Anwers to Pre-Retirees 9 Biggest Worries

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Investment Advice for the Golden Years

Feb 19, 2016 3:15:26 PM
Author: Hanson McClain

Scott and Pat provide advice for the son of a 102-year old man. They finish the discussion with a conversation about planning for your golden years.

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Pat McClain: Let's talk to Steve in Colorado. Steve, thanks for joining us.

Steve: Hi, Scott and Pat.

Pat McClain: Hi, Steve.

Steve: I enjoy your show very much.

Scott Hanson: Thank you, sir.

Steve: My father is 102 years old.

Scott Hanson: Oh, my goodness.

Steve: And he'll be 103 in April, and actually in very good health. And he inherited some land from my mother who died about 12 years ago, some farm land in Kansas. About $400,000 of it he has sold and we'll close here in about a month. And he called me and asked for some advice. He wants to take about $100,000 out and put it in his bank account, and then he wants to know what he can do with the other $300,000 that will draw some interest.

Pat McClain: And so he’s saving this money for his Golden Years? That is pretty funny.

Steve: Actually, he is, because his golf score is about 102.

Pat McClain: Is that...?

Scott Hanson: Wow.

Pat McClain: That's actually better than mine.

Steve: He's pretty incredible anyways...

Scott Hanson: Let me ask you this. So he inherited the property...

Pat McClain: What was the value of that particular piece of land when he inherited it 12 years ago?

Steve: Yeah, that's a good question. The cost basis has actually gone down. It was worth more 12 years ago than it is today.

Scott Hanson: Oh, got it. Yeah, because if the cost basis was up, we probably would have suggested some sort of installment sale on a portion, because there's a step-up in basis upon someone's death, but...

Pat McClain: And what is your father's overall net worth, do you think, including whatever land he's got left?

Steve: You know, probably, $600,000, $700,000.

Scott Hanson: Okay, this is actually a pretty interesting situation. This is the kind of thing I would love to hear five different qualified financial advisers give their opinion on this, because there's so many different ways you can take this. But at the core, investments are based on two main, well, first of all, if you believe that you can't, you don't have a crystal ball.

If you believe you have a crystal ball, then you go out and find whatever is the hot investment that's going to make you the most amount of money in the shortest period of time with the least amount of risk, right? But if you're at the point and think, "I don't think that's possible," you want to do something passive as opposed to instead of trying to develop some piece of commercial real estate or something along those lines.

So investments really come down to two things. One is risk tolerance. How much up and down in the value of an investment can you stomach? And the second is how much time do you have before you need your principal? Those two things are at the core, and we move out from there. So, as investment advisers, just about any investment adviser would look at those two things first of all. What's the kind of risk tolerance? How much up and down can someone stomach? And second, when are the dollars needed?

Pat McClain: And so your father's timeline may be inconsequential in this because it's your timeline. If he doesn't think he's ever going to spend the money, maybe he's investing it for you or your brothers and sisters.

Scott Hanson: Yeah, so the big question really is...

Pat McClain: "Where's the money going to land?"

Steve: Yeah, I think that's one of his concerns is not only if he would need this $300,000 for an emergency, plus he wants that to go into his estate when he does die. He doesn't want it to be, have it be tied up for years where the estate can't get a hold of it. So I know that's one of his concerns.

Pat McClain: Got it. That won't be an issue as long as he has a living trust, which I assume that he has some legal documents, too.

Scott Hanson: And you say his health is great.

Steve: Well, let's say it's very good for a 102-year-old man.

Scott Hanson: Yeah. Has...?

Steve: You know, actually, you talk to him on the phone and you would never know that he's 102.

Scott Hanson: That's amazing.

Pat McClain: And Steve, has he ever invested in something that prices on a daily basis like stocks or bonds?

Steve: Yes, he has, and I think he's got burned in the stock market. He's a little leery of the stock market right now.

Pat McClain: Yeah, so...

Scott Hanson: So the question really is...

Pat McClain: That's the driver is how he's going to react.

Scott Hanson: Yeah, because as soon as you move out of, let's say, bank investments. CD's. As soon as you move out of that there is some degree of risk in whatever you invest in. Things will move up and down and about. He can take the money out and go invest in U. S. government bonds.

Pat McClain: They will go up and down in value.

Scott Hanson: They will go up and down in value. So, if it was my dad...Well, the interesting thing, he doesn't really have a need for yield.

Pat McClain: Yeah, but why would, why put him through any pain with market volatility and fluctuations? Why not just put it all in the bank?

Steve: Well, that's a good question.

Scott Hanson: If it were my dad, that's what I would say.

Pat McClain: Yeah.

Steve: Yeah, you know, and that's probably what I would want...

Scott Hanson: I'd say, "Let's split it between a couple banks."

Pat McClain: If I was so lucky to have a father that had that kind of money, I'm joking, I would put it in the bank, because what's the outcome? The worst thing you can do is say, "Hey, dad, put it in this great investment," and then a month from now if it loses 5% of it's value and he doesn't stay with it, what for? And why put him through any sort of pain whatsoever? He's probably not going to spend it in his lifetime. I'd bring him down to the local bank, someone he's banked with for years. I wouldn't let him talk to the financial adviser that sits in the corner.

Scott Hanson: No, they'll sell him some sort of commission product.

Pat McClain: They'll try to sell him some sort of commission, they'll try to sell him a fixed index annuity or some other garbage.

Scott Hanson: I can't imagine. I don't know if you can buy an annuity at 102 years old.

Pat McClain: Oh, I'm sure you can.

Scott Hanson: You think there's someone that would manufacture it?

Pat McClain: Yes. And I would just put it in a bank CD and I'd talk to the branch manager, and whatever they said they were going to give you as interest, I'd ask for a higher number.

Scott Hanson: And if your dad had said something like, "Look, I definitely want to do something beyond bank CDs," if he says, "Steve, I know I'm 102, but I'd love to try something different," it would really be something, a well-balanced diversified portfolio where you might have 30% exposed to the stock market. The rest in some conservative funds, mostly no-load mutual funds. But he'd be paying some sort of management fee to have someone manage that for you. And it would fluctuate in value. Is there a good chance that five years down the road you would have more money in that type of strategy than in the bank? Absolutely. But...

Steve: Yeah, I think that's good advice.

Pat McClain: Yeah, I wouldn't, I would, I just would, Steve, I wouldn't mess with it. I wouldn't mess with it.

Steve: I understand, and I agree.

Scott Hanson: Yeah, I would do the same thing if it was my dad, Steve.

Pat McClain: 102.

Scott Hanson: That's awesome.

Pat McClain: That is amazing.

Scott Hanson: Actually, enjoy.

Steve: All right.

Pat McClain: All right, thanks, Steve. I'm glad you called.

Scott Hanson: Appreciate the call.