Investments for Mother, windfall

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saj
Posts: 24
Joined: Sun Oct 04, 2015 12:57 pm

Investments for Mother, windfall

Post by saj » Sat Jun 17, 2017 9:55 am

My father recently passed. Fortunately, he made sure that my Mother is taken care of. She will have a windfall of approximately $600,000 and his pension that is $5,500/month. She is not savvy to the investing world and I don't think that she really cares to learn much about it (beyond a basic understanding of where her money will be going).

Emergency funds: Currently nothing
Debt: Mortgage ($180kish)
Tax Filing Status: Single (Widowed, no dependents)
Tax Rate: 25-28% Federal, 5% State
State of Residence: NH, works in MA
Age: 59
Desired Asset allocation: 40/60 (my suggestion)
Desired International allocation: 40% of stocks (my suggestion)

Current retirement assets

Taxable:
- Small amount of company stock (~$20k) from a previous company my Father worked for. I'm suggesting that she liquidate this in favor of other investments.

401/IRA:
- Total value of ~$200k or so
- Low cost funds, 20% stock, 60% bond, 20% cash (he was scared of stocks)
- I intend to suggest that she go to 40/60

Pension:
- As stated before, ~$5500/mo after taxes

Questions:
1. She will continue to work and between her pay and the pension, she should have no issues financially. The only unfortunate part is that she is right on the line of 25-28% taxes. Is there really any good move here to reduce taxes? Even in retirement, she'll be well into the 25% bracket, but she is currently paying 5% MA income tax. I figured that she could live off of the pension money (>$60k a year) due to her have virtually major expenses (real estate taxes, utilities, food, etc. is about it). She is then free to max out her 401K (saves 5% MA tax) and Roth IRA (tax free distributions). I'd suggest that she simply invest in a 3 fund portfolio, or the appropriate target retirement fund.

I don't know that much of anything we do here will matter from a taxes perspective. She is in the 25-28% bracket now, and I'm sure she will be right in that area again in retirement due to pension, SS, and RMDs. Does the 401k still make sense to save 5% MA tax?

2. After she pays off the house and all debts, she should have ~$500,000 in cash. I'm of the opinion that the following would make sense:

- $50k in high-yield savings (make her feel safe)
- $400k in CD ladder
- $50k ear-marked for I-bond purchases and DCA into stock index funds ($10k bonds and $10k/quarter into stock)

For 5 more years, take the same $50k from CDs until she ends up with:

- $50k in high-yield savings
- $50k in I-bonds
- $200k in CD ladder
- $200k in stock index funds* (taxable)

* Index funds would likely be S&P 500 and the appropriate mix of international

At that point, she can continue to contribute to I-bonds as desired from the CD ladder until we reach the desired balance (it seems like there is no true way of knowing which will perform better over time, but I bonds seem to have better liquidity).

I'm going to suggest to her that she retire whenever she wants to, or at the very least try to find her dream job. She should also have more than enough money coming in each month to continue her taxable investments.

Appreciate any thoughts. I just want to make sure that she feels financially safe, but doesn't let her money waste away.

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Watty
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Re: Investments for Mother, windfall

Post by Watty » Sat Jun 17, 2017 10:38 am

There is a wiki on managing a windfall.

https://www.bogleheads.org/wiki/Managing_a_windfall

For the most part it would be good if she just put most of it in a ultra safe investment for 6 months to a year while she adjusts to the loss of your Dad and comes up with a long term plan.

A few things;

Paying off the house and any other debt right away would make sense to me.

Maxing out her retirement accounts for 2017 would also make sense.

Make sure that she has high car insurance limits and an umbrella policy. With more assets she is more likely to be sued so she needs good insurance.

You didn't mention Social Security, and she will likely get that some day so look into what her options are with that. She may want to go into the Social Security office to talk over her options with her Social Security and a survivors benefit.

Vanguard will provide financial planning for a modest fee. It might be worthwhile for her to use them for a few years to get things in order. Be vary careful with any other "financial planners" since the vast majority of them are just sales people that would would be glad to take advantage of her. Ask if you don't understand how dangerous they can be. Do not go to any "free" financial planning dinners, some of the sales people are pretty slick.

Be careful of trying to set up a portfolio for her. Even if you set up a reasonable portfolio things could go badly and get awkward. Even if you do well and things go well you could be hit by the proverbial Mack truck and she might not know what to do with the portfolio. Try to help her set things up in a way that she can manage and will be pretty much on automatic pilot in case you are not around 20 years from now and she is in a nursing home.

It is just my opinion but I am not as keen on i-bonds as some people. With the current rates they are pretty well guaranteed to lose purchasing power after taxes and they are one of the few investments that do not get a stepped up cost basis if they go to her estate someday. Treasury direct can be a pain to deal with too.

When the funds are invested a total stock market fund would be a better choice than an S&P 500 fund because it is more diversified and more tax efficient. A total international stock fund would be good too. It might not be the most tax efficient but a Vanguard lifestrategy fund would also be worth looking at.

https://investor.vanguard.com/mutual-fu ... #/?lang=en

they also have tax managed funds but I don't know much about those.

https://personal.vanguard.com/us/funds/ ... 0103#tab=2

runner540
Posts: 239
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Re: Investments for Mother, windfall

Post by runner540 » Sat Jun 17, 2017 11:07 am

Condolences to you and your mom.

That pension sure sounds nice...
You mention the 401k to save on MA taxes. That will also save on federal income taxes (so at least 30% total: if she maxes out at $24k, she'll save over $7k in taxes), and is the clearest cut way to reduce tax burden.
I agree with the windfall advice to paydown debt, get proper insurance, and then sit on the money for a period of time while she adjusts to a different life.

saj
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Joined: Sun Oct 04, 2015 12:57 pm

Re: Investments for Mother, windfall

Post by saj » Sun Jun 18, 2017 1:03 pm

Thank you for the feedback. We are planning on keeping the money in the appropriate number of FDIC-insured accounts for at least 6 months. The plans that I outlined would happen afterwards.

My comments on the income tax savings were based on the fact that she has no chance of retiring in a significantly lower tax bracket than she is in now. Best case, she is in 28% now and retires in 25%, but it will probably be 25% in both cases. So, while she'd save $7k in taxes now, she ultimately pay it down the road anyways because she will have the pension for as long as she lives.

My Parents already had a $1 million insurance policy, but I'll make sure she keeps it.

I think the advice to be careful with providing her an asset allocation and investments is sound. I think that going with Vanguard or a fee-based advisor to back up my recommendations would be good. I can make sure that nobody suggests anything crazy to her.

aristotelian
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Re: Investments for Mother, windfall

Post by aristotelian » Sun Jun 18, 2017 1:15 pm

She is getting $5500 per month from pension, she will get more from SS soon, and does not want to manage her investments. I don't think a complex portfolio of savings, I Bonds, and CD ladder and index funds makes sense for her.

In view of the tax bracket, I would put $100K in cash and the rest of the taxable funds in Tax Managed Balanced (VTMFX), with a target date fund in the 401k according to her risk tolerance.

Does she have a 401K plan from her employer? The best thing she can do to help her tax situation is to max out her tax deferrals.
Last edited by aristotelian on Sun Jun 18, 2017 1:42 pm, edited 1 time in total.

retiredjg
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Re: Investments for Mother, windfall

Post by retiredjg » Sun Jun 18, 2017 1:39 pm

I had trouble following her situation. You said there was $600k and then only accounted for $220k of it. Where's the other money?

I think the plan may be too complex. What's the point of putting the money into CDs and then DCA'ing it into other things? Just put the money in the final destination at a reasonable stock to bond ratio and be done with it.

Lots of places, lots of moving parts, lots of schedules and things to do for the next 5 years. Why not just have a savings account at a bank and stocks and bond at just one custodian?

I would not even use any I Bonds. I like them fine, but that's just another location and more moving parts. She should be simplifying, not getting more complex, especially since she is not savvy and isn't interested in learning much. Get her set up in a very simple plan and forget about it.

muddlehead
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Re: Investments for Mother, windfall

Post by muddlehead » Sun Jun 18, 2017 3:51 pm

Had a single Mom in very similar circumstances and age 30 years ago. Easy peasy resolution. Your Mom has 600k cash, $5500 p/m pension, her own job, 20k in taxable acct, 200k in IRA. She owes 180k mortgage. If it were me, I'd pay off the mortgage reducing cash to 420k. Find out how many years more she'll work. Ladder CD's accordingly. If she says, for example, 5 years more, put 100k each into 5 yr, 4 yr, 3 yr, and 2 yr CD. When she stops working, she can annually take from the IRA , if she needs the money. She can start social security at full retirement age - 66 yrs old or so. Forget the whole thought process about taxes. More money and time is wasted trying to "minimize" paying taxes than necessary. She's doing more than great financially. Pay whatever the taxes are and move on. Good luck.

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BL
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Re: Investments for Mother, windfall

Post by BL » Mon Jun 19, 2017 1:57 am

aristotelian wrote:She is getting $5500 per month from pension, she will get more from SS soon, and does not want to manage her investments. I don't think a complex portfolio of savings, I Bonds, and CD ladder and index funds makes sense for her.

In view of the tax bracket, I would put $100K in cash and the rest of the taxable funds in Tax Managed Balanced (VTMFX), with a target date fund in the 401k according to her risk tolerance.

Does she have a 401K plan from her employer? The best thing she can do to help her tax situation is to max out her tax deferrals.

I like the simplicity of this.

I also like using Vanguard PAS for someone to get advice from and depend on, or quit in a year or so if desired.

Take up to a year to decide on non-urgent decisions. It is hard to think straight when grieving. She doesn't need the extra stress; there is enough as it is.

Saving on taxes with 401k is good; if preferred check to see if it can go into a Roth 401k for future tax savings. Also put 5500 into a Roth IRA each year she is earning that much at working. She can use some of the taxable money if necessary to cover needed amounts, but if mortgage is paid off, that will require less income to live on.

Check into SS options:
Compare PIAs of both husband and her own to help decide when to take which benefit, eg. :
1. her own at 62 and survivor at 66?
2. survivor start age 60, her own at age 70.
Maybe read Mike Piper threads here or get his recent SS book which includes latest changes to help figure things out.

saj
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Joined: Sun Oct 04, 2015 12:57 pm

Re: Investments for Mother, windfall

Post by saj » Mon Jun 19, 2017 5:43 am

Thank you for all of the feedback. I guess I am making things a bit more complicated than they need to be. We will proceed as follows:

1. Move the 401k/IRA assets into an appropriate AA (Target Retirement fund to keep it simple)
2. Windfall goes to 2x FDIC-insured accounts for 6-12 months
3. Have her start investing in 401k/Roth IRA, again keeping it simple with a Target Retirement fund
4. When she is ready, we will come up with a basic investment plan that requires one touch of accounts per year. We will revisit once the grieving period has passed and we're both thinking more clearly, but I think that keeping to a stock index fund and CD ladder would be simple enough. We'll renew the CD once per year and make any stock investments at that time. She can just relax the rest of the year and not think about it.
5. Investigate SS options

We'll look at Vanguard PAS as well as needed.

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Watty
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Re: Investments for Mother, windfall

Post by Watty » Mon Jun 19, 2017 8:05 am

saj wrote:Thank you for all of the feedback. I guess I am making things a bit more complicated than they need to be. We will proceed as follows:

1. Move the 401k/IRA assets into an appropriate AA (Target Retirement fund to keep it simple)
2. Windfall goes to 2x FDIC-insured accounts for 6-12 months
3. Have her start investing in 401k/Roth IRA, again keeping it simple with a Target Retirement fund
4. When she is ready, we will come up with a basic investment plan that requires one touch of accounts per year. We will revisit once the grieving period has passed and we're both thinking more clearly, but I think that keeping to a stock index fund and CD ladder would be simple enough. We'll renew the CD once per year and make any stock investments at that time. She can just relax the rest of the year and not think about it.
5. Investigate SS options

We'll look at Vanguard PAS as well as needed.


That sounds like a good way to go. Paying off the house would likely be worth doing too.

Don't forget to check to make sure that she has plenty of car insurance and an umbrella policy. With all the stress she is going through she is probably more likely than normal to have a car accident especially if she is not sleeping well.

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