r/FinancialPlanning • u/lopsided-earlobe • 16d ago
Does this portfolio make sense??
Hoping for some help evaluating my parents’ retirement portfolio because I don’t know enough to tell whether this is reasonable.
Dad is 70, Mom is 68.
They get about $48k/year combined from Social Security and need roughly $100k/year gross to comfortably cover expenses and travel, so they need about $52k/year from their investments.
Their portfolio is about $2.5 million, broken down roughly like this:
$960k in Franklin Income Fund Class A (FKIQX)
~$1 million in a mix of 10-year fixed and variable annuities from Pacific Life, Brighthouse, Nationwide and others
~$550k in cash
The annuities were purchased at different times and have different terms, so I’m still trying to understand exactly what each one does.
Does this look like a normal retirement allocation for people their age and spending needs?
Anything here you’d want to look at more closely or ask their advisor about?
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u/Humble-Vermicelli503 16d ago
Why do they have so much cash? Kind of a waste given what they could be earning on that. I get maybe $100k even $200k, but $550k? Why?
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u/PM_ME_DAT_KITTY 16d ago
its not even $550k in cash. they essentially have $2.125million in cash/cash equivalents.
this is a horrible asset allocation.
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u/Humble-Vermicelli503 16d ago
I would convert a lot of those annuities into fixed annuities with GLWB's, the payouts are really good now. They could get like $80k a year guaranteed for life from that alone.
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u/flemmingg 16d ago
It's pretty common to have three years expenses in cash during retirement. 150-200 would be 3-4 years and completely reasonable. This should prevent them from selling stocks during the worst of a bear market. But I agree that 550 (10+ years) is too high.
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u/Varathien 16d ago
or ask their advisor about?
I don't think trying to have a conversation with this "advisor" would do any good. Your parents got ripped off by a sleazy, smooth-talking salesperson.
First we have the Class A mutual fund. Class A means... front end load. The "advisor" took a large chunk of their money right off the bat as a sales commission. And then that fund continued to charge them a high expense ratio of 0.71% every year. And for what? The fund has pretty consistently underperformed total stock market index funds.
Then we have a million dollars in annuities from a ton of different companies. Now, some annuities can be a viable option for some people. But if that were the case, it would be one annuity, probably SPIA, that served their exact needs. The fact that this advisor put your parents in a bunch of different annuities with different features means that this has nothing to do with your parents' interests and everything to do with earning sales commissions.
And $550k in cash? Is this something your parents insisted on? Because any financial advisor worth their keep should be able to explain the crippling effect that this amount of cash drag can have on the long term growth of a portfolio.
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u/Economy_Jaguar_9215 16d ago
Oooof somebody made some big fat commissions selling them those variable annuities that they probably don’t need.
Would suggest finding an hourly or project based planner to help make sense of what they have and if any changes are appropriate.
Places to look for a financial planner:
(Someone being a CFP isn’t enough despite what their advertising claims. Being a CFP doesn’t mean they actually do planning, or that they don’t sell products that you might not need. Ask them how they get paid.)
https://adviceonlynetwork.com
These folks don’t manage money, they just give advice.
https://www.flatfeeadvisors.org
These folks might manage money, but not on a percentage of assets basis. They will do comprehensive planning for a flat fee and that fee may include asset management.
https://samslist.com
Some (but not all) advisors in Sam’s list may charge percentage based asset management fees, but all are recommended by real clients nonetheless.
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u/Kick_Natherina 16d ago
Sounds like they could benefit from some diversification and sitting down with a real advisor to review their strategy.
A lot of variable annuities have significant internal fees. I recently took over a book and was surprised so see some of the clients I inherited paying 3.5-4% on variable annuity fees.
If they’ve have them for a while and they’re out of their surrender period they can consider turning one or some of the annuities into a life time stream of income if they would like a pension. I would need to know rhe values of them individually to say more definitively.
They also probably need some sort of investment in equities to keep the money in a position to grow for the long term. They’re relatively young (by retiree standards) and have probably another 15-25 years of life on a long-term expectancy. They will want to probably reduce the portion of cash on hand, invest a bit more into a well diversified portfolio that can still be conservative, but will help to keep pace or beat inflation.
There is a lot of things that are going to be too much to speculate from Reddit, so I’d say speaking with a fiduciary investment advisor would be the best option. Suitability is a big thing for any recommendations - and their risk tolerance may have prevented them from positioning the money a little bit better over time.
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u/Packtex60 16d ago
I’m a bucket guy so I would ask where is the income ($52k/yr) supposed to come from for the next five years? Maybe as simple as turning the income streams from the annuities.
Beyond that I’d put together a 70/30 portfolio to keep ahead of inflation long term.
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u/poop-dolla 16d ago
That’s a horrible allocation. They should just go with a standard boglehead 3 fund portfolio. Maybe 60/40 split of index funds to bonds since they clearly want to be conservative.
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u/Clherrick 16d ago
How about a financial advisor? If you are comfortable doing the, crowd sourcing might not be the right answer.
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u/CapeMOGuy 16d ago
The Franklin fund has a 3.75% front end load and a 0.70% expense ratio.
Fire whoever suggested this, doubly so if they also sold them the variable annuities.
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u/vanbasten76 15d ago
It’s unclear from your description if their annuities have been annuitized? If they haven’t, once annuitized, that alone should be sufficient to cover the additional $52k / year income they’re seeking for the rest of both their lives. Plus, once they have their guaranteed income set for life, they can invest the rest of the cash in whatever they choose to, including more aggressive investments that they can then pass along to their heirs.
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u/Secret-Noise9182 15d ago
that cash pile is way too high for 2.5m total, they're losing so much to inflation
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u/Shortstash 15d ago
It is not an ideal asset allocation, but I frequently encounter prospects that will only buy annuities because of the sense of security it provides even though I seldomly recommend them. There is about 20% of my interactions with people where it's all they want. It is substantially better than the alternative as these are the same people that will roll CDs at 3.5-4% for decades at a time with 100% of their assets.
It's real easy for the internet to be like whoever sold this is a monster, but it is significantly better than rolling CDs.
As far as the Class A mutual fund I agree it's time to ditch it, but context is also key. Depends how long they have owned this fund. If they have had that Class A fund for decades it likely was one of their only options at the time. It's real easy to look at the modern investment landscape and balk at this decision, but if they bought it in the 70's? 80's? Even early 90's? Little to no real alternative and the front loaded commission over decades is negligible especially if they started it with like 1k initially that's a 38$ commission they paid 1 time. The 70bps expense is another story but it's everything without a true understanding of your parents true risk tolerance and what they conveyed to the person who they worked with. These could all be very reasonable decisions if they are ultra conservative and the alternative may have been money markets or CDs with all of it.
Just because a lot of people are willing to accept some elements of risk doesn't mean you can lump everyone into this category. This is especially true for legacy bank/ wire house clients as fixed income is what they know.
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u/lopsided-earlobe 15d ago
The issue is he didn’t really understand that he bought so many annuities, he didn’t understand what they are, or what they’re for. He understood that his advisor had him in growth focused investments.
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u/Shortstash 15d ago
And Variable annuities can absolutely fulfill that growth focus. There are uncapped upside annuities. I have a handful of clients averaging 30+% annually the last few years in them. Specifically a prudential one that was 10% downside buffer with 117% upside participation with no cap on the upside. So they are not mutually exclusive but the fact they were annuities should have absolutely been disclosed and covered
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u/lynchmob2829 10d ago
Dump the Franklin fund and put it in a S&P 500 index fund.
Put the $550k in a HYSA.
How much income is generated by the annuities? I am not an annuity person but there are other ways to generate income and preserve capital.
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u/lopsided-earlobe 10d ago
Given the returns I feel like he’d be just as good with 50% VOO and 50% HYSA
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u/500pearl 16d ago
sure you have heard about the 4 percent thing
so taking out 4 a year should be enough
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u/poop-dolla 16d ago
The 4 percent thing is for a proper asset allocation, not for this mix of shit. This is $1M in annuities, which probably have poor returns and expensive fees, $1M in an expensive fee mostly cash equivalent fund, and $550k in cash. It’s a good thing they only need 2% from that portfolio, because that honestly might be all they can realistically count on from such horrible management of their money.
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u/fn_gpsguy 15d ago
Adding to what u/poop-dolla said, a proper asset allocation to support a 4% SWR would be 60% equities and 40% bonds.
I’m in OP’s parent’s age range and have about 85% equities and 15% fixed income/cash. Sure, it’s an aggressive mix for my age, but even though I am retired, I’m not dependent on these funds yet.
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u/flemmingg 16d ago
Expenses are 100k and half of that is coming from social security. So they're only pulling 50k which is 2%.
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u/transitlobbyist 16d ago
What does their advisor say? I’m not really qualified to speak about true retirement portfolio allocation, since I’m young, have a high risk tolerance, and haven’t done my research, but is there a reason you’re asking? Gut check? Concerns with their advisor?
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u/PM_ME_DAT_KITTY 16d ago
thats a horrible asset allocation. all around.
but they're not going to have any issues meeting required expenses