Help for Mom - Retiring, Windfall, Edward Jones

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Meg77
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Help for Mom - Retiring, Windfall, Edward Jones

Post by Meg77 » Wed Dec 06, 2017 1:30 pm

Hi Bogleheads,

My mother has asked me to create a financial plan for her and help her invest a pending windfall. She's been with Edward Jones for many years, but several major changes are prompting an overhaul: her advisor is retiring, she is shifting from accumulation to withdrawal mode, and she expects to receive a windfall that will nearly double her portfolio in the coming month or so.

She has been living off a combination of wages (now down to part time) and annual exclusion gifts from her parents, but those gifts will end when my grandparents distribute the remainder of their portfolio to their kids next month (assuming a final tax bill passes that doubles the estate tax and lifetime gift exclusion limits). She has a fairly high risk tolerance, especially for a 60 year old.

Emergency funds: 1 year expenses ($100K)
Debt: None
Tax Filing Status: Single
Tax Rate: Varies depending on cap gains and final tax bill
State of Residence: AL
Age: 60
Desired Asset allocation: Unknown, but she's currently around 70% stocks / 25% bonds / 5% cash and comfortable
Desired International allocation: Unknown.

Current retirement assets

Taxable - Edward Jones Account
--$325K in 15 individual muni bonds earning 5-5.5% ($345K market value). $65K matures in 2018, $75K in 2019, $50K in 2020, $40K in 2021, $60K in 2023, $15K in 2039 and $20K in 2043 (this last one is only 3.5%)

--$886K in 13 individual stocks - [Cost basis on stocks $391K - all have substantial unrealized gains except KO, SO, VZ, and F; none have losses]
$245K BRK
$137K AAPL
$115K AMZN
$94K ABBV
$55K ABT
$49K WMT
$35K FB
$18K T
$37K CSCO
$23K KO
$25K F
$26K SO
$26K VZ

--$414K in Vanguard funds
$158K VFIAX (0.04) $99K unrealized gain
$136K VPCCX (0.46) $80K unrealized gain
$159K VFIAX (0.04) $60K unrealized gain

--$978K in front loaded mutual funds
$70K ABALX (0.60) $18K unrealized gain
$94K ANCFX (0.62) $38K
$72K AGTHX (0.64) $24K
$67K AMECX (0.56) $3K
$69K AIVSX (0.60) $16K
$101K LAFFX (0.74) $3K
$102K LAMAX (0.95) $17K
$102K LIDAX (1.12) $6K
$104K LAVLX (0.97) $43K
$61K ANEFX (0.82) $27K
$70K ANWPX (0.77) $6K
$67K SMCWX (1.11) $27K

Her Traditional IRA at Edward Jones
AAPL $26K
SBUX $51K

Her other Traditional IRA at Edward Jones
$90K in a slew of index and mutual funds I won't bother listing because this will be moved to VG and reinvested

Checking account - $275K ($100K reserved for EF)

Notes Receivable (2 mortgages extended to me fixed at 3%): $297,750

Total Investable Assets: $3,242,000 (excluding $100K EF)

Other details:
---In January she should receive $2,750,000 which is all currently invested in bonds (probably individual ones). I'm not sure if they will be liquidated to cash prior to the transfer, but in any event she's not excited about holding so much in bonds.

---She owns a $400K homestead outright which she plans to sell when her parents pass away (they are in their mid 80s and in decent health; at least one of them could live another 10 years). She'll probably either rent or buy a condo in a city somewhere near one of her kids at that point.

---Her Income
$12K Current income from teaching she does online part time
$17K Principal and interest I pay her on 2 mortgages (will continue until 2041 unless I prepay)
$12K Pension Income she'll begin receiving in 2 years
$14K Social Security she can claim at 66.5 (half my dad's full benefit as they were married 10+ years)
$57K - $100K Dividends and Interest from her new portfolio TBD.

---Her Expenses
She doesn't have a detailed budget but has few fixed costs besides health insurance. She owns a new(ish) house and a new car outright and lives in a small city in Alabama. Her country club membership is a couple of grand a year; utilities and gas are minimal. She tithes and travels, but she can easily live on the above income streams without touching her investment principal. She was happy when I told her she could spend $108K a year (which is roughly her current dividend/interest and wages) without even touching principal. She considers her portfolio there for "extras" like treating her family to a big trip every year, a new car every few years, and future annual exclusion giving.

Questions:
1. Can the individual muni bonds be transferred to Vanguard, or do we need to leave those at EJ? Since they are fixed at 5%+ it doesn't make sense to me to sell them. The amount maturing each year through 2019 should be enough for her to live on combined with her current recurring income (wages and my mtg pmts). Then her pension and SS will kick in as the muni ladder tapers off.

2. What strategy do you suggest regarding the Edward Jones funds? I know the stocks can transfer in kind to Vanguard, and presumably the VG funds can. But what about the loaded funds? Of course we don't want to take all those gains in one or even two years, but I would want to dump the LIDAX in pretty short order given the $6K relatively small gain and the 1%+ expense ratio. The other ones with small gains could go too. It kills me because those are the ones that were just traded this past June when new 5.75% loads were charged. :annoyed I guess I should be grateful they aren't churning more of the portfolio than that...about $150K was sold and reinvested in other funds this year.

3. I plan to roll and consolidate the two IRAs to Vanguard. She probably won't touch these until RMDs begin in 11 years. What fund makes sense for that account specifically, given the tax sheltered nature of it? I know bonds are usually recommended for that, but given those accounts have the longest time horizon I'm not so sure. Could just dump the whole thing into Wellington or another balanced fund?

4. I'm proposing starting a new Vanguard account with the windfall, but for some reason I'm having a tough time recommending a simple 3 fund portfolio. Is it really that easy and appropriate - even for a retiree in a taxable account who will be living off the portfolio within a few years? My plan would be to slowly liquidate the EJ assets and move them to the new portfolio (or like kind transfer as much as possible and slowly transfer them to better funds).

5. Is it worth complicating her situation to suggest things like a HSA or Roth IRA? Possibly even other retirement accounts depending on her job and whether she's considered a contract worker or employee...

Any other suggestions or comments are welcome. Please and thank you!!
Last edited by Meg77 on Wed Dec 06, 2017 2:53 pm, edited 1 time in total.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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BL
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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by BL » Wed Dec 06, 2017 2:42 pm

It sounds like a phone conversation with Vanguard is in order. Have statements in hand or lists of her funds/stocks/munis.

I am fairly sure that transferring loaded American funds in-kind will be no problem. You can even buy them there!

Tax cost in selling vs. ER costs and CG/dividend distribution costs of holding them will help determine which to dump first. Sometimes the tax cost to sell is so great you don't want to sell unless cost to keep is overwhelming.

No one knows how the tax laws may change, so I would not worry too much about it until she gets the windfall. You have the right ideas so will have to decide about total stock market, munis, a single tax-managed Balanced fund (about 50/50, IIRC), or ??

I haven't looked at all the stocks, but perhaps she has her own little index with all those stocks.

Good luck. It is a nice problem to have, but a problem nevertheless.

By the way, I think you meant SS (Social Security) not SSI.
WHAT IS SSI?

SSI stands for Supplemental Security Income. Social Security administers this program. We pay monthly benefits to people with limited income and resources who are disabled, blind, or age 65 or older. Blind or disabled children may also get SSI.

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Meg77
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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by Meg77 » Wed Dec 06, 2017 2:53 pm

BL wrote:
Wed Dec 06, 2017 2:42 pm
It sounds like a phone conversation with Vanguard is in order. Have statements in hand or lists of her funds/stocks/munis.

I am fairly sure that transferring loaded American funds in-kind will be no problem. You can even buy them there!

Tax cost in selling vs. ER costs and CG/dividend distribution costs of holding them will help determine which to dump first. Sometimes the tax cost to sell is so great you don't want to sell unless cost to keep is overwhelming.

No one knows how the tax laws may change, so I would not worry too much about it until she gets the windfall. You have the right ideas so will have to decide about total stock market, munis, a single tax-managed Balanced fund (about 50/50, IIRC), or ??

I haven't looked at all the stocks, but perhaps she has her own little index with all those stocks.

Good luck. It is a nice problem to have, but a problem nevertheless.

By the way, I think you meant SS (Social Security) not SSI.
WHAT IS SSI?

SSI stands for Supplemental Security Income. Social Security administers this program. We pay monthly benefits to people with limited income and resources who are disabled, blind, or age 65 or older. Blind or disabled children may also get SSI.
Thank you! Yes it may be simpler just to call VG and ask about what can be transferred. And I'll update the SSI reference; I always think of it as "Social Security Income" but didn't realize there was another SSI acronym.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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BolderBoy
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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by BolderBoy » Wed Dec 06, 2017 4:59 pm

There is certainly going to be plenty of money (already is). I think one of the topmost priorities should be to get away from EJ - their [mouthwatering] fees will look obscene going forward. The entire January windfall should go to VG or Fidelity or almost anywhere but EJ.

And yes, a three fund portfolio is perfectly appropriate.

As BL suggested, a phone call to VG in quite in order.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

MotoTrojan
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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by MotoTrojan » Wed Dec 06, 2017 5:12 pm

At a minimum, while getting the plan in place, ensure dividend reinvestment is turned off such that all dividends go to your settlement fund. That'll help with the single-stocks, expensive funds, and not sure about single-bonds... might just sell those right-off if you prefer a bond-fund.

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Meg77
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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by Meg77 » Thu Dec 07, 2017 2:25 pm

MotoTrojan wrote:
Wed Dec 06, 2017 5:12 pm
At a minimum, while getting the plan in place, ensure dividend reinvestment is turned off such that all dividends go to your settlement fund. That'll help with the single-stocks, expensive funds, and not sure about single-bonds... might just sell those right-off if you prefer a bond-fund.
Thanks for this tip, and yes I thought of this too. She had her dividend reinvestments turned off earlier this year when she decided to start living off them. I checked though and some funds are still reinvesting.

She has a decent muni ladder established which, along with her other fixed income sources, may enable her to not touch the rest of the portfolio for a few years at least. So I do think once we finalize a new plan that all dividends and interest will be reinvested.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Meg77
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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by Meg77 » Sun Dec 10, 2017 7:44 pm

So I had assumed that annuitizing some of her assets (if that's a real verb) would be an ideal way to give her a baseline fixed income. This is because her small pension and SS income will cover less than half her expenses and also because most of her money is in taxable accounts. But after looking into Vanguards Single Premium Immediate annuities today I don't think that will be appropriate for her - especially at her age where it would take well over $200K to get $1000 a month payment with no inflation rider. She's comfortable living off less than 3% of her portfolio, so the fees and loss of principal for the annuity aren't much of a benefit. Also, she has me to manage her portfolio and withdrawal strategy - if she didn't and didn't have another kid or advisor to trust, guaranteed lifetime income starts to make more sense.

Am I thinking about this the right way?
"An investment in knowledge pays the best interest." - Benjamin Franklin

Dottie57
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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by Dottie57 » Sun Dec 10, 2017 8:18 pm

Meg77 wrote:
Sun Dec 10, 2017 7:44 pm
So I had assumed that annuitizing some of her assets (if that's a real verb) would be an ideal way to give her a baseline fixed income. This is because her small pension and SS income will cover less than half her expenses and also because most of her money is in taxable accounts. But after looking into Vanguards Single Premium Immediate annuities today I don't think that will be appropriate for her - especially at her age where it would take well over $200K to get $1000 a month payment with no inflation rider. She's comfortable living off less than 3% of her portfolio, so the fees and loss of principal for the annuity aren't much of a benefit. Also, she has me to manage her portfolio and withdrawal strategy - if she didn't and didn't have another kid or advisor to trust, guaranteed lifetime income starts to make more sense.

Am I thinking about this the right way?

Your mom may not be excited about bonds , but I would urge her to have 40-50% fof her money in them. Bonds don't usually drop in value like stocks. Or maybe a ladder in cds for 10 years. Each year you buy a new cd to replace the one just used for income.

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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by sergeant » Sun Dec 10, 2017 8:41 pm

Meg77 wrote:
Sun Dec 10, 2017 7:44 pm
So I had assumed that annuitizing some of her assets (if that's a real verb) would be an ideal way to give her a baseline fixed income. This is because her small pension and SS income will cover less than half her expenses and also because most of her money is in taxable accounts. But after looking into Vanguards Single Premium Immediate annuities today I don't think that will be appropriate for her - especially at her age where it would take well over $200K to get $1000 a month payment with no inflation rider. She's comfortable living off less than 3% of her portfolio, so the fees and loss of principal for the annuity aren't much of a benefit. Also, she has me to manage her portfolio and withdrawal strategy - if she didn't and didn't have another kid or advisor to trust, guaranteed lifetime income starts to make more sense.

Am I thinking about this the right way?
You are thinking about this in the correct way. It is nice that you are helping your mother. She is well positioned for success. Whatever exit plan you come up with I would write it down with a timeline.
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Meg77
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Re: Help for Mom - Retiring, Windfall, Edward Jones

Post by Meg77 » Mon Dec 11, 2017 4:03 pm

Dottie57 wrote:
Sun Dec 10, 2017 8:18 pm
Meg77 wrote:
Sun Dec 10, 2017 7:44 pm
So I had assumed that annuitizing some of her assets (if that's a real verb) would be an ideal way to give her a baseline fixed income. This is because her small pension and SS income will cover less than half her expenses and also because most of her money is in taxable accounts. But after looking into Vanguards Single Premium Immediate annuities today I don't think that will be appropriate for her - especially at her age where it would take well over $200K to get $1000 a month payment with no inflation rider. She's comfortable living off less than 3% of her portfolio, so the fees and loss of principal for the annuity aren't much of a benefit. Also, she has me to manage her portfolio and withdrawal strategy - if she didn't and didn't have another kid or advisor to trust, guaranteed lifetime income starts to make more sense.

Am I thinking about this the right way?

Your mom may not be excited about bonds , but I would urge her to have 40-50% fof her money in them. Bonds don't usually drop in value like stocks. Or maybe a ladder in cds for 10 years. Each year you buy a new cd to replace the one just used for income.
Thanks. I agree that 40-50% in cash and bonds makes sense. Currently she's got 9% cash and 20% in individual fixed income assets. Another 10% - 20% of her mutual funds may be in bond mutual funds as well (there are too many funds for me to analyze properly at this stage, especially as we'll be selling most of them).

She definitely is comfortable with fixed income, but she doesn't want her entire inheritance to remain in bonds. That would push her to more like 75% bonds and cash.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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