Help with my parent's finances

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msbbc833
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Joined: Sat May 25, 2013 8:46 pm

Help with my parent's finances

Post by msbbc833 » Wed Sep 03, 2014 10:10 pm

Writing this up for my parents who I am trying to help re-balance their portfolio.
Ages: Father 67 Mother 60
State of residence: Texas
Tax filing status: Married filing jointly
Debt: 15 year mortgage at 5% with a balance of $130K (house is worth $350K)
Emergency funds: two months of cash

Currently father is employed and earns $120K/year with intentions to retire in next 3 years. Mom does not work. Also has social security at $2500/mo. So total household income is $150K. Father could be laid off before he decides to retire, in which he would receive $60-70K severance pay. Once he retires he will have an additional pension of $3200/mo. No other debts other than the house. Kids are grown up and independent.

His 401K
Index Funds
Bond Market Index Fund $101,320
S&P Index Fund $246,695
Actively Managed Funds
U.S. Large Companies Fund $6,246
U.S. Small/Mid Companies Fund $4,990
Science and Tech Fund $41.51
Company Stock Fund $306,950

Total $666,245

Here are the 401K choices
Lifecycle Funds
Lifecycle Retirement Fund (0.32% ER)
Lifecycle 2015 Fund (0.33% ER)
Lifecycle 2020 Fund (0.35% ER)
Lifecycle 2025 Fund (0.36% ER)
Lifecycle 2030 Fund (0.37% ER)
Lifecycle 2035 Fund (0.38% ER)
Lifecycle 2040 Fund (0.38% ER)
Lifecycle 2045 Fund (0.38% ER)
Lifecycle 2050 Fund (0.39% ER)
Indexed Funds
Bond Market Index Fund (0.06% ER)
Balanced Index Fund (0.07% ER)
Standard & Poor's (S&P) 500 Index Fund (0.05% ER)
International Index Fund (0.13% ER)
Russell 2000 Index Fund (0.07% ER)
Actively Managed Funds
VIP Stable Value Fund (0.29% ER)
Global Bond Fund (0.36% ER)
Diversified Real Asset Fund (0.72% ER)
U.S. Large Companies Fund
Global Equity Fund
International Companies Fund
U.S. Small/Mid Companies Fund
Science and Technology Fund
Company Stock Fund (0.05% ER)

Her Traditional IRA at Vanguard
Vanguard Energy ETF $17,922
Vanguard Financial ETF $17,616
Vanguard Health Care ETF $19,610

Total $55,149

His Traditional IRA at Vanguard
Vanguard Energy Fund Investor Shares $5,838
Vanguard Health Care Fund Investor Shares $6,580

Total $12,418

I know my parents have a lot of money tied up in the Company stock and S&P. Lucky for them the S&P has done very well and their company stock has done even better over the past 5 years (S&P up 96% Company stock up over 140%). They have never rebalanced their 401K but given their age I was thinking of converting everything to Lifecycle 2015 or 2020 which have 0.33% and 0.35% ERs respectively. Would appreciate any input regarding this.
Last edited by msbbc833 on Thu Sep 04, 2014 6:25 pm, edited 1 time in total.

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The529guy
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Re: Help with my parent's finances

Post by The529guy » Thu Sep 04, 2014 12:00 am

Welcome to the forum!

Please add the expense ratios of those funds to your post - you will get more replies from folks here.

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BL
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Re: Help with my parent's finances

Post by BL » Thu Sep 04, 2014 12:53 am

I would stick with the index funds; they are low cost (what is the cost?) and cover the total market:
Bond Market Index Fund
Standard & Poor's (S&P) 500 Index Fund (0.05% ER)
International Index Fund
Russell 2000 Index Fund
There is probably nothing wrong with the target retirement fund either, except they are probably more expensive and we can't even tell what company they are from. Would get rid of the actively managed funds.

Would recommend sticking with 3-fund portfolio for all investments: http://www.bogleheads.org/wiki/3-fund_portfolio. The above index funds are similar, as is a Target Retirement or Life Strategy fund at Vanguard. Choosing sectors is more risky than a total market fund, so would get rid of those in IRAs and replace with some version of the 3-fund portfolio. That doesn't mean that each account has to have all 3 funds; just the overall plan would have the proper percent according to their AA (asset allocation).

Are the company stocks outside of the 401K? If so, taxes need to be figured out. It is an undiversified risk to have so much in one company, especially the company you also rely on for your job. You would want to estimate the effect on taxes to sell some of it each year and buy Total International, S&P or Total Stock Market instead, and/or pay off the mortgage; there may be certain extra costs when income hits a certain level, such as AMT, & other limits on deductibility of certain items. Taxcaster or even last year's tax program might help there. On the other hand, if that stock crashes, you will wish you had just paid the taxes!

Suggest you and they read some of the recommended books such as the new e-book: Boglehead's Guide to Investing. Since they have to live with any changes, it is important to be willing to make those changes.


Edit: There may be important tax considerations regarding when and where you cash in the stocks! Please find out before doing anything with them! A key word may be NUA, Net Unrealized Appreciation, which has special rules.
Last edited by BL on Thu Sep 04, 2014 7:55 am, edited 1 time in total.

kazper
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Re: Help with my parent's finances

Post by kazper » Thu Sep 04, 2014 4:09 am

Personally, I would like to see them beef up the emergency fund quite a bit, to probably 6 to 8 months unless they think they can access some of their invested money quickly in the case of an emergency. 2 months seems extremely low, especially for late 60s.

As an aside, I am impressed they are involving you. I have very little details regarding my parents' finances, but I am almost certain it is no positive based on how they spent during my youth. Kudos to you all!

dickenjb
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Re: Help with my parent's finances

Post by dickenjb » Thu Sep 04, 2014 6:30 am

That big slug of company stock is a red flag to me. Is he hoping to use the NUA rule to save on taxes or is he just bullish on the company who may soon lay him off?

Jack FFR1846
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Re: Help with my parent's finances

Post by Jack FFR1846 » Thu Sep 04, 2014 6:53 am

Having owned 2 stocks that went to zero, I personally would be in total panic over the stock. No company gives warning when they are about to die. Sell the company stock at market open.
Bogle: Smart Beta is stupid

freddie
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Re: Help with my parent's finances

Post by freddie » Thu Sep 04, 2014 7:38 am

Refinance that mortgage. Paying 5% is way too much. They would need to think about if a 7 or 10 year arm, 15 year fixed or 30 year made the most sense for them.

Company stock wise he needs to figure out if a NUA makes sense and when he can start doing it while he is still working. Would need to talk to the plan advisor about the later.

JW-Retired
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Re: Help with my parent's finances

Post by JW-Retired » Thu Sep 04, 2014 10:51 am

msbbc833 wrote:Writing this up for my parents who I am trying to help re-balance their portfolio.
Ages: Father 67 Mother 60
State of residence: Texas
Tax filing status: Married filing jointly
Debt: 15 year mortgage at 5% with a balance of $130K (house is worth $350K)
Emergency funds: two months of cash

Currently father is employed and earns $120K/year with intentions to retire in next 3 years. Mom does not work. Also has social security at $2500/mo. So total household income is $150K. Father could be laid off before he decides to retire, in which he would receive $60-70K severance pay. Once he retires he will have an additional pension of $3200/mo. No other debts other than the house. Kids are grown up and independent.

(snip)
His 401K
Index Funds
Bond Market Index Fund $101,320
S&P Index Fund $246,695
Actively Managed Funds
U.S. Large Companies Fund $6,246
U.S. Small/Mid Companies Fund $4,990
Science and Tech Fund $41.51
Company Stock Fund $306,950

Total $666,245

I know my parents have a lot of money tied up in the Company stock and S&P. Lucky for them the S&P has done very well and their company stock has done even better over the past 5 years (S&P up 96% Company stock up over 140%). They have never rebalanced their 401K but given their age I was thinking of converting everything to Lifecycle 2015 or 2020 which have 0.33% and 0.35% ERs respectively. Would appreciate any input regarding this.
The S&P having done well was the market not luck. The company stock something different....... very high risk. I would dump at least 2/3rds of it tomorrow to get to an acceptable level of single stock risk.

If they will be living on the 38.4k/yr pension + $26.6k/yr RMD + $30k/yr SS (= $95k/yr gross), Taxcaster says they are going to be in the 15% tax bracket. So there isn't a lot of taxes there to be saved by some high risk NUA strategy. Don't risk $307k on it.

https://turbotax.intuit.com/tax-tools/c ... taxcaster/
JW
Retired at Last

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Peter Foley
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Re: Help with my parent's finances

Post by Peter Foley » Thu Sep 04, 2014 3:06 pm

I will echo the advice to refinance the mortgage. I assume they could afford the higher monthly payments so they should go with a 15 year mortgage (or with a 7 year ARM as freddie recommended).

ourbrooks
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Re: Help with my parent's finances

Post by ourbrooks » Thu Sep 04, 2014 3:44 pm

When I add up the pension and SS, I get $68,400 a year. They're now living on $150,000. Are they planning to cut their spending in half?

If not, they'd need an additional $81,600 a year. They've got about $723,000. To maintain their spending, they'd have to withdraw at 11% a year, not a sustainable rate.

Don't worry about the asset allocation; worry about how they're going to cut their expenses in half. Perhaps, they should consider selling their current home and moving to a smaller house in a less expensive area.

Novine
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Re: Help with my parent's finances

Post by Novine » Thu Sep 04, 2014 4:12 pm

OP didn't state that annual expenditures are $150,000. They may need to cut expenses but that's speculation without more details from OP.

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Zabar
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Re: Help with my parent's finances

Post by Zabar » Thu Sep 04, 2014 5:28 pm

msbbc833 wrote: Emergency funds: two months of cash

Company Stock Fund $306,950

Total $666,245

Her Traditional IRA at Vanguard
Vanguard Energy ETF $17,922
Vanguard Financial ETF $17,616
Vanguard Health Care ETF $19,610

Total $55,149

His Traditional IRA at Vanguard
Vanguard Energy Fund Investor Shares $5,838
Vanguard Health Care Fund Investor Shares $6,580

Total $12,418
This strikes me as more like gambling than investing--especially if your father is the least bit concerned that he may lose his job at age 67. If the company has done well, then his stock in them has already appreciated significantly. He should take the money (and the tax hit) and run. They clearly need a significantly larger emergency fund at their age and with their home mortgage still active. The "sector bets" in their IRAs probably have significant overlap with the large S&P 500 investment.

msbbc833
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Re: Help with my parent's finances

Post by msbbc833 » Thu Sep 04, 2014 6:11 pm

Thanks for all the replies. The company stock is in the 401K and it is not stock exactly. It is called Company stock fund, and it holds about 99% stock in the company and 1% cash. Would this fund still apply for the NUA rule? I am guessing no.
If NUA is not applicable, then I will probably be converting this into a 3 fund portfolio (40% bonds, 40% S&P, 20% international).

cherijoh
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Re: Help with my parent's finances

Post by cherijoh » Thu Sep 04, 2014 6:47 pm

msbbc833 wrote:Thanks for all the replies. The company stock is in the 401K and it is not stock exactly. It is called Company stock fund, and it holds about 99% stock in the company and 1% cash. Would this fund still apply for the NUA rule? I am guessing no.
If NUA is not applicable, then I will probably be converting this into a 3 fund portfolio (40% bonds, 40% S&P, 20% international).
That would be much more prudent. Besides the high % in a single stock, they have too muck in stock vs. bonds currently, as well as too much in sector funds. They would be in a world of hurt if there is another recession and/or your Dad's company tanks.

The other posters have a valid point about a retirement shortfall - it might be wise to suggest that your parents start estimating retirement expenses. For someone with that much salary, I'm surprised at how relatively small their nest egg is and that they still have a mortgage at their ages.

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celia
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Re: Help with my parent's finances

Post by celia » Thu Sep 04, 2014 7:03 pm

It is recommended not to have over 5% of your assets in the stock of one company. If the company has financial problems, not only could he be laid off, but the stock could drop at the same time. So find out what the rules are for liquidating all/most of it.

How many years are left on the mortgage? Do they know what their monthly living expenses are? (Include part of quarterly and yearly expenses in that calculation.) Once they know their current living expenses are, figure out what their expenses in retirement are likely to be. Then have them live on that amount starting now and put the rest into savings. That will give them confidence that they can afford to retire.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

msbbc833
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Re: Help with my parent's finances

Post by msbbc833 » Thu Sep 04, 2014 7:32 pm

The mortgage has 9 years remaining, they bought the house in 2008 (second home) after their (smaller) first house was already paid off.
Regarding retirement I think they will be okay with 90K/yr. Their SS payments were just started a few months ago, so that income is over and above what they are used to and currently not being used. Also 30% of his pre-tax salary is being put into the 401K so that is another expense that will stop in retirement.

JW-Retired
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Re: Help with my parent's finances

Post by JW-Retired » Fri Sep 05, 2014 10:50 am

msbbc833 wrote: Regarding retirement I think they will be okay with 90K/yr. Their SS payments were just started a few months ago, so that income is over and above what they are used to and currently not being used. Also 30% of his pre-tax salary is being put into the 401K so that is another expense that will stop in retirement.
If the SS income is not being used then they would be far better off not to have taken it. Delayed SS would increase your father's payments 8% a year (2/3rds percent/month) until age 70, and gets the cost of living increase on top of that. If he suspends his SS payments now he would get that 2/3rds percent a month boost until he restarts them. I would strongly recommend this suspension. He could even pay back the SS money to date and get the delay credit for those few months too.

Making Dad's SS as large as possible could be especially important for your 7-year younger mother, since as a widow she gets the amount of SS that your Dad is receiving (or eligible for) at the time of his passing. Unless the pension has a 100% survivor benefit she will see a large income drop when Dad dies.
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BL
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Re: Help with my parent's finances

Post by BL » Fri Sep 05, 2014 11:52 am

Seems like I have heard there is a one-year window to change your mind on SS, maybe pay it back. It would pay to delay his SS (if higher than hers) even if you have to pay it back. He could take spousal at FRA and then his own at age 70.

placeholder
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Re: Help with my parent's finances

Post by placeholder » Fri Sep 05, 2014 2:00 pm

You should check the prospectus for the company stock fund because if it's like mine at distribution it can be converted to shares of common stock and NUA applies.

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Meg77
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Re: Help with my parent's finances

Post by Meg77 » Fri Sep 05, 2014 2:27 pm

Well the good news is that it sounds like they are doing pretty well and won't have to ride out retirement in your guest room!

1. Agree with all the others about selling the company stock. I also don't think there are tax implications to do so within a 401k, but I'm not a CPA. Either way it's still prudent - bite the tax bullet if you have to.

2. Also agree about delaying SS income if at all possible. Each year you delay gives you an 8% boost in income. Your mom could live another 30 years easily - the more social security income she can get, the better - ESPECIALLY if his pension dies with him. Look at reversing the initiation of SS. I think this is possible within a year as long as you pay it back. If they can't, well then let the funds accumulate in cash for now until they have 12 months of living expenses.

3. Outline for your parents how much money they'll have to spend each year at retirement today - and then do a separate calculation of how much they'll have after your father passes away (i.e. how much will SS and the pension drop at that time?). This is a big deal and may be a good reason for your parents to live off the pension and SS alone and reinvest the RMDs from the retirement accounts for your mom to use in her later years. If the difference is dramatic enough your mom may even opt to find part time work now, or your father to keep working longer if need be to pad their investment accounts.

4. With so little time left on the mortgage it probably doesn't make sense to refinance. Most of the interest has already been paid, and closing costs will eat up a lot of any savings you'd get by refinancing. Plus you'd have to stretch out the amortization which isn't a great idea - just pay it off asap.

5. In the 401k I'd go with the Bond Index and the S&P 500 index and the Russell 2000 index and the International Index. Or even the balanced index fund. All great options with super low fees.
"An investment in knowledge pays the best interest." - Benjamin Franklin

JW-Retired
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Re: Help with my parent's finances

Post by JW-Retired » Fri Sep 05, 2014 3:03 pm

OP,
Note, it's one option, but your Dad does not have to pay the SS money back. He can just suspend now and stop receiving any more payments until 70. He will lose the 2/3rds of a percent increase for those "few" months you said he has taken it, but he will still receive that boost for all months between when he suspends and age 70 (or whenever he decides to start up again).
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grabiner
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Re: Help with my parent's finances

Post by grabiner » Fri Sep 05, 2014 9:21 pm

Meg77 wrote:2. Also agree about delaying SS income if at all possible. Each year you delay gives you an 8% boost in income. Your mom could live another 30 years easily - the more social security income she can get, the better - ESPECIALLY if his pension dies with him.
In particular, after your father dies (which is likely to be several years before your mother given the age difference), your mother can get a widow's benefit based on the benefit that he received. If he waits until 70 to get a larger benefit, this increases his benefit while he is alive, and hers after he dies.
Wiki David Grabiner

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