Help with 85-year-old mother's investments

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Help with 85-year-old mother's investments

Postby MktGoddess » Sun May 05, 2013 9:00 pm

I have been overseeing my parents' investments since my dad began suffering dementia in about 2001. He died in 2005 and I have continued to manage my mom's finances since then (I am her POA agent). She has never been particularly interested in knowing what is going on with her money, though I have kept her and my two siblings informed. Mom's memory is failing but physically she's in quite good health. She lives in a retirement community with assisted living continuity of care available. She has no long term care insurance. I'm seeking advice in hopes of making her mid-6-figure portfolio last for the remainder of her life.

Here is the summary; questions follow.

Emergency Funds: Have 6 months current expenses
DEBT: No debt. Credit card paid off every month.

TAX FILING STATUS: Single (widowed)
STATE OF RESIDENCE: GA
Marginal Tax rate (2012) Federal 15% State 6% (after senior retirement income exclusion, 0%)
AGE: 85

EXPENSES (monthly): $3,400
INCOME (monthly): $2,250

PORTFOLIO SIZE: Mid-6 figures

Desired Asset allocation: 20% stocks / 70% bonds / 10% cash (? appropriate)
Desired International allocation: 20% (? appropriate) of stocks

RETIREMENT ASSETS

Taxable
10% 49,200 cash (most in an insured bank MMA, balance in a credit union CD and < $1K in VMMXX)
42% 204,625 Vanguard Target Retirement Income Fund (VTINX) (ER .16%)
30% 146,713 Vanguard Wellesley (VWIAX) (ER .18%)

Individual STOCKS:

<.05% LILLY ELI & CO (LLY) $333
1% Synovus (SNV) 4970
<.05% Wells Fargo (WFC) 402

Individual BONDS:

17% of portfolio

ATLANTA GA ARPT REV GENL SER A $20,000
AGM B/E OID @96.881 5.35% AMT
CPN 5.12500% MTD 2030-01-01 DTD
2004-06-10

ATLANTA GA WTR & WSTEWATR REV $ 5,000
SER A REF FGIC B/E OID @ 96.495
5.21 CPN 5.00000% MTD 2038-11-01
DTD 1999-04-01

COBB-MRETTA GA COLISUM & EXHB $20,000
HALL ATH NPFG RV RFDG OID @98.878
5.7% CPN 5.625% MTD 2026-10-01
DTD 1993-04-01

GA MUN ELEC AUTH PWR REV RFDG $ 5,000
SER B OID @ 92.741 5.75% ETM CPN
5.25000% MTD 2025-01-01 DTD 1993-04-01

SLM CORP EDNOTES B/E MONTHLY $35,000
CPN 6.50000 % MTD 2031-09-15 DTD
2006-07-13

A previous investment advisor (whom we left in 2009, moving all assets to Vanguard) sold her (me) the long term bonds (including the SallieMae) before I really understood the implications.

Her Vanguard IRA (Traditional) is very small (< $15,000):
99.3% Vanguard Total Bond Market Admiral (VBTLX) (.10% ER)
.7% Vanguard Money Market Fund (VMMXX) (.16% ER)

QUESTIONS:

1. I've been reluctant to sell the individual bonds because the interest rate is good (a number of other similar bonds were called away over the last several years) and she needed the income. But I'm concerned about her having individual bonds in the current market. There will be costs of sale (commissions and LTCG). I'm asking your opinion on whether to keep or sell any/all of the individual bonds. If you think I should sell, how would you suggest I invest the proceeds?

2. The individual stocks are a minuscule portion of the portfolio and calculating basis will be complex. My plan is to just hold them until her death when we'll have a stepped up basis. My dad purchased the SNV over many years of DRIP investing and it took a huge hit in the financial meltdown. Any reason to sell?

3. She has owned Wellesley for many years. I like the fund and own it myself. I've kept her in it and have added to it for the extra performance bump. Is this too risky considering her age?

4. Are there any other adjustments you think I should make considering the situation?

The information I've learned from this website and the knowledgeable and less experienced investors has been very helpful. Thank you in advance for any assistance you can provide.
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Re: Help with 85-year-old mother's investments

Postby Bob's not my name » Mon May 06, 2013 4:26 am

MktGoddess wrote:Marginal Tax rate (2012) Federal 15% State 6% (after senior retirement income exclusion, 0%)
There will be costs of sale (commissions and LTCG).
Her LTCG tax rate is 0% federal and 0% state. Won't the VBS commission on those bonds be only $5 - $40?
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Re: Help with 85-year-old mother's investments

Postby MktGoddess » Mon May 06, 2013 9:39 am

Yes, thanks for your reply and for helping me clarify my thinking. Commissions would not be much of a factor. Do you think I should sell the individual bonds? I would probably put proceeds into VTINX.
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Re: Help with 85-year-old mother's investments

Postby archbish99 » Mon May 06, 2013 10:44 am

I suspect you've got a profit on those bonds, since those coupons are likely at a premium given current interest rates. (You list them as having been purchased at a discount; I assume those aren't current prices.) You might also check whether the bonds have a survivor option -- they're not an unreasonable investment for someone who needs income for life, if so. A survivor option means that at the owner's death, they'll redeem at par even before maturity. If they're at a premium, you don't want to do that, just sell them. That's a common reason for an advisor to recommend a very long-term bond for the elderly.

However, given that they're in taxable, I'd probably sell and capture the capital gain tax-free now. Fewer taxes over the long run, and with her tax rate being so low, munis aren't really a necessary area for her to invest in.
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Re: Help with 85-year-old mother's investments

Postby BigFoot48 » Mon May 06, 2013 12:25 pm

My MIL is 87 and I'm managing her Schwab account which has a few similarities to your mother's. A few random thoughts:

1. I have her at 15% stocks (Total Stock Market) and see no reason to bother with an international holding at her age. I also manage it for her age-appropriate needs, and not her heir, my wife, even though some people recommend factoring that event into the allocation percentages. I just don't feel optimizing it for a younger person is important enough in our case. I think your proposed allocation sounds fine.

2. She has one individual $26k TVA bond paying a nice interest rate and I don't intend on selling it as I like the income. I don't see that the current bond market has any impact on that decision.

3. I simplified the portfolio when I took it over, including selling some low value funds and stocks and I would recommend that whenever possible, and with due consideration to the tax impact, just to make the management job easier.

4. I don't see a problem continuing to use the two Vanguard balanced funds, as long as you meet your allocation targets.
Last edited by BigFoot48 on Tue May 07, 2013 9:51 am, edited 2 times in total.
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Re: Help with 85-year-old mother's investments

Postby MooreBonds » Mon May 06, 2013 10:16 pm

MktGoddess wrote:
4. Are there any other adjustments you think I should make considering the situation?

The information I've learned from this website and the knowledgeable and less experienced investors has been very helpful. Thank you in advance for any assistance you can provide.


I managed my grandmother's portfolio for about 6 years before she passed on 2 years ago at 88. When I took over, I came across a broker that helps find callable CDs with death puts. They aren't as common now with the yields the way they are, but callable CDs (and some more archaic CDs that have different criteria for interest payments, such as:
LIBOR < 6%
or
(10-year bond minus 2 year bond)x4

They pay higher yields, but the catch is that they're callable by the issuer after a certain time. Also, the way the rate structures are set up, if/when rates rise back up, you might wind up with lower-yielding CDs based on the equation. The beneficial aspect is that with the death put feature, when the CD owner passes on, their estate can redeem the CD at full value without penalty.

If I were you, I'd look into some of these as a possible augmentation to her portfolio to spruce up the yield.
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Re: Help with 85-year-old mother's investments

Postby Bob's not my name » Tue May 07, 2013 4:02 am

CDs with death puts (callable or non-callable) are appropriate for an estate that will not be exhausted. That's not the case here.
Mktgoddess wrote:I'm seeking advice in hopes of making her mid-6-figure portfolio last for the remainder of her life.
A half million dollars may or may not be enough to cover this healthy 85-year-old. In some areas (including every area I've lived in), assisted living costs $100,000/year, so a half million is enough for six or seven years.

MooreBonds wrote:I came across a broker that helps find callable CDs with death puts.
Also, ALL brokered CDs have death puts. They are not truffles you need a special pig to find. You can just go on Vanguard's website and buy them online.
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Re: Help with 85-year-old mother's investments

Postby sometimesinvestor » Tue May 07, 2013 8:44 am

We dump on advisors alot on this web site but whether it was luck or skill the advisor's long term bond purchases worked out pretty well. As stated by many you should investigate the nature of the bonds and redemption conditions closely.
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Re: Help with 85-year-old mother's investments

Postby MktGoddess » Tue May 07, 2013 9:28 am

Yes, archbish99, she does have a profit at present in the remaining bonds. My dad bought munis for years and it served them well. Mom had two nice corporate bonds with the survivor option which we bought while dad was still alive; both were called within the last couple years. Thanks for your response.

BigFoot48, I appreciate your perspective and thanks for sharing. I've been simplifying slowly over the years (dad had accounts at 3 investment firms + funds at Vanguard & others). Liquidation of the individual bonds would be the last big step in the process which (I think) is why I felt I needed another opinion. Reaching ultimate simplification will be very good!
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Re: Help with 85-year-old mother's investments

Postby MktGoddess » Tue May 07, 2013 9:38 am

Yes, I'll gladly acknowledge that the bonds have worked out pretty well--and I can also thank the advisor for (inadvertently) pushing me to investigate this website (there were other reasons)! :-)

The possibility of mom needing nursing home care is what scares me. She has now lived longer than did her parents or any of her siblings, and she's quite healthy.
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Re: Help with 85-year-old mother's investments

Postby MktGoddess » Tue May 07, 2013 9:45 am

I didn't know about CDs with death puts. I have heard of the strategy of buying CDs with the best yield available even if it's longer term, knowing that if forced we could cash in early and pay the penalty. Perhaps I'll look into that.
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Re: Help with 85-year-old mother's investments

Postby Bob's not my name » Tue May 07, 2013 9:50 am

MktGoddess wrote:I didn't know about CDs with death puts. I have heard of the strategy of buying CDs with the best yield available even if it's longer term, knowing that if forced we could cash in early and pay the penalty. Perhaps I'll look into that.
I recommend against it. Your mother may need the money before death.
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Re: Help with 85-year-old mother's investments

Postby BigFoot48 » Tue May 07, 2013 10:01 am

Bob's not my name wrote:I recommend against it. Your mother may need the money before death.

I agree, now is not the time to be chasing yields with such a relatively short investing period.

My MIL is in good mental and physical health, but the odds of something happening are high and she may need to pay significant amounts to buy into an assisted living center or medical bills at any time. (Although when my FIL had a heart attack and was in intensive care for two months and one month in a care facility in a coma before he died, I was astounded at how little they had to pay with Medicare + retiree supplemental insurance.)

I know a lot of people like CDs these days, but I just use Vanguard Short Term Bond fund for holding "cash" for both the MIL and ourselves, and think it would work well for a short investing horizon.
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Re: Help with 85-year-old mother's investments

Postby Bob's not my name » Tue May 07, 2013 11:23 am

BigFoot48 wrote:I was astounded at how little they had to pay with Medicare [+ retiree supplemental insurance.]
Same experience, except it's Medicare that covers everything. The supplemental statements are deceptive and lead you to believe they're covering stuff Medicare isn't. This has been discussed in greater detail in prior threads.

The real unknown cost of the elderly is assisted living or nursing care. The average stay is short (<2 years, I think), but far longer stays are not unusual. $500,000 may not cover it. If you want to leverage the CD survivor option you wait until there's a terminal illness and then you move in quickly, buying at discount on the secondary market. The other major opportunity is converting a TIRA to Roth at 0% tax (thanks to the deductibility of assisted living and nursing care). Most trustees/attorneys-in-fact are overwhelmed by the emotional and logistical challenges of a death and don't have time or energy left over for investing gimmicks.
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Re: Help with 85-year-old mother's investments

Postby BigFoot48 » Tue May 07, 2013 11:57 am

Bob's not my name wrote:The other major opportunity is converting a TIRA to Roth at 0% tax (thanks to the deductibility of assisted living and nursing care). Most trustees/attorneys-in-fact are overwhelmed by the emotional and logistical challenges of a death and don't have time or energy left over for investing gimmicks.

Ah so! That's a strategy I have never seen mentioned, but could be of significant value to heirs. For example, my MIL's assets are about evenly split between taxable and an IRA, with the taxable sufficient for a significant number of years of assisted living care. So this strategy might work in her case to provide a tax-free Roth to her daughter. I don't have a lot of strategy tips in my Roth Conversion model but will add that one.
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Re: Help with 85-year-old mother's investments

Postby Bob's not my name » Tue May 07, 2013 1:08 pm

Converting a wealthy elderly person's IRA to Roth has these benefits:
  • Tax rate on conversion should be lower than the rate heirs will pay on distributions or conversions, especially if deductible assisted living costs exceed income, yielding a large 0% bracket.
  • Paying any tax on the conversion from taxable funds reduces the size of the estate. Since many states have a $1M estate tax threshold and since, in my view, only estates larger than $1M should be thinking about the heirs' interests anyway, this benefit is typically relevant.
  • Stops depletion of the IRA by RMDs.
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Re: Help with 85-year-old mother's investments

Postby MktGoddess » Wed May 08, 2013 4:29 pm

Wish my mom had more assets in her TIRA. . .but thanks for the suggestion. I'll pass it on to my kids!
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Re: Help with 85-year-old mother's investments

Postby Bob's not my name » Wed May 08, 2013 6:57 pm

Like brokered CDs, it's a suggestion for estates that exceed the owner's needs. Not the case for your mother.
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Re: Help with 85-year-old mother's investments

Postby MktGoddess » Thu May 09, 2013 5:32 pm

Thanks to all for the feedback and suggestions.
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