tl;dr My 70'ish mother and 80-year-old, non-retired father have combined holdings of ~$1.44 million, haphazardly scattered over a number of instruments; help me help them design an intelligent strategy which grows their assets while providing a minimum income (note: their combined Soc Sec benefit per annum is ~$40k).
Background My father is 80 years old, an immigrant from the Old Country, and still works four to five days a week. My goal here today: educate myself enough about an investment strategy appropriate for our family which will bring him some measure of comfort and, ideally, relieve him of his belief that he "must keep working".
Investment history Being an Old Country immigrant, he's not been the most prudent with his investments: he's stubborn, financially naive & generally distrustful; and, unfortunately, despite the admonitions of his financial advisor at the time, he sold a majority of his assets during the 2008 recession, converting his moderate-risk portfolio (roughly 60:40 stocks-to-bonds) to an inappropriately conservative one (nearly 95 percent bonds).
I've developed a functional degree of financial literacy but by no means consider myself sophisticated. I have my own meager investments with robo-advisors that, given market's rallying since recession, have earned money-weighted returns of ~25 percent.1 I cringe hard every time I think about the returns my father missed out on by putting 95 percent of assets in bonds.2 (Unfortunately, at the time, I myself was financially naive and wouldn't have known how to advise him anyway.) No matter, the past is gone; fortunately, I found out about this "strategy" 2 years ago and basically forced him to leave the major bank which oversaw his "actively managed" portfolio of bonds at 1 percent fees. (His investment "advisor" threw a fit when I told him we would be promptly transferring his SEP-IRA to Vanguard.)
1 I expect this to regress to the historical mean for my particular allocation.
2 I'm doing my best to make sure that this missed opportunity cost does not influence choice of portfolio allocation, i.e., behaving more aggressively on account of "missing out on the recovery."
Current holdings Since that time, I've essentially become the steward of our family's investments, which makes me somewhat nervous but which I know is better than the alternative. When I went through all his investment accounts, SEP-IRAs, CDs (
*slaps forehead*), insurance policies & annuities, I was surprised to find he and my mother have a combined $1.4+ million in holdings (not including our childhood home, which is fully paid-off and perhaps can fetch $500k [the original price; purchased 1999]). In addition, they receive a combined Social Security benefit of ~$40,000 per annum.
Below are the holdings. Where possible, I've included return rates and any known fees (according to brief phone conversations with issuing company's representatives; i.e., I have not reviewed actual contracts so I am almost certainly being duped to some extent); also, I've grouped holdings by instrument type and then by descending order of rates of return:
----------------------------------------------------------------------------------------- amount($) | type [fees, %] | return(%) ----------------------------------------------------------------------------------------- 25,000 | life insurance policy #1 [?] | 3.0 30,000 | life insurance policy #2 [?] | 2.0 14,000 | life insurance policy #3 [?] | 1.5 32,000 | life insurance policy #4 [?] | 0.5 41,000 | life insurance policy #5 [?] | 0.0 222,000 | annuity #1 [?] | 4.0 115,000 | annuity #2 [?] | 4.0 50,000 | annuity #3 [?] | 4.0 410,000 | annuity #4 [?] | 3.0 25,000 | annuity #5 [?] | 3.0 197,000 | Vanguard SEP-IRA [0.30 + expense ratios] | market 115,000 | Betterment SEP-IRA [0.25 + expense ratios] | market 12,000 | Wealthfront SEP-IRA [expense ratios only] | market 25,000 | certif. of deposit | n/a 6,000 | certif. of deposit | n/a 2,000 | random penny stock | market 64,000 | mom's IRA | market 23,000 | mom's nonretirement portfolio | market 5,000 | mom's annuity | 3.0 2,000 | mom's certif. of deposit | n/a 1,000 | mom's certif. of deposit | n/a 5,000 | mom's certif. of deposit, SEP-IRA | n/a 6,000 | mom's certif. of deposit, IRA | n/a 1,000 | mom's certif. of deposit, IRA | n/a 5,000 | mom's brokerage | n/a ?500,000 | home (mortgage fully paid) | market
Questions The intentions of this post are many, but most important is to query the very thoughtful community that is StX$ to get a sense of “what I don’t know that I don’t know.” Here are the questions:
- Question 1 Given the size of my parents’ holdings — and what seems to me, at least, to be a considerable Social Security benefit — can our family “afford” to be a little more growth-oriented3 with respect to portfolio strategy?
Life insurance questions
Question 2 The life insurance policies: I understand these least well; the current values are, to my understanding, the “surrender values”. If the listed values are indeed the “surrender values,” am I correct in understanding that my father can recover, in full, the amount stated for each policy?
Question 3 I’m not sure if life insurance policies are the most appropriate instrument for him to hold right now; my siblings and I are adults and I’m not sure our family would “need” the death benefit; also, it seems unusual to me that he can hold the policy until his death; from the company’s perspective, this seems, errr, not profitable. (Since, I would assume, each policy has a payout of several $100,000s.)
- Question 4 Next, the annuities. The best of them return at four percent annually. He does not pay into any of them anymore; he is in the distribution phase for all of them. Perhaps it is better for the value in the annuities — the greatest proportion of his holdings — to earn at market rates? (In other words, is $822k too much money to sit in annuities?)
Certificate of deposit questions
- Question 5 My general belief is that these were all terrible decisions stemming from my father's inappropriate risk-aversion; he has continually "renewed" the CDs over the course of a decade; he does not fully appreciate the notion of inflation and purchasing power, so, it seems to me, he made little to no return on money he did not need to "protect for the short term." My inclination is to invest the cash value of the CDs as soon as they mature, so long as they do not create a taxable event.
Conclusion In general, my inclination is to move the value my parents have in life insurance policies4, CDs, and annuities to a balanced-oriented portfolio3, somewhere in the range of 50:50 to 60:40 stocks-to-bonds. The rationale for this being that my parents will draw minimally from this hypothetical portfolio (given their SS benefits) and, in the very likely event of a market downturn, I am confident I can ensure he does not make the same unfortunate mistake of emotionally selling-off assets.
I would be indebted to this community for their thoughtfulness, critiques, and ideas. If you got all the way down here, I thank you massively for tolerating my longwindedness and ignorance.
4 Again, I am least knowledgeable about what to do with these life insurance policies. Perhaps I first need to request and fully review the contracts.