Formulating Financial Plan for Parents

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
I-doc
Posts: 9
Joined: Fri Feb 12, 2021 10:07 pm

Formulating Financial Plan for Parents

Post by I-doc »

Hi all, thanks in advance for your input. My parents are about 1-1.5 years out from retirement. They have not put a lot of specific thought or proactive planning into retirement prior to this. They currently have a Raymond James advisor who is nice but given their fee structure does not seem to make sense and they are motivated to start saving that expense and doing things more themselves. I told them that I do NOT want to manage their accounts but would help them develop simple and usable plan for them to manage themselves. I also figured it might be reasonable to trial something like planvision to review and make sure what is developed is simple and reasonable. I am on the front end of retirement savings so familiarized myself with the decumulation side of things.

For context, my dad does not have a great history with respect to risk tolerance (pulled money out of the market in the 2000s crash and has maintained money mostly in a very bond/cd heavy allocation since then (because he was not motivated to change this once he made the move and was psychologically more ok with risk in the real estate market). With his increasing education on retirement investments, I think his ability to not pull money out in a crash is decreased, especially if he has a "cash bucket" in his mind to use in market downturns (my mom is more risk tolerant).

In the next year they will be selling a property, paying off a remaining mortgage, and cash flowing a remodel on their retirement house. After said changes, expected total retirement portfolio will be about 1.1 million, which they hope to provide about 40K (pretax) of yearly income (plus they will bring in about 50K of social security and 25K via a rental property). Assets will be retirement home, paid off cars, and a paid off investment property with no debt.

Below figures I tried to put into the established format and the proposed funds/allocation. They seem most comfortable with the idea of a target retirement fund. They are leaning towards moving all of their accounts to fidelity. It seems like the simplest thing for them would be to put all of there different accounts into target retirement funds (like a Fidelity Freedom Institutional Index). However, from what I understand it is not the most tax efficient, to have a target retirement fund in a taxable account (which will be a sizable portion of their portfolios). So two easy options we had thought of was 1) Put everything into a target retirement fund (maybe like a 2020 - would have to look at actual assett allocations and decide) and take the tax hit (not sure how much this would practically be) or 2) put the larger taxable account into a total world index fund and put the rest in some sort of total bond market fund (theoretically more tax efficient?). Or would people suggest something else that is also fairly simple.

Practically, each month they would plan to take RMD amount/12 from the SEP and IRA and the remaining amount needed from taxable account. In severe downturns, they would take money from the cash equivalents buckets. Hopefully this all sounds somewhat reasonable, but completely open to suggestions and input. If I need add anymore data, let me know. Thanks in advance for your help!


Emergency funds: 2-3 months of expenses

Debt: Will be none

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 7% State

State of Residence: South Carolina

Age: Dad-72, Mom-65

Desired Asset allocation: ~35-40% stocks / ~60-65% bonds or cash equivalents
Desired International allocation: 20-30%? of stocks

Please provide an approximate size of your total portfolio ~ 1.1 million

Show us your current retirement assets:
His Roth: 10K
Her Roth: 10K
His SEP: 402K
Her IRA: 65K
His HSA: 22K
Her HSA: 21K
Cash to be put into taxable account and cash equivalents: ~600K

Proposed retirement portfolio: (roths, sep, ira, hsas, taxable at fidelity) Option 1
His Roth: 10K Fidelity Freedom Index Institutional 2020 Fund
Her Roth: 10K Fidelity Freedom Index Institutional 2020 Fund
His SEP: 402 Fidelity Freedom Index Institutional 2020 Fund
Her IRA: 65K Fidelity Freedom Index Institutional 2020 Fund
His HSA: 22K Fidelity Freedom Index Institutional 2020 Fund
Her HSA: 21K Fidelity Freedom Index Institutional 2020 Fund
Joint Taxable Account: 450K Fidelity Freedom Index Institutional 2020 Fund
Cash: ~150K between Ibonds and Money Market or maybe some CD ladder

Proposed retirement portfolio: (roths, sep, ira, hsas, taxable at fidelity) Option 2
His Roth: 10K Fidelity US Bond Index Fund (FXNAX)
Her Roth: 10K Fidelity US Bond Index Fund (FXNAX)
His SEP: 402 Fidelity US Bond Index Fund (FXNAX)
Her IRA: 65K Fidelity US Bond Index Fund (FXNAX)
His HSA: 22K Fidelity US Bond Index Fund (FXNAX)
Her HSA: 21K Fidelity US Bond Index Fund (FXNAX)
Joint Taxable Account: 450K Fidelity Total Market Index Fund (FSKAX)
Cash: ~150K between Ibonds and Money Market or maybe some CD ladder
User avatar
Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: Formulating Financial Plan for Parents

Post by Duckie »

I-doc wrote: Mon May 23, 2022 1:25 pm Age: Dad-72, Mom-65

Desired Asset allocation: ~35-40% stocks / ~60-65% bonds or cash equivalents
Desired International allocation: 20-30%? of stocks

Please provide an approximate size of your total portfolio ~ 1.1 million

Show us your current retirement assets:
His Roth: 10K
Her Roth: 10K
His SEP: 402K
Her IRA: 65K
His HSA: 22K
Her HSA: 21K
Cash to be put into taxable account and cash equivalents: ~600K

Proposed retirement portfolio: (roths, sep, ira, hsas, taxable at fidelity) Option 1
His Roth: 10K Fidelity Freedom Index Institutional 2020 Fund
Her Roth: 10K Fidelity Freedom Index Institutional 2020 Fund
His SEP: 402 Fidelity Freedom Index Institutional 2020 Fund
Her IRA: 65K Fidelity Freedom Index Institutional 2020 Fund
His HSA: 22K Fidelity Freedom Index Institutional 2020 Fund
Her HSA: 21K Fidelity Freedom Index Institutional 2020 Fund
Joint Taxable Account: 450K Fidelity Freedom Index Institutional 2020 Fund
Cash: ~150K between Ibonds and Money Market or maybe some CD ladder

Proposed retirement portfolio: (roths, sep, ira, hsas, taxable at fidelity) Option 2
His Roth: 10K Fidelity US Bond Index Fund (FXNAX)
Her Roth: 10K Fidelity US Bond Index Fund (FXNAX)
His SEP: 402 Fidelity US Bond Index Fund (FXNAX)
Her IRA: 65K Fidelity US Bond Index Fund (FXNAX)
His HSA: 22K Fidelity US Bond Index Fund (FXNAX)
Her HSA: 21K Fidelity US Bond Index Fund (FXNAX)
Joint Taxable Account: 450K Fidelity Total Market Index Fund (FSKAX)
Cash: ~150K between Ibonds and Money Market or maybe some CD ladder
Since you do not want to manage the portfolio Option 1 would be easier for your parents (although they wouldn't have 2020 Institutional, just 2020 Investor class with an AA of 30% US, 20% international, and 50% bonds). While your Option 2 is more tax-efficient and allows for a more personal AA it still could be tweaked. The following portfolio example has an AA of 40% stocks, 60% bonds, with 25% of stocks in international. That breaks down to 30% US stocks, 10% international stocks, and 60% bonds. They could have something like this:

Taxable cash equivalents at various custodians -- $150K -- 13%
13% I-bonds, CDs, money markets

Taxable at Fidelity -- $450K -- 40%
28% (FSKAX) Fidelity Total Market Index Fund (0.015%)
10% (FTIHX) Fidelity Total International Index Fund (0.06%)
2% (MUB) iShares National Muni Bond ETF (0.07%)

His SEP IRA at Fidelity -- $402K -- 35%
35% (FXNAX) Fidelity U.S. Bond Index Fund (0.025%)

Her TIRA at Fidelity -- $65K -- 6%
6% (FXNAX) Fidelity U.S. Bond Index Fund (0.025%)

His Roth IRA at Fidelity -- $10K -- 1%
1% (FXAIX) Fidelity 500 Index Fund (0.015%)

Her Roth IRA at Fidelity -- $10K -- 1%
1% (FXAIX) Fidelity 500 Index Fund (0.015%)

His HSA at Fidelity -- $22K -- 2%
2% (FXNAX) Fidelity U.S. Bond Index Fund (0.025%)

Her HSA at Fidelity -- $21K -- 2%
2% (FXNAX) Fidelity U.S. Bond Index Fund (0.025%)

Under the circumstances I'm inclined to recommend Option 1 with all (FPIFX) Fidelity Freedom Index 2020 Fund Investor Class (0.12%) just for ease of use.
Topic Author
I-doc
Posts: 9
Joined: Fri Feb 12, 2021 10:07 pm

Re: Formulating Financial Plan for Parents

Post by I-doc »

Thanks for the reply. I didn’t catch the difference between investor and institutional class for the freedom index funds but it seems like the ER is relatively small regardless.

Also appreciate the example of option three. Certainly seems like a nicer more tweak-able portfolio but may be too complex for my parents to manage.

I guess is there a good way to figure out how much difference tax wise would be to have a Target date fund in the taxable acct? From my little understanding in general it is better to have equities in a taxable rather than bonds because the gains in stocks are taxed as LT capital gains (as long as over a year) vs bond yields are typically taxed as ordinary income. So, if they will be in the 22% federal income tax bracket the savings would be 7% in federal tax (22-15) plus the difference in state capital gains tax (~7-4=3). So, total savings of about 10% in taxes if talking strictly equities vs bonds in a taxable? To calculate how this works for a target date fund do you just look at the underlying asset allocation of stocks to bonds to figure out how much is gained or lost based on the amount of bonds? Not sure if my explanation makes any sense but basically how do I calculate the cost of this simplified option 1? Thanks!
annu
Posts: 1091
Joined: Mon Nov 04, 2019 6:55 pm

Re: Formulating Financial Plan for Parents

Post by annu »

Will you DCA or go lumpsum :?: Through elections, market can swing, it should not matter in long run, but as you mentioned your dad has low risk tolerance, atleast teaching him about tax loss harvesting will be useful. Also for rebalancing if he gets worried, do not like Target date funds at all. Prefer Total market option much more. as probably better QDI, check the worksheet https://institutional.fidelity.com/app/ ... 842880.PDF

QDI with total market is more than 99%
While 2020 target fund" see multiple, so you can confirm which one you are going with
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Formulating Financial Plan for Parents

Post by aristotelian »

Maybe a variation of Option 1 where most is in target date fund but you also have one or two of the smaller account in TIPS to give them some inflation protection?

Did you see Vanguard's recent issue with target date funds causing large distributions in taxable accounts? That would be the biggest issue with a pure target date strategy, depending on their tax bracket.
Topic Author
I-doc
Posts: 9
Joined: Fri Feb 12, 2021 10:07 pm

Re: Formulating Financial Plan for Parents

Post by I-doc »

Thanks for the replies.

I think they plan to just lumpsum it in. I tried looking at the provided link and it looks like there are two listings under the fund number for QDI, one is 1.xx% and the other is 44.4% (fund 2232 is the example I looked at). I assume it would be the higher one. This is likely a dumb question but is the QDI the percent of the fund that would be taxed as capital gains rather than ordinary income? For example if they have the target retirement fund 2025 and they sell off 40K that year for income, 44.4% of that 40K would be taxed at capital gains rate and the remaining 55.6% would be taxed at ordinary income tax rates?

I guess another topic would be what is the general consensus for what bond funds one should have. Is a total US bond fund reasonable? Is it just because of high inflation that people are using TIPS more? Should bonds be split 50/50 between total bond fund and TIPS to help in case higher inflation continues?
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Formulating Financial Plan for Parents

Post by dbr »

I-doc wrote: Wed May 25, 2022 9:14 am I guess another topic would be what is the general consensus for what bond funds one should have. Is a total US bond fund reasonable? Is it just because of high inflation that people are using TIPS more? Should bonds be split 50/50 between total bond fund and TIPS to help in case higher inflation continues?
This is a never ending discussion that does not have a consensus. When the concept of the 3 Fund portfolio is presented the bonds used are TBM as a feasible zero point or paradigm for bonds that one would shift from if one has a specific understanding why. The idea is that TBM is a highly diversified index though it lack certain bond choices altogether, TIPS for example.

In general once one has selected an asset allocation it may not matter very much what bonds are chosen. Especially it may not matter if the asset allocation is adjusted more aggressive when using very conservative bonds and less aggressive if using more risky bonds.

In general the descriptive parameters of bonds are just the credit risk and the term risk, the first being chances of default and the second being the length of maturity or duration, which sets the price sensitivity to interest rate changes. A different parameter is inflation, to be discussed below. Again in general term risk should be matched to liability term in using the bonds. In practice the term if use is very long, but most people probably find using only long bonds to be uncomfortable. Intermediate duration is a serviceable compromise that anyone can use.

An interesting question is why, given the existence of TIPS, anyone would hold anything other than TIPS as not having inflation risk would seem to be no brainer and TIPS also have no credit risk. I have asked myself that question since TIPS were first issued and finally decided this year to change over from half TIPS and half nominal Treasuries to all TIPS in an intermediate duration index fund.

But probably the TL:DR on this is that choice of fixed income does not matter very much as long as it is not extreme. All long bonds or all cash is a little dubious.
Post Reply