What I Learned Investing My Mom’s IRA

When I rolled a 401(k) from a previous job over to an IRA with Vanguard some years ago, it was easy to invest it: I didn’t think twice about putting most of the money in a Vanguard target-date index fund of funds. I did set aside a bit to dabble with later. (Note that my version of “dabbling” means investing in a few actively managed funds with a Morningstar Medalist Rating of Silver or Gold and occasionally buying stock in a wide-moat company with a high Morningstar Rating.) But the bulk of the account would run on autopilot, with allocations to equities and fixed income adjusting as I approached my selected retirement year.

That decision reflects both my professional experience and psychological makeup. As a former Morningstar mutual fund analyst and personal finance journalist, I’m certain of two things: Asset allocation is usually the primary driver of portfolio performance, and low-cost index funds are hard to beat. And when it comes to something as important as saving for retirement, I’d rather outsource to a trustworthy professional, because I know I’m less likely to face decision regret. The approach also boosts my risk tolerance: I can ignore the bulk of my portfolio when the market is falling—while indulging in a bit of value shopping on the periphery.

Risk Tolerance Is Relative

When it came to my retired mom’s Vanguard IRA, however, I agonized at first. My mother inherited it when my father died in April 2022, just as the market was plunging. Vanguard paused trading in the account for two weeks as ownership transitioned, which was probably for the best: My gut reaction was panic when I saw that my dad had mostly invested in Vanguard 500 Index VFIAX and Vanguard Growth Index VIGAX, creating hefty exposure to plummeting large-growth stocks. The trading hiatus gave me time to collect my thoughts.

Dad had quite an aggressive allocation for a retiree in his 70s, but he wasn’t reckless: My parents weren’t relying on his IRA for retirement income. He and my mom both received pensions that, along with Social Security, covered their regular expenses. To be sure, there is considerable overlap between those two index funds, and that may have been unintentional—a common portfolio mistake. No matter. It turned out to be a nice call over his long holding period, whether he was prescient or just lucky.

But it was time to reallocate. For one thing, Mom is more risk-averse than my dad was. She’d worry more about losses. And my gut was telling me that my risk tolerance when investing someone else’s money—particularly my mother’s—is lower than it is for my own.

More important, my mom’s capacity for risk is lower than it was when my father first made that investment. Granted, pension income and Social Security still cover her daily needs in her independent living retirement community, which relieves some of the pressure I feel as the steward of her account. However, now that she’s in her 80s, she is more likely to be in a situation where she can’t sit out a significant downturn: It’s possible that she may need to pay for in-home care, assisted living, or a nursing home, and that she may someday rely on IRA withdrawals to make up the difference between her regular income and increased expenses.

A Target-Date Fund in Retirement?

A target-date fund might not seem an obvious choice for an investor already in retirement, but Vanguard has an option for current retirees, Vanguard Target Retirement Income VTINX. In addition to providing international diversification in both stocks and bonds, the portfolio includes a chunk in Vanguard Short-Term Inflation-Protected Securities Index VTAPX. I’d wanted to add TIPs exposure to her portfolio, and this seemed like it could be one-stop shopping.

But investing the entire IRA in this option seemed too conservative for my mom’s needs, even considering her risk tolerance and capacity. Calculating the odds that she’ll need long-term care and estimating the duration and cost of such care is a guessing game, but I could at least make educated guesses based on the statistical evidence for women her age and the current costs of the assisted living options at her continuing care community. I figured it is unlikely that she will need to draw down her entire IRA.

Meanwhile, my mom hopes to limit withdrawals from her IRA to the annual required minimum distributions: She wants to leave a legacy for her daughters and grandchildren. She’s grateful that my father grew their nest egg by investing, and she’d like it to grow bigger.

How to balance these competing needs? I wanted to invest conservatively with the possibility of long-term-care costs in mind, without forgoing opportunities for long-term growth. I decided on my own version of the Bucket investing approach that Christine Benz recommends for retirement. It seemed easiest to approach these two goals separately. To meet the first one, I put a chunk of the account in Vanguard Target Retirement Income, with some set aside in cash equivalents.

Allocation Funds Take the Edge Off

That was easy. Meeting the second goal gave me pause, though, for it meant investing with my extended family in mind. There was no easy target-date solution for this one.

An asset-allocation fund was the next best thing. Granted, it required a bit more thought than a target-date fund: I had to choose how much to put in stocks versus fixed income. I took the middle road with Vanguard LifeStrategy Moderate Growth VSMGX, which has a 60% equity stake and, unlike a traditional balanced fund, is diversified internationally. I couldn’t resist a bit of an active bet, though: I put some of this bucket in Gold-rated Vanguard Wellington VWENX.

The end portfolio:

• Conservative Bucket: Vanguard Target Retirement Income, plus a near-term cash stash
• Moderate Growth Bucket: Vanguard LifeStrategy Moderate Growth, with a dash of Vanguard Wellington

Is my simple solution a perfect one? Maybe not. (For one thing, I’ve limited our ability to actively manage annual RMDs.) But it’s a sound, diversified, low-cost, appropriately allocated portfolio. Down the road, I might wish I had been more or less conservative, depending on how events and markets unfold. But at least I won’t be kicking myself.