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My parents started help with a low risk tolerance!

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nkranyak
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My parents started help with a low risk tolerance!  Reply with quote  

Hi all,

My parents did not finish paying off their credit debt until about the age of 40 (they're the same age). They're now both 51 and have 20k in savings and 200k in a 401k plan through my dad's work. They owe about 180k on a mortgage still (monthly payments of 900). The options in the 401k are VERY limited!

WE ALL KNOW INTEREST RATES ARE LOW. This forces us into US equities. The problem with people are they're greedy! We "reach" for yields. I am scared of a stock market correction because my parents' 401k plan is 60% in equities! They require a higher yield to catch up for the lost years, but I feel as though we have been guided into equities by zero or negative REAL (after inflation) yields elsewhere. The market is clearly OVERvalued and there isn't a better yield being offered elsewhere and their money obviously has to stay in the 401k. Where do I move it!?
Post Fri Feb 20, 2015 2:28 am
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oldguy
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quote:
WE ALL KNOW INTEREST RATES ARE LOW. This forces us into US equities. The problem with people are they're greedy! We "reach" for yields. I am scared of a stock market correction because my parents' 401k plan is 60% in equities!


I'd say that your parents have a pretty good plan. If they are putting about $500/m into that 401k, it should be over a million when they are age 65. Plus they'll have the house either paid-off or close to it.

Re your aversion to risk. Keep in mind the Law of Investing - "risk and return are directly proportional". You cannot "save" your way to wealth, inflation eats a wage-earner's money faster than he can save it. Eg, that $500/m @ 0 interest would be only $84,000in 14 yrs. But if that $500/m is "invested' grows to a million. Do not underestimate the power of compound interest, it can turn $45k into a million in 30 yrs. In fact most people are surprised by compounding - learn the math, it will be very important to your far-future. Eg, the Rule of 72, when "years' X "rate" = 72 your money doubles. An 8% fund doubles every 9 years.

The US Market has a longterm average return of about 11%/yr, ie it doubles about every 6.5 yrs. IMO, people under age 55 should be nearly 100% in equities. After age 55, when you have wealth, you need to move to wealth-preservation - about 50/50 stocks/bonds, then 25/75 after retirement.

Not 'greed' at all, but a sensible wealth-building plan. Very Happy
Post Fri Feb 20, 2015 2:59 am
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