Nest egg: how to get my parents' from stocks to bonds?

Against all better judgment, my parents have kept their nest egg entirely in stocks, though they are now 76 and 81 (mom and dad). We kids are making the case that they should have most of their investable assets in bonds rather than stocks (common advice is your age should be the % of your portfolio in bonds), i.e. they should be around 80% in bonds).

As it happens, about 80% of their nest egg is in IRAs, so yay, no tax penalty for reallocating to bonds, regardless of time frame. The question now is what’s the best way to do it? Flip 80% over to bonds tomorrow, or do some kind of dollar cost averaging scheme over the next six months/year/x years?

I would just move it all at once, but it is a lousy time to sell - and the ‘age in bonds’ rule is not always followed.

As explained in the following NYT opinion piece, Warren Buffet has a trust for his wife that is 90% equities.

It could be perfectly rational to be all in stocks. It isnt possible to know what is right for them based on the paucity of information you offer in the OP. I can say that any age based rule is at best a very general framework and at the least, garbage.

I would be very hesitant to recommend sweeping changes to your parent’s portfolio based on what seems to be lo be little experience and even less technical knowledge.

It is a little like posting an OP saying that your parents live in Wisconsin but you have decided they should really live in Florida. What other factors lead you to believe they need to make this kind of change to their portfolio?

The issue is coming up because they are preparing to move to an independent-living retirement community. This prompted a review of their finances, and my brother and I concluded that even under an unlikely horrible worst-case scenario (involving lengthy stays in assisted-living and skilled-nursing facilities), their nest egg will likely be adequate, even with the low rate of return bonds are providing these days. But the risk exposure of being 100% in equities is seldom recommended for people at age 80, and this holds true for them as well; a market crash like the two that we’ve had since Y2K would be a problem for them.

TL,DR: if they reallocate heavily to bonds, they will almost certainly have enough money. If they stay in stocks and the market crashes in the near future, they could be fucked. Primary question is how to make the move to bonds.

I’m leaning this way. It is indeed a crummy time to sell, with the market 15% off of its peak, but I worry about continued exposure for them. I think locking in those losses can just be viewed as an unfortunate consequence of waiting so long to shift into bonds. The alternative is to effectively delay the transition with a DCA approach, which smells a bit like trying to time the market, i.e. hoping that it goes up over the next year or so and trims the losses they would lock in if they reallocated it all tomorrow.

Personally, I’d be wary of moving into bonds just now, certainly if done all at once. Market commentators have been calling a bond market bubble for years - sometime soon they will be proved correct. With most bonds trading above par, you are facing a certain capital loss if held to redemption, and a possible capital loss even if not.

This all assumes you are going to build a bond portfolio by buying individual bonds on the open market.

If I wanted to reduce my investment risk/diversify into bonds, I’d go for a mutual fund, ideally one with flexibility to invest in sub-investment grade bonds or even to go short.

There is more to investing than just “stocks vs. bonds.” There are all kinds of equities and all kind of debt. They might benefit from the advice of a professional financial advisor who has no skin in the investments themselves.

And there are all sorts of questions to answer related to “What do they need the money for?” I assume they are taking minimum distributions, is this money they need to live off of, or are their living expenses paid for mainly by pensions and social security, and this money is not as necessary, that it is a backstop and will be inherited, etc. All that colors the decisions on what is the best instrument of investment. Talk to a fee only pro.

Rather than the percent-distribution rule, I’d recommend looking at it this way: money they need to withdraw in the next 5 years should be in bonds (or other low/no risk options, even cash). I’m not sure if that increases or decreases the amount you need to re-allocate, but it’s a different way to address their tolerance for risk/volatility.

I would start moving at least a little money over, say once a quarter or something. Even if it’s a lousy market now, you never know where it’s going, and moving small amounts will average the risk.

Are they holding individual stocks? If so, you might find some that are good candidates to sell even in a bad market. Maybe they benefit from the downturn, or they’re such losers that they’re going nowhere but down anyway.

They receive social security disbursements and a CSRS annuity, but they will be relying on their nest egg to supplement this as they pay their expenses in the independent-living retirement community. If they go 80% bonds, the absolute worst-case scenario (early transitions to assisted-living or skilled-nursing) has their money running out in just over 9 years. If they stay heavily in stocks AND the market experiences a crash, their money will run out far sooner.

So “money needed in the next five years” is roughly half their portfolio. Somewhat less than 80%. Risk tolerance is generally regarded as an emotional thing (most people simply don’t feel good about seeing their net worth swing wildly), but for them, since they will likely need to spend most or all of this over the next ~10 years, they can’t tolerate much risk without courting bankruptcy.