Learn how Sr. Portfolio Manager provided financial guidance to his parents as they approached their 70s.
One must consider many factors when planning for elderly investors, not least of which is a thorough inquiry into financial investment goals and time horizons. People age 80 and older are in a unique position, in that their timeframe and goals for investing may be distinctly different than those of younger generations. I found this topic quite timely, as I provide financial guidance to my parents, both of whom are approaching their 70s. They recently retired and downsized, from our family home to a small beach house. I learned a few things as we planned together for this change. Here are my biggest takeaways relevant to their situation—and perhaps to that of others in this life stage.
Here are a few details and insights we discovered during our planning journey. I hope that these insights may help you or your loved one’s finances as age 80 is reached and a ninth decade begins.
The biggest decision my parents faced when downsizing to a smaller home was what to do with money from the sale of our family home. While Dad was intent on using it to pay off the new home, Mom wanted to invest money in the stock market. I wanted to help them make the best decision for their financial success.
I want to address the first two takeaways together, as I believe they’re related—liquidity and a mortgage go hand in hand if a senior is using real estate money for retirement living. Liquidity is not something I think about in my personal investing, as I’m 35 and focused only on growth. Everyone’s life circumstances are different, but the point I want to get across is that at age 80 and older, these circumstances can change more quickly than at 35. Which brings us to the second point:
When Dad told me he wanted to pay off the mortgage, I asked why. His response: “So I don’t have to worry about where I’m going to live.”
This reasoning is tough to argue with. While there are some emotional biases, as his advisor I needed to mention that a standard portfolio of 60% equities and 40% fixed income can be expected to return around 5% on an annual basis (see graph). And because my parents have financed their new home at 2.5%, it would likely cost about 2.5% per year in potential lost returns to pay it off. This figure does not include inflationary impacts or the tax benefits of holding a mortgage. While I’m a numbers person and these percentages would be enough to sway me, Dad is not me.
Let’s pull an emotional string for this scenario: What happens when you or your significant other becomes sick, and money is needed? If you’ve used a good portion of liquid assets to pay off your house, do you then sell it? Do you let the bank charge current market interest rates to lend the money you just gave them?
My suggestion is to instead pursue liquid investments. You can sell part of a 60/40 portfolio as necessary; you cannot sell part of your house. I believe liquidity is the most important aspect of investing at age 80 and older.
So you’ve decided to put money into liquid assets. But where does that leave you now? How aggressive or how conservative do you need to be? This is where your advisor and your financial plan will come into play, which brings us to our third consideration:
If you’re in your 70s or 80s, your wealth advisor will be in the best position to help assess life goals and provide an asset allocation mix that can help realize those goals. Your advisor should help you determine how much and what types of income you’ll have, how to be strategic about distributions and tax concerns, and other matters.
For my parents—and for most people, I think—two big goals are:
These two things, for Dad anyway, were at odds with one another: he did not want to take any risks in the equities market or “put hard-earned money at risk.” He’s right, but these are calculated risks.
This is where you need to trust your financial plan and take a certain amount of risk to fund your retirement and life goals. It’s true at any age. Your advisor should be able to marry your desires with an allocation that can provide a sufficient return (adjusted for the amount of risk you’re willing and capable of assuming) to help reach all of your goals and continue living with Economic Freedom™.
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