Dr. Don, My dad is 69 and retired from US West (which was recently acquired by Qwest Communications (Q) ). My mom is 65 and is a homemaker. Dad has had a couple of health scares in the past few years. I've been trying to help them get their finances in order and make sure Dad can continue enjoy retirement and still leave something for Mom's future in the event of his passing. In the event Dad passes away before Mom there will be very little. Nothing provided for from the US West retirement (Dad took no spouse provision). All she will have is a burial life insurance policy ($15,000), a paid-off home, Social Security and a portfolio of communication stocks. The stocks are the big concern. It will be my mom's main source of income. I'm trying desperately to have my parents change their portfolio over to a mutual fund or even a bond fund, but there is no budging them. They are die-hards and true blue to "the one that brought them to the dance." Here's their portfolio. I know you will see why I am so concerned. With my meager knowledge of individual stocks, as far as I can see, Dad's portfolio was the best it was ever going to be about a year ago. Since then it's had a reduction of about $30,000. Please help me with something comprehensive to persuade my parents to at least trade some of the stock for others that at least have some potential. Thank you, GF
I understand your father's corporate loyalty, but his dance partner's getting more like Sybil with each passing year. His shares in
will be split into four separate companies next year. It's the third major restructuring since the 1984 breakup that created the seven Baby Bells. Along with corporate loyalty it may be the task of computing the
tax cost on his shares that keeps him in these stocks.
As you point out, the portfolio has lost about 40% in value over the past 12 months. That's a huge hit in any portfolio but especially hard to accept in a retirement portfolio, and by itself makes a strong case for the need to diversify. Unfortunately, the horse has bolted, so locking the barn door isn't going to help your parents. After experiencing a 40% decline in the portfolio over the past year, the temptation is to wait for the stocks to recover.
There's an added temptation to hold on to the shares because, even with the recent losses in this portfolio, it's likely that your father will still owe capital gains taxes on these long-term holdings. If your father predeceases your mother, your mother should benefit from a stepped-up basis on the stock and be able to reduce or eliminate the capital gains taxes due on the portfolio.
It's worth the money to hire a tax professional to review the portfolio and to advise them on this matter. The tax professional may advise them that trying to avoid the capital gains tax is a reasonable trade-off for the portfolio's risk. Put another way, looking forward, your father could be indifferent when it comes to choosing between the prospects of losing 20% of his gains to taxes, or some calculated percentage (less than 20%) to a market decline in the value of these shares. Tracy Byrnes offers
Some Basics on Cost Basis in her reporting for
It's not just the emphasis on telecommunications stocks that's wrong for this portfolio. When investing for a financial goal, the further away the goal the more risk you can accept in investing for that goal. In your parent's case, the goal was retirement. Now that they're retired, a 100% stock portfolio has far too much risk to meet their needs for both income and growth. That's because their need for income now dominates their need for growth.
There's still room for stocks in this portfolio, but I would recommend at least half the portfolio be reallocated to a money market fund and to bonds. Ask his broker what the seven-day yields are on his money funds. It should be around 6%. If it's not, ask what alternate funds are available. Certificates of deposit would be a reasonable alternative to bonds in the portfolio.
Your parents hold some shares in physical form as certificates and some with their broker. For convenience, I suggest that they move all shares to the brokerage account. They might also consider setting up a brokerage account as a transfer-on-death, or TOD, account. TOD provisions can allow shares that are held individually to pass on to the surviving spouse or other beneficiary without being held up in probate. Only residents of states that have adopted the Uniform Transfer on Death Act can use TOD provisions. Your parent's broker should be consulted for more information about this type of account.
Nolo.com can provide some additional information on the features of a TOD account.
I'd recommend that you and your parents discuss the idea of a reverse mortgage and see how they feel about using one. It's a lot easier to have this discussion now when they don't have an immediate need for the income than having to make a rushed decision later on when they may not be able to understand the ramifications of that decision.
Bankrate.com offers a solid overview of the product's features.