Q. My father is 86. He has about $1 million in investment assets. He lives in a senior's apartment complex, has no debts and lives pretty simply. After his Social Security and pensions, he probably needs about $15,000 to $20,000 per year to be drawn down from his investment accounts. He is in decently good health - both physically and mentally.
He has an investment advisor manage this money for him - and he's got a broad-based balanced portfolio of fixed income and equities. The advisor's annual fees are not outrageous, about $7,500.
My personal belief is that his portfolio is too complex for someone his age. Also, I don't think he really needs an advisor or to spend that money on fees. I think he could simplify with some kind of lazy portfolio - but perhaps weighted towards less risk.
Is there a simple answer here? —A.K., by email
A. A very simple answer is to have the portfolio 100 percent invested in stocks through a broad index fund. Why? Because the dividend income would provide the $15,000 to $20,000 a year that he needs while the cost of management would decline to nearly zero.
He could do this very easily by putting his entire portfolio into an ETF that covered the total domestic stock market. That would also save the $7,500 he now spends on having an adviser.
That’s a pretty extreme position, of course, but he has the assets to sustain it. His personal situation, not a formula, suggests such a step. It’s also good for you or any other heirs. It will probably be OK for him— but it’s not for people prone to worry.
But let me suggest a more secure path. Let him commit about three years of the money he would need to pay for the higher cost of assisted living or long-term care— about $150,000— to cash or a simple three-year ladder of certificates of deposit. This will most likely cover any future medical expenses. Even if it doesn’t, it will provide “run-room” for selling a portion of the equities. If only three years makes you both nervous, make it $200,000 for four years. Or even $250,000 for five years.
This may sound aggressive, but if you examine the actual situation, it isn’t. The longer the run-room he has, the greater the probability that he will never exhaust it.
A more conventional approach would be to create the same cash reserve and invest the remaining money in a somewhat more conservative investment such as Admiral shares of the Vanguard Balanced Index fund (ticker: VBIAX). This fund is 60 percent domestic equities, 40 percent domestic fixed income and has an expense ratio of 0.09 percent. Over the last ten years Morningstar shows that it has provided a higher return than 89 percent of all comparable risk funds.
Q. I've been reading about Couch Potato investing for about seven years now. I think I have a pretty good understanding of the Couch Potato method. I've applied these principles to our Roth IRA's and my 401(k). I'm 33 and have a one-year-old son. We've been saving a few bucks here and there in a basic savings account for college, but now I want to get serious. I've opened a 529 through Schwab and plan to invest about $2,000 annually.
Now I'm not so sure this is the best choice. I've also read up on Educational Savings Accounts or have kicked around the idea of opening a separate brokerage account so I can have complete control of the funds I invest in. What would your recommendation be for college investing? Or to put it another way, how would you save for college if you were in my shoes?? —N.B., Chandler, AZ
A. Since the early 1970s we’ve been going through one upheaval or another. It wasn’t all bad, but job stability has been terrible in the good periods as well as the bad periods. For that reason, I’ve never been able to develop much enthusiasm for 529 plans. For all but the most securely employed (and high income) people, the better path has been to build family security with a hefty cash reserve and do some relatively high risk investing in your own account. You are the prime mover now. You will be in the future, too.
In your specific case, investing $2,000 a year in a 529 isn’t going to move the college expense needle very much and might be better employed invested in broader family security. By the way, I’m not talking down to your $2,000 savings— I’m reflecting the punishing absurdity of college costs.