 the peak of the stock market, the 1929 stock market crash and the Great Depression. It took the stock market until 1954 [25 years] to reach its 1929 high. How long could a 67 year old wait to recoup from a major stock market crash ?

Helena, is that you?

 

[Alexi]

Helena, is that you?

As in Mt St Helens ??

There are many kinds of surprise explosions/eruptions.
In the stock market it's known as a "black swan" event.

 

[mrfeh]

I would do 2 things:

• tell them they need to understand/enumerate their expenses
• point them at the Boglehead investing startup kit

I wouldn't give them any specific investing advice, because they will blame you when the balance declines.

 

[24601NoMore]

Remember the other "Roaring 20s" [oh, the irony] when even shoeshine boys were investing in the stock market. Many assumed stocks would always go up and bought on margin. Then came September 1929 the peak of the stock market, the 1929 stock market crash and the Great Depression. It took the stock market until 1954 [25 years] to reach its 1929 high. How long could a 67 year old wait to recoup from a major stock market crash ?

Excellent point, and there have been many instances since then that it's taken 8-16 years for the market to recover from it's prior peak levels (dividends included). If the next crash takes 15+ years to recover, one or both of them may not even be alive by then to see the value of that $500K recover to the levels where they invested it.

I'm reading one of Larry Swedroe's books at the moment and he makes a great point about the "need" to take risk. It doesn't sound like these folks "need" to take any risk as their expenses are fully covered. So, the first question I'd ask is: what's the goal for the $500K? Are they trying to grow it to bequeath it to heirs? Do they want to grow it to ensure they have enough money to cover unexpected LTC expenses? Etc.

Tough to impossible to make any recommendations about what to do with the $500K until the couple's goal(s) for those dollars is known. Also - regarding another recommendation up-thread: as much as I love Wellesly and Wellington, neither is particularly diversified when it comes to the number of individual equities they hold, so I'd only recommend either in combination with other funds that provide broader overall diversification.

 

[Aerides]

Remember the other "Roaring 20s" [oh, the irony] when even shoeshine boys were investing in the stock market. Many assumed stocks would always go up and bought on margin. Then came September 1929 the peak of the stock market, the 1929 stock market crash and the Great Depression. It took the stock market until 1954 [25 years] to reach its 1929 high. How long could a 67 year old wait to recoup from a major stock market crash ?

the environment is quite different now, of course, with various market regulations and a completely different world economy. Planning for a 2008 event is reasonable. But if you want to be sade in the second-coming-of-1929, you are aren't much in stocks, and save all your life as if you might need to weather a 10-15 year storm.

Many retirees, early or otherwise, hedge against a 100% stock portfolio with smarter, safer allocations, to ride out the more likely recession events - i.e. keeping 2-4 of years in cash/CD's, having some wiggle in the budget to reduce discretionary spend when it's prudent, etc.

To the OP, I would point them to good sources of info, but steer well clear of saying "put it in XYZ."