Retirement Asset Allocation

[leevena]

My background has been life/health and would like some guidance on a general quesiton regarding retirment. It involves a relative who is now incapable of making decisions and needs 24 hour care. My wife and I have relocated from west coast to east coast to care for him, living in his home. Another sibling has power of attorny.

Background is a 80 year old male, widowed, health is somewhat fragile (but no immediate threat to death), has $130k for investments, a house worth about $180k (paid off), SS income of $1,100 per month, and life insurance of $32k. We do not the exact amount, but the $130k was substantially higher prior to the market crash. We do not know what types of investments were involved.

Current cash needs are about $2,000 per month, but could go down somewhat as we get a better understanding of his expenses and can trim some of them. Our guess is that the expenses could go down a few hundred per month, but no real figures yet.

Our concern is that the cash be preserved. We are looking for professional help from financial planners as what to do.

My question concerns the allocation mix that we are beginning to hear from these planners. Is there a certain type of mix we should be aiming for? One in particular proposed a mix of 25% cash, 30% fixed, and 45% equities. I was a little shocked to hear the mix contained equities at 45%.

Any thoughts or ideas would be greatly appreciated.

[J Simmons]

45% does seem high for equities given conventional investment wisdom and the relative's age. However, if you rebalance and put more of that 45% into cash and fixed, then you'd miss out on any rebound in value from the recent market crash. While always a gamble, if you moved say 30 percentage points from equity to cash and fixed (leaving just 15% in equities) and then equities do rebound, the portfolio would have suffered the downturn of '08 on that 30% but not enjoyed the potential rebound.

It is unfortunate that you did not relocate from San Diego to the east coast and take a look at the portfolio mix a year ago. But your relative's portfolio is where it is. You may want to move some away from equities but perhaps not as much as conventional investment wisdom would suggest even for someone in his 80s.

Given his age, you'd likely want to be more surgical than simply away from equities in the move. You'd likely want to keep only those equities for which a good argument can be made that they'd be on the upswing if the market as a whole does rebound.

But then what do I know--I'm not an investment adviser.

[Bird]

Personally, I like to include as much equity as income needs will allow, further constrained by potential needs for large amounts of cash. Specifically, equity income type stocks and/or funds, which should maintain or increase income, even if they fluctuate in value. You should be able to find something yielding 5% or thereabouts, which is $6500/year or $542/month while maintaining principal. Not enough...but unless you go into high-yield bonds, you won't be able to generate enough income and maintain principal, so you'll have to slowly eat away at principal.

This quickly becomes way too complicated, with too many unknowns, to generate any details, but that line of thinking might be helpful. Thinking a little more out loud, I guess I would keep enough cash to use to make up the difference between income generated and expenses for 2 or 3 years, which I think is a lot less than 25%. The 45% figure for equities is not necessarily objectionable to me, although I'd probably come in a little less than that in an effort to generate more income.

You might want to check out the yields on "Income" funds, which are usually a mix of equities and bonds, to get an idea of the income that can be generated reasonably conservatively, and go from there in mixing in more bonds for higher current yields or more equities for (potential) increases in income and growth.

[leevena]

Thanks to the both of you for your replies, I appreciate your thoughts.

JSimmons, sorry I never got a chance to stop by your office, this all happened so quick. My mother in law was diagnosed and died 4 weeks later. My wife left immediatly when diagnosed, and I stayed behind to finish up work and sell the house. You are right about checking last year, but we were assured that the advisor was doing a good job. Take care.

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