Help with 66yr old mother

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Winterjp123
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Help with 66yr old mother

Post by Winterjp123 » Wed Oct 19, 2016 12:15 pm

All,

This is a continuance of my last few questions over the past months. I am now working on helping my mother organize her finances which were spread out over quite a few individual accounts to include stock plans, managed advisor accounts, etc. I have everything pretty much consolidated into one vanguard account now and would like some advice for allocation moving forward.

Total portfolio value is approx 640k - I have sold off all of her expensive mutual funds and investments she's accumulated over the years with advisors and the money is now resting in a money market fund ready to re-invest in a 2-3 fund portfolio via Vanguard, just like I have done with mine thanks to this forum. It is worth mentioning that she carries a significant amount of blue-chip stocks (Exxon, Monsanto, Disney, P&G) that have a cost basis of next to nothing, as these have been held for 20-30 years and split multiple times. Selling these would trigger a significant tax event for her and I see no reason to do that as they are stable for the most part and costing her nothing to hold. Total value of these holdings are approx 225k

The rest of the money is split 177k in a taxable account and 233k in a Traditional IRA account for a total of about 410k in investable assets. I think I know what to do but since it's not my money, I would appreciate all of the educated advice on this forum to provide a double check. My questions are as follows:

1 )Assest allocation of 50/50 sound reasonable for her at 66 yrs of age? She's in good health and active as she can be - can't see her needing the money for some time if ever, as she receives a disability payment of approx $3,500 a month to cover living expenses for life w health good secondary health insurance in addition to Medicare. I could of course go less aggressive or more for that matter, but would be curious as to what everyones thoughts are. Additionally, I obviously need to consider the fact that she is already fairly heavy on stocks with her Blue Chip Holdings at 225k as it is.

2) I was thinking of just a two fund portfolio - Total Stock and Total Bond Admiral Shares but could also simply go with one Target Date however since she is basically already retired I would have to decide which one make most sense for the AA, Thoughts?

3) Although, I feel fairly confident these decisions I'm making are safe, part of me thinks about hiring a Fiduciary or retirement/estate planer and pay them a one time fee to develop a plan. I could then follow, just so I can sleep better at night knowing I covered all my bases. I don't think this is entirely necessary but is an option.

4) I have actually been dragging my feet a bit on buying into Total Stock as the S and P is trading so high right now, I realize this is timing the market and a pointless thought process but figured everyone telling me waiting is silly would spark me to action.

5) I haven't even taken into account Required Minimum Distributions that she will have to take at 70 and how this might or might not effect my plan. Again, I'm just her son with enough knowledge on this stuff to get her out of paying all these fees as she ages, not a retirement professional.

It's noteworthy to mention that my Mother also owns two houses w no mortgage and one of them will feasibly sell for around 250k in next month or so when she lists so that will be another cash infusion to her accounts. The home she lives in currently is worth around 450k. I feel like she is in pretty good shape retirement-wise but obviously want her and her money to be protected for the foreseeable future.


Thanks in advance for everyones thoughts/help and attention to this otherwise lengthy post. I realize there are a few moving parts here so please let me know if I missed or omitted any important considerations.

Jason

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Re: Help with 66yr old mother

Post by Jack FFR1846 » Wed Oct 19, 2016 12:42 pm

All those stocks would certainly make me queezy. Have you considered selling enough to keep within her tax bracket each year, then convert to a proper, diversified mutual fund?
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BL
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Re: Help with 66yr old mother

Post by BL » Wed Oct 19, 2016 12:55 pm

2) I was thinking of just a two fund portfolio - Total Stock and Total Bond Admiral Shares but could also simply go with one Target Date however since she is basically already retired I would have to decide which one make most sense for the AA, Thoughts?
I believe there is a Balanced Fund of just total stock and bond at about at 60/40 ratio which might also suit you. Life Strategy Conservative or Wellesley, both 40/60, would bring down stock concentration a bit.
Also there is a Tax-managed Balanced Fund (50/50?) for taxable if she is above the 25% bracket (is disability taxable?).

I would consider the stocks as part of the equity portion, and consider cashing in some each year. Also be sure to send dividends to taxable fund or for spending.

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celia
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Re: Help with 66yr old mother

Post by celia » Wed Oct 19, 2016 1:23 pm

Winterjp123 wrote:1 )Assest allocation of 50/50 sound reasonable for her at 66 yrs of age? She's in good health and active as she can be - can't see her needing the money for some time if ever, as she receives a disability payment of approx $3,500 a month . . .
This sounds contradictory. If she is healthy, why is she getting such a huge disability allowance (without stating medical information)? Is she widowed and was it for her husband?

Is she taking SS yet? Your other financial actions may impact how much of her SS is taxed. Have you looked at her tax situation for the next 10 years to see if converting some of tIRA to Roth make sense over the long term (when receiving SS and RMDs)?

For tax efficiency, her bonds should be in her tIRA and equities in taxable.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Although I am also another person who would suggest waiting to invest until the markets stabilize, I would instead suggest that you cost-average by buying in "installments". Why not buy 1/12 of the new assets each month (spread out over a year or so?
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.

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CAsage
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Re: Help with 66yr old mother

Post by CAsage » Wed Oct 19, 2016 1:32 pm

Of course, if you inherit those stocks at some point... they get a step up basis and you pay no taxes.
Be sure and consider her asset allocation in total before you choose fund(s). That might lean you towards choosing a total stock, total bond, and (maybe) international stock in percentages so that when you add in the existing stock the total amount is 50/50 or 60/40. That is harder with a pre-mixed fund. Of course, when she sells the house, you could put that into bonds to balance. Any solution within the ranges discussed will be similar.
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Winterjp123
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Re: Help with 66yr old mother

Post by Winterjp123 » Sat Oct 22, 2016 11:21 am

I wanted to thank everyone for their input on my question a few days ago...I have been traveling so took me some time to respond back.

I feel a bit better equipped to move forward with a plan for her and I agree with everyone that I need to look at her total stock holdings as equities and work her asset allocation from that. I was considering just leaving her Blue Chips alone but because the amount is so significant I probably need to develop a plan to divest some of these holdings into something more diversified and conservative as she ages.

There were a few questions that came up -

Her disability comes to her because of an accident she sustained while working about 15 years ago, it unfortunately left her with some lasting mental health issues and ended up costing her an entire career. Her case was eventually ruled as permanent total disability which is now become her main source of income. Social Security and Workers Comp both send checks each month and her health care secondary is covered by her old employer.

Social Security is a part of her disability payment along with workers comp but neither is taxable in her case and her tax bracket is effectively 0%. However, if I end up selling some of her equities then that would obviously become a taxable event.

Converting her tIRA to a Roth sounds like it my be over my head to an extent. I certainly understand what this is/means but not sure I'm comfortable as to how this would effect her retirement long term. Are you able to convert only part of the tIRA, I thought it was an all or nothing event?

As for the all in one fund, that is certainly a good suggestion - I looked up the LifeStrategy funds, aren't these similar to Target Date? Is there any advantage of one over a the other? Lifestrategy is just a fixed AA vs Target Date which auto adjusts as it matures?


Her asset allocation as it stands right now in her Vanguard account, 30% individual stocks and 70% short term cash reserves.

My choice as I see it, is to buy enough Total Stock Market until her her equity is at 50% and then invest the rest into Total Bond(Or I could just go with an all in one fund suggested above but would have to go with a bond heavy one to offset the 30% equity she already has in individual stocks) - then slowly sell off the individual stocks and convert them into Total Stock(All in one) over the course of several years. Anyone have a problem with a 50/50 asset allocation for her at 66yrs old? Anybody have thoughts on 2 fund vs all in one strategy?

From a tax planning standpoint, I will buy the Total Bond out of her tIRA first and then put any additional into her brokerage account.

From a divided standpoint I should not be reinvesting her dividends, correct? Any difference in how I should treat the dividends in the taxable account vs non-taxable or just not reinvest any of them and deposit them straight into her checking account?

Thanks again everyone for the help on this!!

Jason

rixer
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Re: Help with 66yr old mother

Post by rixer » Sat Oct 22, 2016 11:38 am

As far as lifestrategy vs target date funds, lifestrategy remains the same allocation and target dates automatically reduces down the equity portion. Since I am retired, I want my AA to remain the same at 40/60 so the lifestrategy is the better fund for my situation.

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Re: Help with 66yr old mother

Post by ralph124cf » Sat Oct 22, 2016 12:17 pm

Dividends received in taxable accounts may well be taxed at 0% in your mothers tax bracket. You may also sell a certain amount of stock from the taxable account without triggering capital gains tax. This 0% tax rate on dividends and capital gains applies up to $37,000, and a 15% rate applies above that up to an income of $415,000.

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msk
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Re: Help with 66yr old mother

Post by msk » Sat Oct 22, 2016 12:37 pm

Let me get this straight. Your mother receives $3500 a month tax free. That's an assured $42k p.a. or the equivalent of holding bonds amounting to a million $ being cashed at 4% p.a., possibly even with built-in future cost of living adjustments? Why on Earth would she need any more bonds? If it were me I'd put all her money into VT or something similar, and leave those blue chips alone. They have served her well in the past decades, so why introduce a tax liability now? She can still use the dividends as play money.

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BL
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Re: Help with 66yr old mother

Post by BL » Sun Oct 23, 2016 8:15 am

My choice as I see it, is to buy enough Total Stock Market until her her equity is at 50% and then invest the rest into Total Bond(Or I could just go with an all in one fund suggested above but would have to go with a bond heavy one to offset the 30% equity she already has in individual stocks) - then slowly sell off the individual stocks and convert them into Total Stock(All in one) over the course of several years. Anyone have a problem with a 50/50 asset allocation for her at 66yrs old? Anybody have thoughts on 2 fund vs all in one strategy?
2 funds may be simpler than all-in-one with this plan.

From a tax planning standpoint, I will buy the Total Bond out of her tIRA first and then put any additional into her brokerage account.

From a divided standpoint I should not be reinvesting her dividends, correct? Any difference in how I should treat the dividends in the taxable account vs non-taxable or just not reinvest any of them and deposit them straight into her checking account?
I would not re-invest in the individual stocks. You could re-invest the rest unless she needs the additional income, then send taxable dividends to checking account. The tax won't change either way. By the way, only the qualified dividends would be treated like capital gains taxes (0% in 15% tax bracket. The rest of the ordinary dividends in taxable are treated like ordinary income.

Dottie57
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Re: Help with 66yr old mother

Post by Dottie57 » Sun Oct 23, 2016 8:35 am

msk wrote:Let me get this straight. Your mother receives $3500 a month tax free. That's an assured $42k p.a. or the equivalent of holding bonds amounting to a million $ being cashed at 4% p.a., possibly even with built-in future cost of living adjustments? Why on Earth would she need any more bonds? If it were me I'd put all her money into VT or something similar, and leave those blue chips alone. They have served her well in the past decades, so why introduce a tax liability now? She can still use the dividends as play money.
I would have bonds to reduce losses in a bad market. Why? For future long tetm care needs. Assisted living and nursing homes cost more than $42k. And you want money when you need it.

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Watty
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Re: Help with 66yr old mother

Post by Watty » Sun Oct 23, 2016 8:54 am

One thing to make sure that to do is to have a firm contingency plan in place if something happens to you. I have head of situations where an only child that was managing a parents finances died and it was a mess.

With her health issues I would be ultra conservative and put a lot of the money that is in retirement accounts into an individual TIPS bond ladder to pay for assisted living since it sounds she is more likely to need it some day. You don't want to own them in taxable accounts because of tax issues.

There is a saying "once you have one the game then there is no need to play". The disability payment is not the same investing in bonds so she still needs a LOT of bonds in her portfolio but regular bonds still have interest rate and inflation risk which is why I suggest individual TIPS.

Be sure that you know all the terms of the disability payments since part of that could be to replace lost income and that might be reduced when she hits her normal full retirement age which could be soon.

Winterjp123
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Re: Help with 66yr old mother

Post by Winterjp123 » Sun Oct 23, 2016 9:13 am

Thank you everyone for your continued input...

You raise a good point MSK although I guess I just assumed that most people who have worked their whole life would eventually receive some kind of SS benefit in addition to their individual retirement holdings which would undoubtedly contain a significant portion of bond holdings. Why would my mother's case be any different or is my logic off? I actually like your suggestion but just want to make sure I completely understand the rationale behind it. I could also be confused because I have no idea what an average SS payout would be, I'm assuming $3500 is way above the norm? (Forgive me I still have some years to go before I have to fully understand SS payouts) Part of the reason her payment is such is because the disability portion technically comes from Workers Comp and SS is the other half. She chose not to pursue a lump sum payment and instead opted for the annuity which made more sense for her long term.

Jason

dbr
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Re: Help with 66yr old mother

Post by dbr » Sun Oct 23, 2016 9:19 am

I think your plan is sound. There is no reason to take a lot of risk in stocks and there is no reason to particularly avoid risk in stocks.

I don't know what the actual maximum SS benefit is, but I think a wage earner who had maxed SS most of his career and who delays benefits to age 70 gets about $3100/mo. right now.

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Re: Help with 66yr old mother

Post by JW-Retired » Sun Oct 23, 2016 9:44 am

dbr wrote: I don't know what the actual maximum SS benefit is, but I think a wage earner who had maxed SS most of his career and who delays benefits to age 70 gets about $3100/mo. right now.
The delayed to 70 maximum is close to $3500/mo.
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dbr
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Re: Help with 66yr old mother

Post by dbr » Sun Oct 23, 2016 9:47 am

JW-Retired wrote:
dbr wrote: I don't know what the actual maximum SS benefit is, but I think a wage earner who had maxed SS most of his career and who delays benefits to age 70 gets about $3100/mo. right now.
The delayed to 70 maximum is close to $3500/mo.
JW
Oh, that would be right because my number was net after Medicare Part B was deducted.

Winterjp123
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Re: Help with 66yr old mother

Post by Winterjp123 » Sun Oct 23, 2016 9:54 am

Quick question about the TIPS that were brought up, if I can only purchase in 5yr,10yr,30yr maturity dates how do you get around the RMD that she will have to take from her retirement account in 4 years? I'm assuming there would be a penalty to cash in early if all the money is tied up which wouldn't make sense

dbr
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Re: Help with 66yr old mother

Post by dbr » Sun Oct 23, 2016 10:08 am

Winterjp123 wrote:Quick question about the TIPS that were brought up, if I can only purchase in 5yr,10yr,30yr maturity dates how do you get around the RMD that she will have to take from her retirement account in 4 years? I'm assuming there would be a penalty to cash in early if all the money is tied up which wouldn't make sense
There is no penalty to "cash in" TIPS. TIPS bonds are marketable at any time. What that does is introduce interest rate risk that the market price of the bond may have fluctuated at any given time. There will also be a spread on the selling price through a broker. The Treasury sells TIPS at no commission or spread but does not buy them back. To hold individual TIPS planning to take the principal as income you have to start well ahead of the game and build a TIPS ladder with the right maturities. This takes major finagling to work out. A TIPS fund, while subject to interest rate risk, is really a perfectly reasonable way for most investors to hold TIPS. It is not as if one is going to redeem the whole position at one fixed point in time.

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Watty
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Re: Help with 66yr old mother

Post by Watty » Sun Oct 23, 2016 3:50 pm

Winterjp123 wrote:Quick question about the TIPS that were brought up, if I can only purchase in 5yr,10yr,30yr maturity dates how do you get around the RMD that she will have to take from her retirement account in 4 years? I'm assuming there would be a penalty to cash in early if all the money is tied up which wouldn't make sense
You can easily buy or sell and existing TIPS bond but it will sell at a premium or discount if if interest rates have changed.

You can only buy those dates for newly issued TIPS so to work around that you can buy an existing TIPS that was issued in the past that has some in-between date like 7 or 12 years. As I recall there are only a couple of gaps where there are not TIPS that mature in a specific year because the government never issued them. One easy way to work around that is to buy more TIPS that mature the year before.

There are old threads about how to build a TIPS ladder that you should be able to find or you can likely find that elsewhere on the internet.

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Re: Help with 66yr old mother

Post by David Jay » Sun Oct 23, 2016 5:05 pm

Winterjp123 wrote:Converting her tIRA to a Roth sounds like it my be over my head to an extent. I certainly understand what this is/means but not sure I'm comfortable as to how this would effect her retirement long term. Are you able to convert only part of the tIRA, I thought it was an all or nothing event?
The reason many people do Roth conversions is to reduce future RMD problems. Starting at 70 1/2, mandatory RMD withdrawals must be taken. The withdrawal percentage is based on life expectancy, by age 80 the percentages start to get very large. Filing single, your mom doesn't have a lot of headroom so she will be pushed into higher and higher tax brackets in her later years.

You can make as many tIRA to Roth conversions as you choose, of any size. I made 2 last year alone as my anticipated tax bracket changed due to job changes. All conversions are taxed as ordinary income, so plans need to be made to pay the taxes at your mom's current marginal rate. What I am doing is filling my "15%" tax bracket with Roth conversions, so I don't end up paying 25% or 28% later in life.

The money in Roth accounts is tax free and there are no withdrawal requirements for the original owner (inherited Roth accounts are still tax free but must be withdrawn over the recipient's lifetime).
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Re: Help with 66yr old mother

Post by msk » Sun Oct 23, 2016 11:26 pm

The way I see things: Your mother has "effectively" a million $ of very secure bonds that will continue paying her $3400/month. All her other investments do not seem to amount to a million $. Hence, even if all her investments are in stocks, the effective split between bonds and stocks will still be 50+% in bonds. Why favor stocks? Because they ought to do better over her remaining 2 to 4 decades of life. How to extract value from the stocks? The usual 4% p.a. is a good choice. What can go wrong? Stocks could fall 50% in value within a year, but invariably over the past half century they recovered very quickly. But let us say they do not recover for a decade. Well, she'll still be getting her $3400 /m and she'll still be able to supplement a good bit from her stocks, despite the drop in value. The more of her money you keep in bonds the more you condemn that fraction to very meagre returns over many years (what does a 10 yr bond return these days? That's the combined forecast of the bond market!). Frankly, we are now living through a very perverse period in bonds; interest rates being so low as to be considered unrewarding, yet we continue with bond:stock splits guidelines made during more normal periods of history. Personally I do not hold any bonds at all, age 72, but I treat my pension as my bond allocation. In brief: treat your secure pension as a bond holding and work those BH guidelines from there.

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Re: Help with 66yr old mother

Post by dbr » Mon Oct 24, 2016 9:02 am

msk wrote:The way I see things: Your mother has "effectively" a million $ of very secure bonds that will continue paying her $3400/month. All her other investments do not seem to amount to a million $. Hence, even if all her investments are in stocks, the effective split between bonds and stocks will still be 50+% in bonds. Why favor stocks? Because they ought to do better over her remaining 2 to 4 decades of life. How to extract value from the stocks? The usual 4% p.a. is a good choice. What can go wrong? Stocks could fall 50% in value within a year, but invariably over the past half century they recovered very quickly. But let us say they do not recover for a decade. Well, she'll still be getting her $3400 /m and she'll still be able to supplement a good bit from her stocks, despite the drop in value. The more of her money you keep in bonds the more you condemn that fraction to very meagre returns over many years (what does a 10 yr bond return these days? That's the combined forecast of the bond market!). Frankly, we are now living through a very perverse period in bonds; interest rates being so low as to be considered unrewarding, yet we continue with bond:stock splits guidelines made during more normal periods of history. Personally I do not hold any bonds at all, age 72, but I treat my pension as my bond allocation. In brief: treat your secure pension as a bond holding and work those BH guidelines from there.
You don't have to treat your pension as a bond to go back and understand that you will get the income you already know you are getting. However, the main point of your discussion is absolutely correct. The concern here is income. One part of it is securely delivered. The other part will be nearly securely delivered unless the investor owns no stocks. However, the security of that "4%" withdrawal is not increased by owning 100% stocks. It will be just as well to hold 50% in stocks for example, or 60%. 100% stocks is not horribly bad if running out of money is the risk, however. Owning no or too little stocks can guarantee that the portfolio cannot be sustained depending on the withdrawal rate. Owning 100% in stocks would be motivated by wanting to take more uncertainty in outcome to expect greater overall wealth at the end. I would argue that owning 100% stocks cannot be reasoned from treating pensions as a bond unless you start from the proposition that the only correct asset allocation is 50/50.

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Re: Help with 66yr old mother

Post by trueblueky » Mon Oct 24, 2016 2:47 pm

She has $225k individual stocks in taxable, $177k cash in taxable, $250k from house sale going to taxable, total $652k in taxable. $223k in IRA. Total $875k including the house sale. Annual income is $42k not taxed.

Her standard deduction as a single over 65 is $7850 and exemption is $4050, so she can have $11,900 in ordinary income before paying any tax. She can have to the top of the 15% bracket ($37,650 of taxable income, so $49,550 income) before she pays any taxes on LTCG and qualified dividends. Someone please correct me if disability income somehow is counted in AGI or MAGI.

It is in her best interest to use that untaxed space. It would not surprise me if the individual stocks are already generating 2% or so in distributions so .02*225,000 = $4,500 of that space is used there. Surely the cash is generating a little interest as well. Nonetheless, she can afford $40,000 or so in LTCG from selling the individual stocks.

Since she's 66, there are about five tax years (including the current one) before RMDs begin, depending on when she reaches 70 1/2. The $223k IRA will have an initial RMD of around $8,000 and will likely grow each year for several years.

I would not do Roth conversions since she appears likely to be in the 0% bracket in future years. Will she owe capital gains on the house she is selling? That may make a difference this year.

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Re: Help with 66yr old mother

Post by CurlyDave » Tue Oct 25, 2016 12:05 am

I am with msk here.

Your mom has income equivalent to over $1m in bonds. she does not need any more bonds, and in fact with her current assets, you could put all of her investable assets into stocks and she would not be at a 50/50 asset allocation.

I suspect her fixed income situation is even better than stated because at least part of that disability is somwhat inflation adjusted. I have been collecting SS for 9 years now (started at 62) and I can tell you that the "somewhat" is a very well advised word. SS is supposedly inflation adjusted, but the sad truth is that the adjustment does not keep up with the real world. No where near.

Now, is putting all of her investable assets into stocks risky? Yes it is, but the alternative of more bonds is actually even worse. Inflation is going to visit risk on bond portfolios whether the holder likes it or not. You can not put your head in the sand and say bonds are going to be "safe". Over 30 to 40 years they will suffer tremendous buying power loss to inflation.

The other thing to consider is whether the 4% from the Trinity study really applies in this situation. I would love to see a re-vist of safe withdrawal rates with part of a portfolio being an entitlement such as your mom has. Essentially, there is no such thing as complete failure of a portfolio that includes an entitlement from the government.

* * * * * * *

While I am a little older than your mom, DW is a little younger and we practice what I am saying here. We have entitlements (pensions and SS) that I treat as our fixed income allocation. Except for a small amount of cash on hand, the rest of our portfolio is in ETFs and some individual stocks.

I have looked hard at various withdrawal scenarios, and am taking about 6% annually from our stocks and IRAs (I actually take 0.5% each month). I do not inflation adjust this, but the increase in stock values over time does that. I think this is actually less risky than a 4% inflation adjusted withdrawal, which is never altered. In practice, what this does is to front-load our withdrawals. Since I think we will be less active as we age, this is a good thing. There are studies which say that spending in retirement decreases by about 1% per year.

* * * * * * * *

Lastly, do not be frightened about the potential for nursing home costs. Between the entitlements your mom has, the income from her portfolio, and the realization that if she needs a nursing home, the home she currently lives in can be sold (another $450k), you have that covered. And you do not need to panic and sell her current home in a rush. Even in a bad market there will be plenty to hold out for a reasonable price.

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Watty
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Re: Help with 66yr old mother

Post by Watty » Tue Oct 25, 2016 9:30 am

You need to be very cautious about heavily over-weighting stocks.

She owns the individual stocks which already adds more risk to her portfolio than someone would who owns index funds. If you overweight stocks in the rest of her investments then her overall portfolio may be riskier than you realize.

The people that are saying that the the disability payment can be treated as a bond are incorrect.

The the disability payment reduces her needed income. Having a reduced needed income might very well make a higher stock asset allocation more reasonable but that is not the same as it being a bond.

And illustration of why a pension is not a bond could be a pair of retired twins that are financially identical except that.
1) John lives in a low cost of living are and needs $40,000 a year to live on
2) Jack lives in a high cost of living area and needs $80,000 a year to live on and he has an inflation adjusted pension of $40,000.

They both have a million dollar retirement portfolio that they withdraw 4% from to get $40,000 a year.

They both want an asset allocation of 50% stocks and 50% bonds.

If you counted Jacks pension as a million dollars in bonds then he would invest all of his portfolio in stocks. John would split his portfolio between stocks and bonds. That does not make any sense because they both have the same goal of withdrawing $40,000 a year from the portfolio.

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Re: Help with 66yr old mother

Post by Tal- » Tue Oct 25, 2016 11:37 am

Fun topic. Here are my thoughts, as a FAQ.

What is the correct stock/bond allocation?
Given that the chances of her needing income from her investments is small, I would be fairly stock-heavy with this. Something like 70/30 feels right to me. However, I would never go high enough that she couldn't stomach the volatility, and if she can't handle the swings of a 70/30, there's not much wrong with a 50/50. Given that she's held individual stocks for years, this may not be an issue.

Should you liquidate the individual stocks?
This is a bimodal answer, depending on if she will need or want that money in her lifetime. If she will need it, you will need a long-term strategy to slowly start decreasing assets in these stocks. This will avoid major tax hits in any one year, and decrease the total taxes paid. However, if she will not need/want/use it, keeping it as-is, may be correct. While I'm uneasy having so much in individual stocks, the taxes may be convincing enough to make this the correct strategy.

Should you consider a Roth conversion?
If my read is correct, you could move over small amounts each year from a traditional to a Roth, without triggering taxes. Find out how much income she can have without paying a dime in taxes, then back into how much she could convert. Note that the proration gets complicated on this, but mathematically, it may save you some tax dollars and RMDs.

Should you buy equities now or later?
Now. But you already knew that timing the market is bad juju :)

Do you need an estate plan (attorney stuff)?
She needs to do estate planning documents - yes.

Do you need an estate plan (financial stuff)?
You've done a good job for her, and should be commended, but if you're waffling on things like 'whether you should invest in the stock market today' type of questions, I think getting some additional help on the team may be a good idea. This is a situation where small mistakes have big costs. For example, a 50/50 allocation when she is comfortable with a 70/30 would have a huge financial impact. Keeping cash on the sidelines could have a huge financial impact. So, I would consider finding an hourly adviser to work with you for a short-term basis.
Debt is to personal finance as a knife is to cooking.

learning_head
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Re: Help with 66yr old mother

Post by learning_head » Tue Oct 25, 2016 12:38 pm

Watty wrote:You need to be very cautious about heavily over-weighting stocks.

She owns the individual stocks which already adds more risk to her portfolio than someone would who owns index funds. If you overweight stocks in the rest of her investments then her overall portfolio may be riskier than you realize.

The people that are saying that the the disability payment can be treated as a bond are incorrect.

The the disability payment reduces her needed income. Having a reduced needed income might very well make a higher stock asset allocation more reasonable but that is not the same as it being a bond.

And illustration of why a pension is not a bond could be a pair of retired twins that are financially identical except that.
1) John lives in a low cost of living are and needs $40,000 a year to live on
2) Jack lives in a high cost of living area and needs $80,000 a year to live on and he has an inflation adjusted pension of $40,000.

They both have a million dollar retirement portfolio that they withdraw 4% from to get $40,000 a year.

They both want an asset allocation of 50% stocks and 50% bonds.

If you counted Jacks pension as a million dollars in bonds then he would invest all of his portfolio in stocks. John would split his portfolio between stocks and bonds. That does not make any sense because they both have the same goal of withdrawing $40,000 a year from the portfolio.
What a great and convincing explanation! I am sold.

Now if OPs mother needs $0 out of portfolio (if her needs are more than covered by other income streams), what would be the recommendation?

dbr
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Re: Help with 66yr old mother

Post by dbr » Tue Oct 25, 2016 4:16 pm

learning_head wrote:
Now if OPs mother needs $0 out of portfolio (if her needs are more than covered by other income streams), what would be the recommendation?
Everything starts with what you want to do with your money.

In this case the decision has been made that the individual does not want to spend any of the money they have saved. That decision is contained in the statement " . . . the OP's mother needs $0 out of portfolio . . ." There are several things one might think about that. One is that needs could be underestimated, at least that there might be a plan for contingencies. One might suggest not putting all the portfolio at extreme risk.

A second thing one might think about is spending more money. In that case we want to make sure the portfolio is managed to sustain that.

Another thing might be thinking about how best to invest for the heirs that will eventually get the money. In that case a portfolio invested for maximum long term growth might be chosen. Or, if the person wants to be very certain about what will be passed on, a very conservative portfolio could be chosen. On option might be thinking of giving away a lot of money, if it is not needed and there are worthwhile things that might be done with the money by others.

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Watty
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Re: Help with 66yr old mother

Post by Watty » Tue Oct 25, 2016 5:38 pm

learning_head wrote:What a great and convincing explanation! I am sold.

Now if OPs mother needs $0 out of portfolio (if her needs are more than covered by other income streams), what would be the recommendation?
Just be aware that the situation with the twins is a bit more complex too. For example if their investments ran into big trouble and they had to cut their spending from their investment portfolio by $10,000 then the first twins budget would be cut by 25%. The twin with the pension would only have to cut his budget by 12.5%. The difference in the impact of their risk would mean that the twin with the pension could reasonably invest a bit more aggressively, but nowhere near 100% stocks.

When looking at what asset allocation to use I like to look at comparable mutual funds to see what asset allocation they use.

The Vanguard Life Strategy "conservative growth" fund uses 60% bonds and 40% stocks, and the "moderate growth" uses 40% bonds and 60% stocks. You can look at the details of those funds to see how they use things like international stocks.

https://investor.vanguard.com/mutual-fu ... estrategy/#/

I would consider her individual stocks more risky than an index fund so a 50/50 stock and bond asset allocation would be as aggressive as I would feel comfortable with for a disabled senior even if she does not have an immediate need for the money. Cutting back to 40% stocks would be very reasonable too.

If any of the individual stocks are more than 5% of her stock portfolio I would make selling them down to 5% a high priority even if it meant that she had to pay some capital gains taxes.

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