Investment Allocation for widow with 3 children

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FreezerGuy
Posts: 2
Joined: Mon Dec 06, 2021 11:10 am

Investment Allocation for widow with 3 children

Post by FreezerGuy »

A young man has passed and I have been asked to share an opinion on how to best allocate investments for a middle age widow with 3 small children under the age of 10. Fortunately Life insurance will provide about 2 M . Social security survivor benefit may provide up to $4000/month. Widow works ($40k) and has benefits for herself and kids. Recently refinanced mortgage with 30yr low interest rate for 500K home.

Hiring a financial planner is being considered as an option, but I am looking for reader thoughts on this situation.

My financial background is as a self directed invester who uses predominately low cost index funds in my portfolio. My personal portfolio (recent retiree)) is 20% cash, 30% bonds, the rest is stock. I am asking for opinions on asset allocation for the money available for this situation. I know she needs a portfolio that needs to last for 40 years, and will provide for college educations for 3 children.
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arcticpineapplecorp.
Posts: 15081
Joined: Tue Mar 06, 2012 8:22 pm

Re: Investment Allocation for widow with 3 children

Post by arcticpineapplecorp. »

FreezerGuy wrote: Mon Dec 06, 2021 11:39 am I am asking for opinions on asset allocation for the money available for this situation. I know she needs a portfolio that needs to last for 40 years, and will provide for college educations for 3 children.
sorry for your loss.

sounds like there are two goals stated (there may be more, like pay off house early?)
1. college costs for kids
2. retirement/money to last 40 years

so there'd be two different allocations for those two goals. the second "might" be more aggressive if she doesn't need to start drawing it down for decades, whereas the first probably would be invested less aggressively since the money will likely be used in less than 18 years, right?

though just because she might not need the retirement monies for 40 years, she might not have the willingness to take risk, so there's really more info that would be needed, like the need, ability and willingness to take risk:

https://www.cbsnews.com/news/asset-allo ... -you-take/

https://www.cbsnews.com/news/asset-allo ... tolerance/

https://www.cbsnews.com/news/asset-allo ... -you-need/

https://www.cbsnews.com/news/asset-allo ... ing-goals/

it would be more helpful to list out all the details accoring to this:
https://www.bogleheads.org/wiki/Asking_ ... _questions
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Point
Posts: 660
Joined: Mon Jul 10, 2017 9:33 pm

Re: Investment Allocation for widow with 3 children

Post by Point »

It seems like the way to approach this is to start with a budget for her needs. Going through the last two years of expenses and identifying what regular expenses there will be moving forward will determine what resources will be need for day to day budget and mortgage, then a decision can be made about investing for the kids education. Lastly, what resources need to be allocated one time and ongoing for her retirement, LTC, etc.
ivgrivchuck
Posts: 1672
Joined: Sun Sep 27, 2020 6:20 pm

Re: Investment Allocation for widow with 3 children

Post by ivgrivchuck »

FreezerGuy wrote: Mon Dec 06, 2021 11:39 am A young man has passed and I have been asked to share an opinion on how to best allocate investments for a middle age widow with 3 small children under the age of 10. Fortunately Life insurance will provide about 2 M . Social security survivor benefit may provide up to $4000/month. Widow works ($40k) and has benefits for herself and kids. Recently refinanced mortgage with 30yr low interest rate for 500K home.

Hiring a financial planner is being considered as an option, but I am looking for reader thoughts on this situation.

My financial background is as a self directed invester who uses predominately low cost index funds in my portfolio. My personal portfolio (recent retiree)) is 20% cash, 30% bonds, the rest is stock. I am asking for opinions on asset allocation for the money available for this situation. I know she needs a portfolio that needs to last for 40 years, and will provide for college educations for 3 children.
What I would do:

1) Pay off the mortgage. There is zero reason to keep it around in this situation. Reduces liabilities/risk.
2) To keep it simple, invest into classic 60/40 portfolio. I think this is the right balance considering the long time horizon and the vulnerable situation. The simplest way to achieve this is to put all money into VSMGX. There are many other ways to achieve this of course, and it depends on existing investments.
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Investment Allocation for widow with 3 children

Post by Grt2bOutdoors »

arcticpineapplecorp. wrote: Mon Dec 06, 2021 1:41 pm
FreezerGuy wrote: Mon Dec 06, 2021 11:39 am I am asking for opinions on asset allocation for the money available for this situation. I know she needs a portfolio that needs to last for 40 years, and will provide for college educations for 3 children.
sorry for your loss.

sounds like there are two goals stated (there may be more, like pay off house early?)
1. college costs for kids
2. retirement/money to last 40 years

so there'd be two different allocations for those two goals. the second "might" be more aggressive if she doesn't need to start drawing it down for decades, whereas the first probably would be invested less aggressively since the money will likely be used in less than 18 years, right?

though just because she might not need the retirement monies for 40 years, she might not have the willingness to take risk, so there's really more info that would be needed, like the need, ability and willingness to take risk:

https://www.cbsnews.com/news/asset-allo ... -you-take/

https://www.cbsnews.com/news/asset-allo ... tolerance/

https://www.cbsnews.com/news/asset-allo ... -you-need/

https://www.cbsnews.com/news/asset-allo ... ing-goals/

it would be more helpful to list out all the details accoring to this:
https://www.bogleheads.org/wiki/Asking_ ... _questions
+1 I agree with this post of framing the needs of the widow. I see getting kids to age 22 (post college and launched). That's a window of 0-22 years. I then see another window of 18 years after the last child is out of college. Also, while some might say stick it in a 529 plan, I would not simply because its one pot of monies, but the primary concern to me is seeing the family getting through college. If you put it in a 529 plan or other specific college designated account, and you need the money later on for things other than college you run into some tax and penalty issues.

I also agree with not taking too much risk, nor too little. Anything from 50/50 to 60/40, maybe 70/30 if okay with aggressive portfolio (35-38 percent decline in assets). This will be subjective to what the widow's personal risk tolerance is AND is this a recent loss of spouse? Might not be in quite frame of mind to make that decision. See the wiki on "windfalls" - recommend reading it and taking time to think. RUN from anyone who tries to force a decision. Does the widow have life insurance on herself? She is now the primary caretaker and income provider to the family. She should be insured if she qualifies for it up until last child graduates college. $2 million is alot and a little, depending on how you view it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Investment Allocation for widow with 3 children

Post by dbr »

In this situation asset allocation is not the question. The question is income, spending, and saving as a plan over the lifetime of the investor and the family. A critical dividing point is whether or not there will be savings from current income or spending from the portfolio if current income is not sufficient. The first step is to estimate spending and devise a budget.

I do agree that for long term investing of a significant amount of insurance money a 60/40 to 70/30 allocation is likely to be appropriate.
Topic Author
FreezerGuy
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Joined: Mon Dec 06, 2021 11:10 am

Re: Investment Allocation for widow with 3 children

Post by FreezerGuy »

Thanks for all the input. Additional info that may help:
The family lived well below their means though the deceased had a good income. She has minimal life insurance, but has agreed to apply for additional. There are retirement assets that will pass to her that are also near 1M, and they are presently invested quite aggressively. The accounts are locked due to the death so no changes can be made in the makeup. She has short term reserves, and as this was a loss due to a accident situation that will require some time to be settled, the insurance proceeds will take at least another month to be available. Yes, she is rather risk adverse and realizes that most of the family income is no longer coming in. She does have a appointment set up with SS for benefits for her and kids
Makefile
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Joined: Fri Apr 22, 2016 11:03 pm

Re: Investment Allocation for widow with 3 children

Post by Makefile »

FreezerGuy wrote: Mon Dec 06, 2021 4:55 pm Thanks for all the input. Additional info that may help:
The family lived well below their means though the deceased had a good income. She has minimal life insurance, but has agreed to apply for additional. There are retirement assets that will pass to her that are also near 1M, and they are presently invested quite aggressively. The accounts are locked due to the death so no changes can be made in the makeup. She has short term reserves, and as this was a loss due to a accident situation that will require some time to be settled, the insurance proceeds will take at least another month to be available. Yes, she is rather risk adverse and realizes that most of the family income is no longer coming in. She does have a appointment set up with SS for benefits for her and kids
It sounds like the man was quite thoughtful in providing for the family this way. Obviously it could have been much different had this insurance/retirement account not been in place.

I believe she has a choice of either treating the retirement accounts as her own (and not have access until 59 1/2), or to take RMDs under the pre-Secure Act rules, being a spouse. With 2M in taxable, it sounds like treating as her own is certainly the better choice.

I second the recommendation of a Vanguard LifeStrategy fund.

I wonder how much she needs to draw on the 2M per year. VSMGX conveniently had a dividend yield of about 1.7% in 2020, so directing the dividends to a bank account would generate about $34,000 in two lumps twice a year. I'm not endorsing "dividend investing" just that this would be a convenient way to slowly draw from the assets. You could, of course, set up an automatic withdrawal plan in addition to or instead of this.

There is, of course, Vanguard PAS if you think having someone to talk to would lead to financial success, but of course it sounds like it would boil down to paying PAS to reimplement a LifeStrategy fund anyway.

I suppose she will have to get familiar with estimated taxes or additional withholding in any case--though as HoH+child tax credits there might be generous space for qualified dividends?

Also, I imagine she will be reflecting on whether to continue full time or perhaps work part time given childcare needs.

As Grt2bOutdoors said, I think she may have the luxury of not needing to care whether to use a 529 plan or not, at least until all of this settles down. (there's some stuff on the wiki about how to handle a windfall)

She also likely has the ability to maintain a larger-than-usual emergency fund if it helps sleep at night.
huzen
Posts: 90
Joined: Thu Apr 30, 2015 6:21 pm

Re: Investment Allocation for widow with 3 children

Post by huzen »

To start, be reassured that the social security survivor's benefits will be there for them. She has a lot happening and low ability to manage it all. The insurance money can be left alone for the short term while she adjusts.

When she's ready, she can figure out her expenses, income, and how things might look in the future. Does her current house/location make sense for her new situation? Will she continue to work?

I was early 40s with two kids when I found myself in this situation. I started out very very conservatively and increased my stock allocation as I got a better understanding of need, ability, and willingness to take risk. Currently I'm 55% stocks (vtsax in taxable) and 45% fixed ($250k in HYSA+CDs, bonds in IRA, the rest of the bonds in taxable).

She might consider being less aggressive in the retirement accounts so she can get to her desired AA without packing a taxable account full of bond fund.
mr_brightside
Posts: 897
Joined: Sat Oct 17, 2020 3:23 pm

Re: Investment Allocation for widow with 3 children

Post by mr_brightside »

You could do a lot worse than putting the bulk of it in the Vanguard Balanced Fund

I agree paying off the mortgage would offer significant peace of mind

Also set up 529s for the kiddos

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billfromct
Posts: 2057
Joined: Tue Dec 03, 2013 8:05 am

Re: Investment Allocation for widow with 3 children

Post by billfromct »

I’ve commented several times about SS survivor benefits for children.

You may want to let the mother know that SS could ask her for how the SS survivor benefits for the kids was spent.

My kids got SS survivor benefits and my understanding was that the money had to be used for their expenses or savings. SS asked me several times to document how the SS survivor benefits were spent/saved for each child. I kept each monthly payment on an excel spreadsheet so it was very easy to document the spending/investments.

Most of the kids SS survivor benefits (95%) were put into their 529 plan, investments & Roth IRA once they started their summer job at age 16.

Again meticulous records are key.

Maybe SS requirements have changed in the last 10-12 years, but she should be prepared in case that information is needed.

bill
huzen
Posts: 90
Joined: Thu Apr 30, 2015 6:21 pm

Re: Investment Allocation for widow with 3 children

Post by huzen »

The social security administration will let her know what will happen with their benefits.

Ssa.gov has a pdf called "A Guide for Representative Payees" that has the info. Bottom of page 8 states that a Representative Payee who is the parent of a minor beneficiary and lives in the same household doesn't have a reporting requirement.
carminered2019
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Re: Investment Allocation for widow with 3 children

Post by carminered2019 »

If I was in the same situation specially with 3 small kids, I would pay off the mortage before any investment. 40K salary pretax plus 4K per month from SS is still not enough for a family of 4 with a 500K mortgage.
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