How I Helped my Parents Get Smart with their Retirement
3 Simple Ways I Helped my Parents Make Smart Investment Decisions
As I approached 40, my parents and I had reversed roles — now, I was the one providing them with investment advice. Several years into their retirement I found that my parents were not using their investments effectively. Overall, they were financially secure but missing out on opportunities to increase monthly income; excluding social security, they were making about $1,000/month in passive income, primarily from pension-type investments.
At the start of 2020, they had several important decisions to make such as how to navigate a pandemic-fueled market crash, confusing offers for pension payouts, and how to invest idle cash. To increase their monthly income and the probability it would last for years to come, I took a few simple, commonsense measures that did not require the involvement of expensive and confusing financial advisors.
Take control of pensions and annuities
This may sound scary but I believe most people can get better returns managing money themselves as opposed to buying an annuity or keeping a pension. Even investing in a passive, relatively conservative ETF should earn more cash flow. In the case of my father, he received about $400/month from a pension. However, in late 2019, he received a letter from the pension administrator offering a lump sum payment of about $73K — nearly 15 years worth of payments. Considering that my dad’s health was failing, we took the lump sum, rolling it over to a self-directed IRA account. To get his desired monthly income, we invested in a high-yield ETF (symbol: YYY) generating about $525/month. While my parents took on some risk of the principle losing value, it was fine in the short to mid-term since they didn’t need the cash — it was more important that the monthly dividends were consistent. And consistent they were — throughout 2020, he earned nearly $1,500 more than he was receiving from the guaranteed pension payments.
We did the same thing with my mother’s annuity. For years, she received about $300/month from an annuity worth around $100K. In early 2020, we rolled it over into another self-directed IRA split between a mix of ETFs (YYY, FTEC, SCHR, and SPHY) to minimize risk while still achieving monthly income goals. Now, she was earning nearly $100 more each month with the opportunity for capital appreciation. Over the last year, this IRA is up 5% and meeting my mother’s monthly cash flow needs.
Minimize Fear
As I become immersed in my parent’s retirement finances, I learned something — they were incredibly fearful and uncertain about how to invest their money. Fear of losing money caused my mother to let around $125K received in an inheritance sit in low yield money market and CD accounts…for years. It was safe, didn’t lose value but it wasn’t producing any real income. I had to help her get over this fear and invest the money. First, I reframed the risk. Instead of focusing on losing money, I got her to think about the opportunity cost of not investing. Over the last several years, she had missed out on an average of 15% annual returns, equaling nearly $70K. Once she had a clear picture of the real risk, I devised a simple allocation strategy to manage risk, increase income, and provide some growth potential. We split the inheritance into 3rds — government bonds (conservative), high-yield corporate bonds (moderate risk), and a dividend growth fund (moderate risk). From January to December 2020, the portfolio returned 10% and $5K in dividends.
Stop Panic Decisions
I love my parents but sometimes they make dumb decisions. Sometimes, I’m able to stop them. For example, that time when the market immediately fell after the 2016 Presidential election was called and my mother wanted to sell her stocks. Thankfully, she texted me first and I got her to calm down. Or March 2020 when the market crashed due to the pandemic. My mother was naturally scared and wanted to sell her holdings to protect what money was left. However, the crash had already happened and selling at that point would simply lock in her losses. This time I made the argument that the share price didn’t matter. What mattered, for them, was that monthly dividends kept coming in on schedule. In the short term, swings in the share prices didn’t matter much; they could wait for the market to rebound.
However, I wasn’t able to stop my father from making a bad decision during the pandemic market crash. Unbeknownst to me, he sold several stock holdings locking in losses of 30–50%. He didn’t need the money from those stocks, he simply panicked as the market fell a thousand points every day. If he had held on to those stocks they likely would be worth more now than before the pandemic.
Five years ago, I didn’t imagine I would need to become so involved in my parent’s finances. But I’m glad I did. Now, I take comfort that they have the financial resources to make it through retirement.
