Greetings, all.
I have a 66-year-old aunt who is adamant that she will NEVER retire (by choice). She's accumulated roughly $700,000 in her 401K to date. I'd appreciate any thoughts on what she should be invested in there given she not only won't be drawing money out but actually contributing more into the 401K for the next 10+ (?) years. Her assumption is the 401K $ is ultimately going to her kids as her wages and Social Security supply all the cash she needs to live on. She doesn't have LTC insurance, but she does have enough cash for at least 2 years of care if that need arose.
TIA.
Comments
Also, she has to consider the possibility that she may be forced out of the work place, but not in a position to need LTC, in which case she may need some of the 401k to live.
If she is not thinking of retirement, if I were her, most of my funds would be invested in good balanced funds such as VWINX, GLRBX after keeping a reasonable amount for emergencies etc. You can also consider Retirement funds from T. Rowe Price as they provide processional asset allocation with wider diversification.
The two I have mentioned have predominantly US domestic companies but the companies they hold are operational in global space with activities in many countries. So, I do not see it as much as handicap. While my own portfolio is more complex, it does not have to be too complex. Complexity is usually more expensive and does not always lead to success. I will be looking personally to simplification as I get to older ages. I don't think she would want to stay on top of these and instead enjoy her life. Neither someone helping her will want to spend too much time.
First and foremost, I am not a financial consultant or advisor. So I don’t normally reply to questions that you raised. Also, to produce a more focused plan, an advisor would need considerably more information about the health and special circumstances of those impacted by any candidate plan.
Given those obvious constraints, and with considerable reservation, I can offer a few general guidelines since I recently addressed a similar set of issues with an extended family member.
The initial step in this process is to identify some pertinent odds to establish an appropriate investment timeframe.
For a 66 year old white female in the US, the average expected survival life is roughly 19 years. For a black female subtract one year. Regardless of your aunt’s optimistic goal to pass the wealth, her savings must last at least that long. She must protect herself first.
The issue of Long Term Care (LTC) is also relevant. Statistical databases suggest that it is a coin flip (50/50 odds) if a person of your aunt’s age will require LTC assistance. Additionally, if LTC is required, the average female stay is 2.6 years with a 12 % likelihood that the stay will extend beyond 5 years.
Since you reported that your aunt has immediate cash access to cover 2-plus years of LTC service, this challenge, although not fully covered, possesses only a minor uncertainty. This is not troublesome since adjustments and reallocations can be made later if required.
Keep in mind that if the savings are in an IRA, withdrawals are mandatory at age 70 ½ using a escalating schedule. That requirement might come in at just the right time. Independent of her desires to work forever, your aunt’s employer might have a different idea. For conservative planning purposes, I would assume that her earning power evaporates about at that same age.
Further, given your brief description of her, I assume she is a novice investor without deep rooted financial learning in that arena or investment preferences. My family member is precisely in that category.
Given those assumptions and considerations, the overarching guidelines of any plan should be simplicity and low costs. Since the timeframe extends well beyond the minimum 19-year nominal life expectancy number because of the pass-through goal, a portfolio that is heavily weighted towards equity products seems reasonable.
As a baseline, I suggest she consider a three component mutual fund portfolio that includes broad US equities, bonds, and foreign holdings. Vanguard Index products serve this function without daily market monitoring needs; they also proffer the lowest cost structure. I suggest she consider a Vanguard total market Index fund, a balanced mutual fund (for a little active management exposure), and an international Index fund.
A simple portfolio with a 35 % commitment to VTSAX, a 50 % VWINX holding, and a 15 % VGTSX foreign exposure yields a 55 % US equity, a 30 % bond, and a 15 % foreign equity asset allocation. There’s respectable diversification in this modest portfolio.
The bond exposure will limit volatility. In very rough terms, the anticipated current return prospects for this portfolio given our economic malaise is about a 6 % annual average return with a 12 % standard deviation. That translates to an expected annual cumulative return of 5.3 % allowing for the degrading impact of portfolio volatility.
The marketplace is a dangerous place these days (actually almost every day). So a dollar cost averaging approach spread over a year in four increments might be a risk mitigating tactic.
I hope this helps a little. It is surely not a perfect solution, but just might provide you some useful insights before making a final decision.
Best Wishes.
Also, if not currently in a Roth, a conversion might well be another idea here - certainly would be of great benefit to the intended heirs. Regards
There are no absolutes, but short of the Supreme Court, her job is very secure. She has no debt with the house and a brand-new car paid for. So, I'm thinking she can handle the expense of 3 years of LTC without insurance.
Am I correct that there are no RMD's for the 401K (regardless of age) as long as she keeps working and contributing to the plan? Having said that, I do see the logic to converting some 401K $ into a Roth IRA for the heirs.
An added wrinkle could be taking some $ out of the 401K for current spending money and delaying filing for Social Security benefits, as discussed in the NYTimes today:
http://www.nytimes.com/2013/06/09/your-money/why-many-retirees-could-outlive-a-1-million-nest-egg.html?pagewanted=all&_r=0
"Your first RMD Your first required distribution must be made by April 1 of the year following the year when you turned 70½. For example, if you turn 70½ in February 2011, you must take your first RMD by April 1, 2012. The IRS calls this your Required Beginning Date.There's an exception to this rule: If you're still working, you can generally delay RMDs, but only from the retirement plans you participate in with your current employer. In these situations, your first distribution must be made by April 1 of the year following the year of your retirement." Excerpted from: https://www.usaa.com/inet/pages/ret_minimum_distributions?akredirect=true
*** Be sure to check with IRS before taking any actions (or inaction:-) in this regard.
Pangolin - Sounds like you and your aunt have your act together. Great questions. Should you contemplate Rothizing, proceed with caution. IMHO that was a much easier call to make 4+ years ago with world equity markets priced at only about 40% of where they are today. Regards
The decision with respect to either a Roth IRA or a Traditional IRA or a conversion is not simple; it is not a no-brainer. Like most investment choices and options, a final decision depends.
The Roth IRA decision is not easy since it is multidimensional with several forecasts as required input. One size definitely does not fit all.
It depends on several factors. I faced this challenge a number of years ago when the Roth option was originally introduced by our government. I did a boatload of calculations that eventually included many random Monte Carlo simulations. I finally decided on a mixed approach since many of the influencing parameters are unknown.
I did not keep a copy of my studies, but I do recall some of the pertinent outcomes.
A Roth only works if the expected taxes at planned withdrawal are below the current tax schedule. A Roth is not attractive if the monies to pay the current tax bill for the conversion or purchase must be extracted from what would be used to buy the Roth itself. It is these extra, auxiliary funds that make the decision in favor of the Roth attractive.
Further, the time scale before planned withdrawals and the expected rate of return for the IRA also enter the decision equation. A Roth is more attractive as the time horizon expands, making it more useful for estate planning objectives. If the anticipated IRA portfolio annual payoff is low, it takes a longer time to recover the initial tax bite for purchasing a Roth rather than a Traditional IRA. Low future portfolio return rates penalize the Roth option.
I’m surely not a tax wizard and the research that I did on this topic is dated. I’m not so sure of the details. So I recommend consulting a tax specialist before making a major commitment.
Here is a reference to a technical study that addresses some of these issues. It documents required future get-even tax rates as a function of time scale and portfolio investment return rates. The paper’s tables help to provide guidance towards any IRA decision:
http://www.academyfinancial.org/10Conference/10Proceedings/(3A)%20Krishnan.pdf
This paper by professor V. S. Krishnan titled “Roth IRA Conversion and Estate Planning” presents some tradeoff studies that illustrate the interactive complexity of time scale and portfolio return when making an option selection. The tables that he includes at the conclusion of the paper show the trendlines.
Also, all the major mutual fund houses provide informative articles on this subject matter. Here is one sample from T. Rowe Price:
http://individual.troweprice.com/public/Retail/Retirement/IRA/Traditional-vs.-Roth
A final decision does demand some committed time to explore the wide ranging likely future outcomes. Roth/Traditional IRA decisions are never easy given future investment return and tax uncertainties.
The Roth gains much of its superiority from its estate planning, pass-through features. Since that is the stated goal of the original post, the Roth IRA option seems to be in a wheelhouse position for Pangolin’s situation assuming that current tax consequences from any conversion can be conveniently handled from other than those funds dedicated to the IRA itself.
Of course, all this discussion assumes that at some juncture, the 401K pot will be converted to IRA status.
I hope this is of some service to you.
Best Wishes.