Q&A: How Much Risk Should My Mom Take in Retirement?

0:00Joe, did you ever advise your mom on asset allocation? I actually just did. Some people may know my dad passed away this last spring, just under a year ago. And so my mom, when she received some life insurance money and she was redeploying her assets for one person versus two, I got to walk mom through the efficient frontier again. Oh, she's learning from the best. Well, thank you. Stop, stop. Keep going, keep going. Well, today we are going to talk to a caller who is helping her mom figure out how to invest as she approaches the most critical years of making sure you're getting it right. We're going to help her through that.

0:41We're also going to talk to a return caller. This is somebody who spoke to us in 2022 with a question about whole life insurance, and she's calling with an update and a follow-up question. And for the true money nerds out there, we are going to dive deep with the numbers for a caller who says that by the time this episode airs, his wife will likely have quit her job. Oh. You ready, Joe? I'm buckle up. Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. Every choice carries a tradeoff and that applies to your money, time, focus, and energy.

1:23This show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia every other episode-ish. I answer questions from you, and I do so with my buddy, the former financial planner, Joe Salcihai. What's up, Joe? Well, it's kind of a sad day because I also found out that in the last week, Paula, the creator of the throat lozenge died. Oh. Yeah, there was no coffin at his funeral, by the way. Oh. Come on. That deserves better than a want-want. In an effort to not lose our audience, we're just going to jump right into the first question.

2:06Okay, fine. This one comes from Kimmy. Hi, Paula. My name is Kimmy. I'm a huge fangirl. Joe's fine, too. My question is mostly about my mom. We grew up dirt poor, but she turned her life around and now has about$1 million in liquid assets saved for retirement. She owns a home worth about$300 ,000 with$40 ,000 left on the mortgage. I recently did an analysis of her spending using Monarch and her retirement benefits. If she started drawing next year at age 62 between her pension,$29 ,000 a year, and her Social Security benefit,$27 ,000 a year, At her current rate of spending, she only needs to pull a paltry$8 ,000 out of her 403B every year, with a little extra in the first three years to cover health insurance before Medicare kicks in.

2:57This obviously leaves her with some R &D problems as she ages, and I'm planning to do some Roth conversions with her before she reaches 73. Her assets are currently invested, in my opinion, in an overly conservative way, given how little she needs to rely on them. She currently has about 15 % of her assets in high-yield savings, 50 % in bonds, and 35 % in equities. I spent a little time with a Monte Carlo simulator, and in every scenario, it looks better for her to move more or all of her assets into equities. Is there anything I'm missing as I push her towards more risk? I'm looking out, of course, for her comfortable and secure retirement first and foremost.

3:41I love my mom, and she deserves the absolute best in life, although she insists on living simply. Secondarily, I'm looking out for my own future since I'm 41 and have been severely disabled and unable to work since I contracted COVID two years ago. I live in a very high cost of living area, and because I'm disabled, all of the third of a million dollars I saved for my own retirement is currently accessible to me without the 10 % penalty. Nearly all of my money is in equities, and I am okay with the roller coaster. I currently draw disability benefits of$2 ,000 a month and have been spending down my savings at a rate of$3 ,000 per month, which will slow to a nominal amount if and when I am approved for SSDI, hopefully in two years.

4:28Thanks again for all that you do. I'm looking forward to your answer. Kimmy, thank you so much for that question. First, I love that you're calling with a question about how to take care of your mom. It shows the enormous generosity of spirit and care that you have for your family and for her. I agree. Her asset allocation sounds too conservative. You said she's 15 % in high yield savings, 50 % in bonds, and 35 % in equities. Now, as I think through the framework of what she's going to spend, I'm thinking in buckets. So I'm thinking about the bucket of money that she will rely on in a two to three year window.

5:08And then I'm thinking of sort of a medium term bucket and then a much longer term bucket. The very long term bucket, I agree, could go very heavily into equities. Now, what percentage precisely would be determined by running the efficient frontier, running some simulations around the efficient frontier to take a look. But when it comes to withdrawal strategies, the primary thing to guard against is sequence of returns risk. And the way that you guard against that is not by being overly conservative with the entire retirement portfolio, but rather by keeping that particular two or three year reserve invested conservatively.

5:49And then outside of that, getting more aggressive with the remainder of the portfolio. Financial advisors refer to this as a glide path, which is just a jargony technical way of saying you decrease risk for the early years of retirement and then you increase risk again. Because after you get out of those early years of retirement, you've survived sequence of returns risk. I 100 % agree with you. And I think just the question of, are you overlooking anything? Her instincts are right in terms of what the best thing to do is. But when I look at Achilles heel on this plan, whenever you are working with someone who is older and who's been conservative their entire life, I would assume that this portfolio has always kind of been this way, might not be the truth, but that's my assumption here, Paula.

6:44Well, if that's the case, and then you decide on a glide path, which is scientifically more appropriate, you're still increasing standard deviation. And so the thing that I worry about then is just mom's behavior, which means is mom going to all of a sudden see bumps in her portfolio that she didn't see before? And that's going to give her some consternation because it seems like, Kimmy, that you're pretty savvy about this. if you're running Monte Carlo simulations on this. So if you can find what the standard deviation would be on this portfolio and then explain to mom that, hey, you know what?

7:23This could do 14 % worse or 14 % better. And that's a normal day at the office for this portfolio. Just tell mom what the volatility is going to be ahead of time. That's the main thing that I worry about. Joe, do you agree with my instinct that essentially I'm conceptualizing this retirement money into three buckets, one being that very immediate term, two to three year beginning of retirement bucket, and then a medium term bucket, and then a long-term bucket. Sure. Absolutely. But most of that long-term bucket, it appears if mom's going to be frugal her entire life, I think also her instinct, which she didn't say outright 100%, but a lot of this is inheritance money.

8:05So for Kimmy, we can really look at her goals with this money as much as mom's goals. And by the way, this is where a lot of people get this wrong. During my career, when I was a financial planner, I had people call me angry. They're like, this dumb financial advisor has the money aggressive and mom's 75 years old. Mom has no business at 75 being in aggressive investments. And they're like, we want you to take a look. So then I would go take a look and I'd talk to mom and guess what? The advisor was just a bad communicator because what they were really doing, Paula, was they were basing it on when the money was going to be spent, mom wasn't going to spend any of that money.

8:43So if mom's not going to spend any of that money and the beneficiary is not going to spend it for 15 years, that essentially then is long-term money regardless of what mom's age is. Because it's not about the age, it's about when the dollar is going to be plucked. That's the big thing. But yes, absolutely. The bucket approach and keeping that first bucket just in cash is also going to help with mom's behavior. Just go, mom, you know what? This is going to bounce around a little more, but it comes out better in this in terms of when you're going to need that money. And with that short-term bucket, we've got all this money in cash.

9:18So when the market's bouncing around, you don't have to worry about it. Right. And to the example that you just gave, the person who's 75, I would argue that even if the 75-year-old is the person who plans on spending that money during their retirement. If you make the assumption that that 75-year-old is going to live to the age of 100, which is not unrealistic these days, well, they've got 25 years ahead of them. That's a heck of a long road. Yeah, good point. Longevity risk is a real thing for the CFP community. Which I'm sorry, I still, every time I hear that, all I can think is financial planning is the only industry in which living a long and healthy and happy life is considered a risk.

10:07What a bait in the a**. What a great problem to have. Oh, I live too long. My goal is to live to a triple digit age. But in financial planning, that's referred to as a risk, apparently. I don't have an age goal, though. Do you? Assuming I'm healthy, right? Assuming that I can live independently, wake up and put my pants on every day. Yeah. Assuming I'm healthy, I would love to live into the triple digits. Well, I would too, but I don't have, that's not like my goal. It's much more, I want to say holistic, but that's not the right word. It's more organic. I just want to be able to enjoy what I'm doing.

10:44As long as I'm enjoying what I'm doing, I want to keep going. So I don't have a number. Well, you know, Joe, as they say, what gets measured gets managed. Well, I am. I'm measuring my fun. That's what I'm measuring. I'm measuring my fun. The funno, the standard deviation on this funno meter. The fun meter. Kimmy, I want to address the portion of your question where you ask about yourself as well. You're 41 years old. I'm so sorry to hear about the long COVID and the disability that has come out of that. I have a good friend who also is suffering from a multi-year disability as a result of contracting COVID.

11:21and it is, I know from talking to her, a tremendously difficult thing to deal with. So I'm so sorry to hear that you are facing that. And I also applaud you for having saved a third of a million dollars so that you are rooted in a position of strength, a position of power that can help fuel you through this current challenge. Absolutely. Absolutely. So huge kudos to you, huge congratulations to you for building that source of power for yourself. There are a couple of things about the financial circumstance that you outlined that I want to note. First, you mentioned that you're running right now a$3 ,000 monthly deficit between your current cost of living and the payments that you're receiving.

12:17And you expect that this will continue for another two years, at which point you hope SSDI will kick in. That means that over the span of the next two years, you would end up spending$72 ,000 out of your savings. And it sounds as though with a third of a million dollars, your savings are, we'll say, ballpark somewhere in the neighborhood of$330 ,000,$340 ,000, somewhere in there. So to spend$72 ,000 out of that is a significant chunk in the context of my concern that that money might not be replenished. where my mind is going is, what is the bucket that you need that can get you the portfolio that you can rely on when you are in your 60s, your 70s, your 80s?

13:05Because right now you're 41. You've got a lot of compounding on your side. I want to make sure as much money as possible retains the opportunity to compound. Yes. A lot of the big wins that both she and her mom have had, I think, is because of frugality, Paula. And this is a place, I think, where just a little more frugality can go a long way in securing a future, making sure that everything's going to be great for a long period of time. But I don't know how much more she can do. I mean, she lives in a high cost of living area and total living expenses of$5 ,000 a month in the context of a high cost of living city is - Is cut to the bone.

13:46Yeah, that's already a small pool of money to live on. This is where a great tracking tool, right? She said she uses Monarch, phenomenal tracking tool. I always advocate, as you know, Paula, this weekly just 20-minute meeting to look at it. It sounds like she does that. Just staying up with the heartbeat, using technology to her advantage to continue to stay up on the heartbeat of what money's going out the door and how quickly it's going to work in her favor. Right. What worries me is what happens if SSDI doesn't kick in in two years? Which is you look at the way that program operates. It is very, very difficult to get.

14:23It can take even longer than that for the most qualified people. Yeah, that's my major concern. I don't mind running a deficit. I understand that oftentimes in a person's life, they may have to run a deficit. and speaking in broad generalities, in a person's life, there will be moments where they may have to run a deficit. They may have to tap into savings. And I don't mind that in the context of a lifespan in which there's cyclicality. Sometimes there's a surplus, sometimes there's a deficit and those times of deficit are offset by future surpluses. That's just the rhythm of life. What concerns me is running a deficit with a very real possibility that there might not be a future surplus to pay that back.

15:14And I don't know how to address that because I don't know how else she can cut back given that she's already living on$60 ,000 in a high cost city. I think the most significant financial move would be to go someplace that has a lower cost of living. But if she has relationships with doctors in her current city, if there's certain medical treatment that she's getting in her current city, then she might have a very good reason for prioritizing living in the place where she does. Well, this is what's been on my mind a lot lately because we talk about geo-arbitrage, and I know it works for some people very well, Paula.

15:55But the issue as I study more and more successful retirement planning in particular, moving to areas where you don't know people, you don't have a social network, that can decrease your longevity. We talk about the fun meter. Men over 70 have the highest rate of suicide of any age group. I think part of it has to do with the way that we model these behaviors. I deserve to move to a different area where the weather is nicer or suits me. But we underplay the fact that we don't know anybody in that spot. We don't have any friends in that spot. And I've actually seen it as I, in my 50s, I'm seeing friends approaching normal retirement age, and they are already making some of these things that I think are kind of a mistake for a lot of people, not for everybody, But for a lot of people, I have a friend named Todd who spends lots of time at this lake house that they purchased.

16:55It's a couple hours away. I'm very lucky that I've developed this great friends network. We have game nights and we'll have between nine and 15 people come to game nights. As a guy in my late 50s, I feel very lucky to have this support network. But we never see Todd anymore. We don't see Todd. And we forget to invite Todd to stuff because of the fact that we don't see Todd anymore. And yet when you talk to Todd, the reason he's got this vacation house is because, quote, I deserve it. And I worked my whole life for it. And it's isolating. And it's difficult when you isolate like that for a lot of people.

17:33So the flippant answer is, well, geo-arbitrage. But to your point also, we don't know what's going on, why she lives in this spot. But while I like the idea of geo-arbitrage, I also want to make sure that you develop the support network wherever you go. At least look into it wherever you go before you go. I agree. Staying in a place where you have family, where you have friends, and where you have really good medical care. That's the other element of it, is sometimes there's just better medical care in certain areas than there is in others. And if there are relationships that you've developed with particular providers or any particular specialists.

18:13It's worth staying in a place in order to maintain those relationships. I certainly know people who live in the location that they live in purely for the sake or largely for the sake of continuing to see the providers that they see. The value capture of location is important. I think the reason it's such a challenging question is because, Because as we always say, the key to financial planning is to grow the gap between what you earn and what you spend. And there are only two ways to grow that gap. You can earn more or you can spend less. And so when there are limitations in both directions, that's where there's a real challenge that occurs.

19:00But hopefully, Kimmy, during this, you've thought of a few things. I know that whenever I contemplate these, my subconscious mind begins working and hopefully there's a spark. Right. Kimmy, I think if there's one thing I would say, it's remember how young you are. 41 is this interesting age where you're old enough to assume that you're old, but you're too young to realize how young you are. 41 is really really flipping young and i'd say that's the biggest point that i want to emphasize there is far more ahead of you than what's behind you but kimmy tell us how that lands with you and please call us back if you have any follow-up questions anything else because we're rooting for you we're in your corner we are big kimmy fans yes we are so thank you for the question Well, speaking of return calls, our next caller is a return call.

20:05This is somebody who called us back in 2022. Wow. With a question about whole life insurance. And she is calling with an update and a follow-up question. We're going to hear from her next. The kids are back in school now, and I finally have some extra time to plan a weekend getaway for just us. We've been wanting to visit Lancaster County, Pennsylvania for a while now because I've heard so many people rave about it. We love exploring new places, finding the cutest shops, and eating at restaurants that the locals love. DiscoverLancaster.com is the best place to learn about the unique things to do and upcoming events.

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23:08Welcome back. Our next question comes from Daughter. Hey, Paula and Jo. I'm a previous caller. I you guys gave me a really beautiful name to memorialize a journalist and I for the life of me can't find what it was. I feel really bad. It might have been nor I don't remember. I was the caller whose parents took out a life insurance policy for me on me when I was like seven and paid the premiums on it until I got my first big girl job and then wrote it over to me. I had called in asking what in the world I should do with a life insurance policy if I don't have any dependents. and you guys gave me the great advice to donate it, which I didn't even know was an option.

23:52So I ended up making the beneficiary a organization that both my parents and I really like and support because it's partially my money and partially theirs that we need to fund it. So I wanted to honor them. But it came up in conversation with a friend and her husband who are going to have kids. I'm not, that my parents have done this as like a savings account essentially. And they said, oh, that's a good idea to do for your kids. And I said, I actually don't know if it is a good idea. So I guess that's my question for you guys. I mean, for me, that ship has sailed. He bought that 20 years ago.

24:23I don't know. And it is what it is. But is that for parents something to look into to like gift money to your children? I guess maybe assume that educational expenses are being saved for that this wouldn't necessarily be an inheritance. I know that my parents, I think it's called a 529 plan, the one where you save for educational expenses. I know that my college was paid for from saving in a 529, and I know that I will receive an inheritance. So this is all separate from that. Is this a good way to pass on money? I know there's a lot of debate over whether or not whole life insurance can be used as an investment vehicle.

25:02And if yes, in what circumstances, that's reasonable. So I'm interested to know y 'all's opinion. If maybe on the scale of different ways to give money to one's children, where does this fall? Thank you guys for your great advice and interested to hear your perspective. Daughter, thank you for the question. First of all, I was really curious about what name we gave you. So I looked it up and And please correct me if I'm wrong, but I believe you were the caller on episode 378, which aired on May 5th, 2022. And if that was you, then... Can't find it. Well, if that was you, then the name that we gave you was Daughter of Generous Parents.

25:49When I re-listen to that question, so it's episode 378, air date May 5th, 2022, starting right around the 51-minute mark. and I listened to the entire question and answer. I assumed that that was you. And I didn't hear any mention of a journalist there. And the name was Daughter of Generous Parents. But I do recall at some point that fall of 2022 and early 2023, that was the time in which I was giving a lot of people journalist-based names. So did we say it on a different episode or did we answer two different life insurance questions? So that's the part that we've been trying to sleuth. We actually spent a decent chunk of the morning trying to figure it out.

26:36Okay, if you were the caller on episode 378, air date May 5th, 2022, then that means that your premium was$47 a month. And your parents bought that policy for you and your two siblings. And so you wanted to know what to do with it, given that you weren't planning on having any beneficiaries. And sure enough, we told you, name a charity as the beneficiary because you've got, you know, for the cost of less than 50 bucks a month, you have a guaranteed payout to your favorite charity of choice. This is not something that most people think about. So I was glad that we were able to give her that advice.

27:16I remember when I first heard that a long time ago, early in my financial planning career, I saw an experienced advisor recommend that with a client. They're like, I really want to give money to the local humane society, but I don't know how to do it. And it was a single woman. And the advisor said, do you have a life insurance policy through work? Yes. And does anybody need your money? No. Well, then why don't you name the Humane Society and then when you retire, you can take over that policy if you'd like. Wow, I can do that? Yeah. Great. Beautiful. So if you were the caller in 378, then that was the name that we gave you.

27:53To answer the question that you asked, no, a whole life insurance policy is not a good savings vehicle for parents who want to pass some savings down to their children. there are much, much better ways to do that. Now, the exception would be if you are so incredibly high net worth that you are worried about tax consequences because the benefit that you as a parent would give to your child is going to have severe estate tax ramifications and is far outside of any type of gift tax. I mean, if we're talking advanced tax planning strategies, That would be the exception. But for the average parent who wants to give money to the average child in any either middle class or even upper middle class home, no, it's not a good method.