Please help me help my mother with her personal portfolio

[CoolHandZeke]

Please help me help my mother with her personal portfolio. Here we go…

EMERGENCY FUNDS
Yes, and if calculated as part of total assets ≈28.35% of total asset allocation.

DEBT
230K mortgage at 4.375%
No credit card debt, student loans, or car loans.

TAX FILING STATUS
Single

TAX RATE
Federal: 25%
State: n/a
State of Residence: WA

AGE
61

DESIRED ASSET ALLOCATION – Bogleheads investment philosophy, “A good guideline is to hold your age in bonds.”
60% bonds?
40% stocks?

INTERNATIONAL ALLOCATION
10% of stocks?

CURRENT PORTFOLIO = Six figures. Total of all accounts together (not each account individually), excluding emergency funds, equals 100%.

1) Taxable individual brokerage account at Vanguard:
1.98% cash for investing
2.23% AMGEN INC (AMGN)
8.98% DISNEY WALT COMPANY (DIS)
0.40% MATTEL INC (MAT)
15.12% MICROSOFT CORP (MSFT)

2) Rollover IRA at Vanguard:
0.16% cash for investing
0.41% MICROSOFT CORP (MSFT)
1.62% STARBUCKS CORP (SBUX)

3) Annuity Fund at MassMutual Financial Group:
22.78% Vanguard Target Retirement 2010 Fund (VTENX) (0.17% expense ratio)

Annuity fund available options:

Guaranteed –
• SAGIC Core Bond (ticker symbol?) (0.59% expense ratio)

Stable Value –
• Premier Money Market Fd (Babson) (MKSXX) (0.46% expense ratio)

Intermediate Term Bond –
• MassMutual Select PIMCO Total Return Fund (MSPZX) (0.42% expense ratio)
• Vanguard Inflation-Protected Securities Fund (VIPIX) (0.07% expense ratio)
• Vanguard Total Bond Market Index Fund (VBTIX) (0.07% expense ratio)

Asset Allocation/Lifestyle –
• IATSE Annuity Balanced Fund
Allocation Targets as of February 1, 2011:
o SAGIC Core Bond (Babson) 25.0 %
o Vanguard Inflation-Protected Securities 15.0%
o Vanguard Mid Cap Index Fund 5.0%
o Vanguard Small Cap Index Fund 2.0%
o Vanguard 500 Index Fund 18.0%
o Northern International Equity Index 15.0%
o Vanguard Total Bond Market Index Fund 20.0%

Asset Allocation/Lifecycle –
• Vanguard Target Retirement Income Fund (VTINX) (0.17% expense ratio)
• Vanguard Target Retirement 2010 Fund (VTENX) (0.17% expense ratio)
• Vanguard Target Retirement 2015 Fund (VTXVX) (0.17% expense ratio)
• Vanguard Target Retirement 2020 Fund (VTWNX) (0.17% expense ratio)
• Vanguard Target Retirement 2025 Fund (VTTVX) (0.18% expense ratio)
• Vanguard Target Retirement 2030 Fund (VTHRX) (0.18% expense ratio)
• Vanguard Target Retirement 2035 Fund (VTTHX) (0.19% expense ratio)
• Vanguard Target Retirement 2040 Fund (VFORX) (0.19% expense ratio)
• Vanguard Target Retirement 2045 Fund (VTIVX) (0.19% expense ratio)
• Vanguard Target Retirement 2050 Fund (VFIFX) (0.19% expense ratio)

Large Cap Value –
• MainStay ICAP Select Equity Fund (ICSLX) (0.98% expense ratio)

Large Cap Core –
• Vanguard 500 Index Fund (VIFSX) (0.05% expense ratio)

Large Cap Growth –
• William Blair Growth Fund (WBGSX) (1.16% expense ratio)

Mid Cap Core –
• Vanguard Mid-Capitalization Index Fund (VMCIX) (0.08% expense ratio)

Mid Cap Growth –
• Artisan Mid Cap Fund (ARTMX) (1.34% expense ratio)

Small Cap Value –
• Eaton Vance Small Cap Value Fund (EISGX) (1.31% expense ratio)

Small Cap Core –
• Vanguard Small Cap Index Fund (NAESX) (0.31% expense ratio)

Intl/Global Large Core –
• Northern International Equity Index Fund (NOINX) (0.62% expense ratio)
• Thornburg International Value Fund (TIVRX) (1.04% expense ratio)

4) 401(k) at Western Employees Benefit Plan:
46.33% Wells Fargo Stable Val C (0.482% expense ratio)

401(k) available options:

• Wells Fargo Stable Val C (ticker symbol?) (0.482% expense ratio)
• Metropolitan West Total Return Bond I (MWTIX) (0.42% expense ratio)
• PIMCO Total Return Instl (PTTRX) (0.46% expense ratio)
• Prudential High-Yield Z (PHYZX) (0.63% expense ratio)
• American Funds American Balanced R6 (RLBGX) (0.30% expense ratio)
• Vanguard 500 Index Signal (VIFSX) (0.05% expense ratio)
• Wells Fargo Advantage Growth Adm (SGRKX) (0.96% expense ratio)
• Vanguard Equity-Income Inv (VEIPX) (0.31% expense ratio)
• ING Mid Cap Opportunities I (NMCIX) (0.90% expense ratio)
• Victory Established Value I (VEVIX) (0.70% expense ratio)
• Vanguard Small Cap Index Signal (VSISX) (0.10% expense ratio)
• American Funds EuroPacific Gr R6 (RERGX) (0.50% expense ratio)
• Vanguard Target Retirement 2020 Inv (VTWNX) (0.17% expense ratio)
• Vanguard Target Retirement 2025 Inv (VTTVX) (0.18% expense ratio)
• Vanguard Target Retirement 2030 Inv (VTHRX) (0.18% expense ratio)
• Vanguard Target Retirement 2035 Inv (VTTHX) (0.19% expense ratio)
• Vanguard Target Retirement 2040 Inv (VFORX) (0.19% expense ratio)
• Vanguard Target Retirement 2045 Inv (VTIVX) (0.19% expense ratio)

New annual contributions:
-At least 19% of annual salary to 401k (including matching contributions), though I’m unsure of dollar amount. Approximately 11.5K-15K?
-New annual contributions to taxable? Not sure, though very little.

Questions:

1) MAIN GOAL: Simplify entire portfolio to follow a relatively low risk investment style (60% bonds and 40% stocks?) as my mother nears retirement in approximately 2020. I’ve read about percentage of bonds matching your age and about lazy portfolios (Vanguard Total Bond, Total Stock, and Total International). I need help to overhaul her entire portfolio, if necessary.

2) Biggest issues are the annuity fund (22.78%) and 401(k) (46.33%), correct? The annuity is invested in the Vanguard Target Retirement 2010 Fund as opposed to the Retirement 2020 Fund because of the percentage differences between bonds and stocks. I believe she would feel better with bonds around 60% (close to her age). Unfortunately, neither the annuity nor the 401(k) can be transferred to Vanguard as my mother is still working. Consequently, in consideration of the entire portfolio, I really need help in choosing from the available options within the annuity and 401(k), as well as transfers of current allocations and new contributions. Also, when to make account transfers of the current balances and when to allocate new contributions?

3) Are the emergency funds (cash) too great an amount? The current amount is easily greater than six months of monthly expenses, and much closer to one year’s worth of expenses. Should some of these funds be used as the minimum investment amount ($3K) to establish a new Roth IRA at Vanguard (see question 4)?

4) Roth IRA??? She currently does not have one. Bogleheads Wiki: “Investors should always establish an emergency fund first, and then fund their deductible retirement account or Roth IRA before their taxable accounts.” If she establishes a new Roth IRA, what index funds should she buy, how much, and when?

5) My mother’s taxable individual brokerage account at Vanguard is comprised of a fairly large amount of money disbursed in stock among only four companies (Amgen, Disney, Mattel, and Microsoft). Should she leave this account alone? Or sell some or all of this stock in order to purchase much more diversified Vanguard mutual funds or Vanguard ETFs?

6) What to do with the Vanguard Rollover IRA? Again, my mother has money disbursed in stock among only two companies (Microsoft and Starbucks). Leave this account alone? Sell some or all of this stock in order to purchase much more diversified Vanguard mutual funds or Vanguard ETFs? I imagine the annuity and 401(k) will eventually be transferred to this account.

I truly appreciate your honest, well thought feedback. Please try and put yourself in my mother’s shoes. I also promise to engage your responses with further conversation. As I’m sure many of you can understand, I’m very concerned for my mother and would like to provide sound advice. Further, I’ve also read a great deal on this forum including the recent thread, “Help me help my mother go from Edward Jones to Vanguard.” It was brought up in that thread, and many others, that it’s not wise to provide financial advice to friends or family. Trust me, once I get my mother’s portfolio on the right track, I will do my best to turn her to a financial advisor at Vanguard (if one is available).

Thank you,

My mother’s son

[hoppy08520]

Zeke, I'm the guy who started the "Help me help my mom move from Edward Jones to Vanguard" thread. So on behalf of all sons, allow me to commend you for helping your mother.

It looks like your mother's situation is more complicated than mine.

You didn't bring this up in your questions, but the fact that she has a $230K mortgage at age 61 stands out. At least she has a low mortgage rate. You might want to get some advice on what if anything she should do about that. I don't know if there's an argument for taking other assets (like part of her taxable account, or part of her emergency funds, or doing less 401(k) contributions assuming she's contributing enough to get the maximum employer match) and paying down the mortgage but it might be something to investigate with people who know more than I do.

If she is age 61, she might be able to do an in-service 401k transfer if the plan allows it. You might want to do more research on this. But I wouldn't worry too much about this because she has good options in her 401k. In fact, she might have better options in her 401k plan than she can get on her own because she has some institutional funds with lower ER than a regular individual can get.

I think she should definitely open a Roth IRA and put some emergency funds into it. She can do $6,000 for 2011 and $6000 for 2012 right now (she has two weeks left for a 2011 contribution). She can choose safe funds so it can still be accessible for emergency purposes, but if she never uses it, or as money accumulates, she can start transferring the money to more long-term funds with better returns. See this particular reply in a thread that I think speaks well to this tactic, although be aware that this is for a different person with a different profile than your mother: viewtopic.php?f=1&t=92472&newpost=1332372#p1334827.

3) I have $1.5k available that I was going to put in my Roth IRA. Should I hold off on the Roth and pay down my debt aggressively now that I've reached my emergency fund goal? I can easily afford $400/month, seeing as I was putting away $300/month for the emergency fund and I am paying $100/month for the loan already. The downside to this is that I'll only have my company's 401k contributions for long-term. I know there are also credit score implications in this question - feel free to add commentary about this if you would like.

Here is what I would do:

Sell your emergency fund, as others have indicated. Put the majority of it into something safe (FDIC is fine for now) but put $5k of it into a Roth IRA for 2011 (you can do this until April 15, 2012) and put another $5k of it in the Roth for 2012. Put this money in something very safe like a money market or short-term bonds. This is essentially a "zero cost" move - you will not see much in the way of gains (if any) in the Roth, but you can withdraw your contributions without penalty at any point if you need to. This accomplishes the preservation of tax-advantaged space for the future - as your ability to save grows in the future (and you get to the point where you can max our your 401k), you can incorporate the money in the Roth into your asset allocation.

I think it's hard to know what to advise her with her taxable account with those four stocks. It's laudable of your mother to support Washington companies (Microsoft and Starbucks) but I think most people here would advise her to diversify, but what about capital gains if she sells them? It's hard to advise either way without understanding those tax implications. If you want good advice, you might want to provide the share price at which she bought if you can find that out.

When you need to re-balance across a variety of funds, the wiki article Principles of Tax-Efficient Fund Placement, the general order is this:

If you have both taxable and tax-advantaged accounts, you generally want to hold bonds in a retirement account and stocks in a taxable account. The advantages for holding stocks in a taxable account include:
1. Tax-deferred accounts convert long-term capital gains into ordinary income upon distribution; long-term capital gains have, at most times, been taxed at a lower rate than ordinary income.
2. Qualified dividends are currently (until Dec. 31, 2012) [1] taxed at a lower rate.
3. Long-term capital gains are only due when realized, which offers an additional means of deferring taxes.
4. Ability to harvest losses.
5. Ability to donate appreciated shares to charity, avoiding all taxes.
6. Estate planning; there is a potential for stepped-up cost basis upon death.

So, what this is suggesting is that you look first to your taxable accounts. But what should she do with that taxable account? Back to the capital gains issue of selling that stock. If she has a mix of gains and losses, maybe she can sell in tandem to balance them out and move the proceeds into a mutual fund. But I'm not the expert on this; I'm sure other people can provide better advice.

I think once you get this sorted out, in a spreadsheet, try out a combination of different funds across the various accounts and play around with it until you get to the desired AA across stocks (US and International) and bonds.

If you're looking for a lazy 3/4 fund portfolio, then in the 401k, I'd look at this because you need to bring bonds up to 60%:

* PIMCO Total Return Instl (PTTRX) (0.46% expense ratio)

Search this forum for other threads on PTTRX. This is a very well-regarded bond fund and you can get it at institutional ER but some people are concerned that the fund manager is nearing retirement. This is a great thread on the topic although it's from August 2010 so it might be dated: viewtopic.php?f=1&t=58976. Here's another comparing PTTRX to the Wells Fargo: viewtopic.php?t=64797, although it seems to be impossible to find this Wells Fargo Stable Value anywhere.

So you might want to load up on PTTRX and then do any left-over in Vanguard 500 Index Signal (VIFSX). If you use VIFSX, then you'll need to balance it out with Vanguard Extended Market Fund (VEXMX) in a different account at a 4:1 ratio to replicate the overall Total US Stock Market fund.

In the Annuity, look to:
Vanguard Total Bond Market Index Fund (VBTIX) (0.07% expense ratio)

In the Rollover IRA, it's rather small so just pick something like Vanguard Total Bond Market Index Fund (VBTIX) to add more bonds or the Extended Market Fund to balance VFISX in the 401k.

If she wants 40% stock, then maybe you want this to be around 28% US and 12% International or whatever ratio you'd like. If you can manage to sell some of the stocks in the tax advantaged account, then put it in Vanguard Total International Stock Index Fund. If you can't, then it gets more complicated because I'm not sure where you park your 12% international. You don't have good choices in the annuity account and I'm not familiar with the ones in the 401k program. You might need to do a creative mix of the Vanguard Target Date funds in the 401k and annuity simply to get your international allocation in. But then this could underweight you in bonds.

If she puts $12K into Roths, then you'll need to put that into whatever you need to round out the overall AA, unless you want to consider that money to be part of her emergency fund.

The crux of all this is you have to figure out what she can do with her taxable accounts. If you can sell those stocks sensibly then you can invest in international funds there and then the rest falls into place with regard to your overall AA. She also needs to decide if she can "take" $12K from emergency funds and put them into the Roth IRA and "count" it toward her overall AA.

[CoolHandZeke]

Thank you very, very much, hoppy. I certainly appreciate the reply. This is an extremely quick reply on my end right now as I'm out the door to catch a ferry...

Honestly, I'm not sure if I should be replying now or if I should wait for others to respond as well. Otherwise, this thread will continue further down the list.

Hoppy, you bring up an excellent point regarding her mortgage. She purchased a dream cabin (no bank waterfront) that was designed by her late father. Unfortunately, as her father has passed and her mother is in ill health, she will be gaining inheritance that will help her pay off this mortgage. Otherwise, my sister and I are expecting to help with the mortgage as the years continue considering we will both inherit the cabin from my mother. This is quite a long story, but the mortgage shouldn't be an issue. Or is it? Do others want to chime in? Am I missing something?

Yes, I love the idea of her opening a Roth IRA. Why $6,000 and not $5,000? Is that because of her age? Also, how is she able to put $ into a Roth IRA and be able to withdraw the contributions without penalty (according to previous post)?

I'm working on the share price at which she purchased those four stocks in her taxable account. Does anyone else want to help guide me guide her as to what to do with those?

Again, please let me know if I should be more patient with these threads in order to allow more responses. I appreciate everyone's help!

[JW Nearly Retired]

Since she is over 55 she can contribute $6000 to her IRAs and $17000 to her 401k. This 401k amount doesn't include any matching contributions from her employer.

Agree with others that she should eliminate the risk of having just a few individual stocks if it doesn't generate onerous taxes. Certainly she should sell the stocks in her IRA immediately and invest in funds. In the taxable account you need to determine their basis and what cap gains taxes this might generate? It might not be much if she bought these less than 12 years ago. Even if they generate some taxes this may not be too bad at the present 15% cap gains rate. Washington has no income tax so this is all she would have to pay now. The rate is due to go up next year.
JW

[hoppy08520]

you bring up an excellent point regarding her mortgage.

It sounds like you all have given it a lot of thought. It just stood out but if she's anticipating an inheritance and you're operating almost like it's a "family mortgage" then it sounds like you know what you're doing.

Why $6,000 and not $5,000? Is that because of her age? Also, how is she able to put $ into a Roth IRA and be able to withdraw the contributions without penalty (according to previous post)?

.
Age 50 and older can contribute $6,000 annually. Under that is $5,000 annually.

As previous poster noted, she can withdraw contributions tax free but not the earnings.

See: https://personal.vanguard.com/us/whatwe ... _rl=FB7577

and

http://www.bogleheads.org/wiki/Emergenc ... gency_fund

and

http://www.bankrate.com/finance/retirem ... -fund.aspx

and

viewtopic.php?t=45554

The justification to use Roth as emergency fund:
* You're putting money in tax-advantaged space. You can only do this $5,000 (or $6,000) per year, and you can't do it for past years (except for the previous year up to the April? deadline). Just get the money in there. You won't get another chance at this.
* Invest the emergency fund money in a fund that is safe so the money will be there in case of, you know, emergencies.
* Make sure you in vest the money in an accessible fund where you won't pay withdrawal penalties if you need the money.
* If your financial situation improves, then you can start transferring some of the funds "reserved" toward emergency funds to more long-term investments where you can get a better return (but more risk).
* People advise not counting the portion of your Roth that is "reserved" toward emergency funds as part of your overall AA for your retirement portfolio. Just pretend it's not there when you're calculating your portfolio's AA.
* It can't hurt to put emergency funds in a Roth if you follow the principles above, and it can only help because you can get more money in tax-advantages space.
* If you have to withdraw the emergency funds, you've lost nothing -- it would have been in an non-tax-advantaged emergency fund outside the Roth anyway.
* If you don't have to withdraw the emergency funds, then be happy because now you have a lot of tax-free money in your Roth that otherwise would have been in a taxable account.

The only drawback I can think of with using Roth IRA as emergency fund is:
* You pay a penalty for withdrawing earnings. But, that money probably won't earn much anyway. And, what meager earnings you would have gotten in a taxable account might be partially taxed in that taxable account, so I think it's pretty minor.
* You have to be disciplined about segregating the "emergency" portion of your Roth from your "retirement" portion of the Roth so you don't start having emergency vacations that eat into the "retirement" portion of your Roth.

[parkersharon32]

Hoppy, thanks for the reply. Your reply helped me as well.

[CoolHandZeke]

Hoppy,

You've been a huge help. Thank you for taking the time.

Here is what I've accomplished so far:

1) NEW $6,000 contribution (2011) from emergency funds to new Roth IRA at Vanguard. As of now, invested solely in the Prime Money Market account. 2012 contribution will come soon...

2) Annuity Fund (22.78% of portfolio) = Transfered all assets to the Vanguard Total Bond Market Index Fund (VBTIX) (0.07% expense ratio).

3) SOLD the relatively small amounts in Rollover IRA at Vanguard, comprised of Microsoft (0.41% of total portfolio) and Starbucks (1.62% of total portfolio), which will be transferred to the money market before we decide what mutual fund to invest in.

Besides the taxable account, which I'm still looking to find out when she purchased the stock and at what price, WHEN should we convert the 401(k) (46.33% of portfolio) from Wells Fargo Stable Val C (0.482% expense ratio) to the PIMCO Total Return Instl (PTTRX) (0.46% expense ratio) and Vanguard 500 Index Signal (VIFSX)? VIFSX, for instance, is nearly at a 52 week high. Should we transfer to that account NOW? Future contributions will dollar-cost average, but what about lump sums?

After reading this full thread, anyone else have advice?

Thanks, everyone.

[hoppy08520]

WHEN[/b][/u] should we convert the 401(k) (46.33% of portfolio) from Wells Fargo Stable Val C (0.482% expense ratio) to the PIMCO Total Return Instl (PTTRX) (0.46% expense ratio) and Vanguard 500 Index Signal (VIFSX)? VIFSX, for instance, is nearly at a 52 week high. Should we transfer to that account NOW? Future contributions will dollar-cost average, but what about lump sums?

Glad she's making progress.

As for timing, you probably won't get much advice about market timing in this site. One of the Boglehead principles is that it's futile to time the market. I think most people will say it's a toss-up whether to make these changes 100% now, or maybe in thirds spread out over month.

Don't forget, the recommendation to do PTTRX/VIFSX is under the assumption that you'll be about to "round out" the "extended market" (under a 4:1 ratio VIFSX:ExtendedMarket to replicate Total Stock Market) and add international. I think that both of these would be in the taxable account or the Roth IRA (assuming she has enough emergency fund outside the Roths).

I'd recommend you get all this in a spreadsheet so you can get the correct overall allocations for US (S&P 500 and Extended Market), International and Bonds.

[hoppy08520]

I have a variation of this spreadsheet and I copied it for your purposes:

https://docs.google.com/spreadsheet/ccc ... Xh2TGZmQVE

Feel free to take this spreadsheet and save a private version for yourself.

You can change some of the numbers around to make it balance. The toughest part is finding tax-advantaged space for the bonds. You're going to have to move things around until you can get it to add up.

[CoolHandZeke]

Hoppy,

Thank you again for your responses. I've already implemented some changes for my mom's account and plan to use the spreadsheet you've provided. Very helpful.