Helping Parents with Retirement

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DrDexter
Posts: 17
Joined: Sun Apr 16, 2017 2:19 pm

Helping Parents with Retirement

Post by DrDexter » Sat Aug 11, 2018 7:30 pm

Hi

My retired father has recently fallen into poor physical and mental health, so he can no longer manage the finances for himself and my mother as he has done during his lifetime. I recently completed durable power of attorney paperwork for both of them and am set up legally to make decisions on their behalf with their consent.

They have monthly income from the following sources. I included what % of the total monthly income comes from each source.

8.35% - Pension
56.75% - Social Security
4.81% -Part time work
19.17% -Withdrawals from IRA / Taxable
5.86% -Annuity #1
2.93% -Annuity #2
2.13% -Annuity #3

I attached the details of their two IRAs and their joint taxable account.

They have always lived relatively frugally and continue to live within their means. My mother is 69 and my father 70. Rough income / assets: monthly budget is $5k / month income from the various sources. Assets are roughly mid 6 figures. Of the income sources listed above, they currently spend 100% of the sum of that each month to cover bills and normal spending for groceries, etc. Any additional expenses for example to take vacations or to do a remodel on the house, or even the twice annual property tax on their condo, requires additional withdrawals from their IRA’s or Taxable account.

I’ve read about the theoretical safe withdrawal rate and my parents are currently above that in that they are withdrawing 6.4% of their total portfolio value on an annual basis with just the currently monthly allowance and a 1.4% management fee making up part of that 6.4% Without the management fee, it would get them down to a more comfortable 5%. If I assumed zero growth in their accounts just for planning purposes, with their current run rate, their portfolio would deplete to zero in about 15 years. Good news is that even if that occurred, there is enough we can cut out of the monthly budget (for example, regular donations to multiple charities and church groups) that they could live on the amount they currently receive from the pension + social security + annuities.


They are using a money manager who charges them a fee of 1.4% annually and he has them in an overly complicated portfolio with higher than necessary expense ratios. I included details on the holdings including the expense ratio for each at the end of this post.

I’ve read a lot about annuities and unfortunately I’m pretty sure they didn’t buy the “good” kind, but instead way overpaid on some upfront sales commission (purchased from the same “advisor” who continues to take another 1.4% annually.) They are more than 5 years into them now and I don’t think there is any way out. While it may not have been ideal I think the damage is already done and it does provide a fixed income guarantee which is useful.

What I am planning to do immediately is move all of the current holdings in their two individual IRAs and their joint taxable account over to Vanguard to stop losing the 1.4% a year to the financial advisor who is doing nothing for them. I have not yet fully researched the tax implications of selling any of the funds, so my thought was to first simply move them to Vanguard as is and in a separate step after investigate the best strategy for selling all of these funds and moving them into a more simple 3 fund portfolio with vanguard. Also what they are currently in looks a bit aggressive for their age, so I might shift things to be a little more conservative in terms of asset allocation.

Any Bogleheads have any further advice for me in terms of what I should be doing for my parents or anyone see a reason why I shouldn’t move this to Vanguard immediately?

Holding name / expense ratio

IRA #1
IQ HEDGE MULTI-STRATEGY TRACKER ETF 0.96%
PUTNAM ABSOLUTE RETURN 700 FD CL Y 0.96%
GATEWAY FUND CLASS Y 0.70%
ALPS TRUST ETF ALERIAN MLP 1.40%
VANGUARD FTSE EMERGING MARKETS ETF 0.14%
SPDR INDEX SHS FDS S&P INTL SMALL CAP ETF 0.40%
SPDR S&P WORLD EX-US 0.34%
ISHARES RUSSELL TOP 200 GROWTH ETF 0.20%
POWERSHARES FTSE RAFI US 1000 0.39%
ISHARES TR RUSSELL MIDCAP INDEX FD 0.20%
ISHARES RUSSELL 2000 VALUE 0.20%
BLACKROCK FLOATING RATE INCM PORT INSTL 0.69%
GOLDMAN SACHS GLOBAL INCOME FUND INSTITUTIONA... 1.03%
LORD ABBETT SHORT DURATIO INCOME FUND 0.60%
PUTNAM FDS TR 0.00%
SPDR BARCLAYS CAPITAL SHORT TERM CORP BD 0.12%

IRA #2
IQ HEDGE MULTI-STRATEGY TRACKER ETF 0.96%
PUTNAM ABSOLUTE RETURN 700 FD CL Y 0.96%
GATEWAY FUND CLASS Y 0.70%
ALPS TRUST ETF ALERIAN MLP 1.40%
VANGUARD FTSE EMERGING MARKETS ETF 0.14%
SPDR INDEX SHS FDS S&P INTL SMALL CAP ETF 0.40%
SPDR S&P WORLD EX-US 0.34%
ISHARES RUSSELL TOP 200 GROWTH ETF 0.20%
POWERSHARES FTSE RAFI US 1000 0.39%
ISHARES TR RUSSELL MIDCAP INDEX FD 0.20%
ISHARES RUSSELL 2000 VALUE 0.20%
BLACKROCK FLOATING RATE INCM PORT INSTL 0.69%
GOLDMAN SACHS GLOBAL INCOME FUND INSTITUTIONA... 1.03%
LORD ABBETT SHORT DURATIO INCOME FUND 0.60%
PUTNAM FDS TR 0.00%
SPDR BARCLAYS CAPITAL SHORT TERM CORP BD 0.12%

JOINT TAXABLE
IQ HEDGE MULTI-STRATEGY TRACKER ETF 0.96%
PUTNAM ABSOLUTE RETURN 700 FD CL Y 0.96%
GATEWAY FUND CLASS Y 0.70%
ALPS TRUST ETF ALERIAN MLP 1.40%
VANGUARD FTSE EMERGING MARKETS ETF 0.14%
SPDR INDEX SHS FDS S&P INTL SMALL CAP ETF 0.40%
SPDR S&P WORLD EX-US 0.34%
ISHARES RUSSELL TOP 200 GROWTH ETF 0.20%
POWERSHARES FTSE RAFI US 1000 0.39%
ISHARES TR RUSSELL MIDCAP INDEX FD 0.20%
ISHARES RUSSELL 2000 VALUE 0.20%
BLACKROCK FLOATING RATE INCM PORT INSTL 0.69%
GOLDMAN SACHS GLOBAL INCOME FUND INSTITUTIONA... 1.03%
VANGUARD MUN BD FD INC LTD TERM PTFL 0.19%
LORD ABBETT SHORT DURATIO INCOME FUND 0.60%
PUTNAM FDS TR 0.00%
Last edited by DrDexter on Mon Aug 13, 2018 6:08 pm, edited 2 times in total.

JBTX
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Re: Helping Parents with Retirement

Post by JBTX » Sat Aug 11, 2018 8:10 pm

As to the SWR, is generally meant to be based upon the beginning of retirement. Then the $ withdrawal will increase with inflation. On balance, the remaining balance will go down, so the relative withdrawal rate against remaining funds will tend to increase. 6% may not inappropriate for an 80 year old. So it really depends on your parents age. 6% WR for a 65 year old is too high. 80 year old probably not.

Not knowing the wishes of your parents, it is hard to advise about what you should do. Only you know that.

If it were my money, I would move it to a vanguard or fidelity, and greatly simplify it - using low fee index funds, target date funds and or life strategy funds. The portfolio above is ridiculously and pointlessly complicated. If it were not my money but my parents, I would probably err to the conservative side.

I'd be less inclined to make radical moves with the taxable, due to capital gains and some of the funds don't have horrible expense ratios.

Dottie57
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Re: Helping Parents with Retirement

Post by Dottie57 » Sat Aug 11, 2018 9:03 pm

After moving the accounts, work on the annuities. See if money can be salvaged. Or what the payout would be at various ages.

Good luck!

DrDexter
Posts: 17
Joined: Sun Apr 16, 2017 2:19 pm

Re: Helping Parents with Retirement

Post by DrDexter » Sat Aug 11, 2018 9:27 pm

@JBTX

My parents are 69 and 70, so still relatively early in retirement and of course life expectancy is uncertain, so that's why I am looking at the withdrawal rates closely. Either way not losing the 1.4% a year to the current advisor definitely improves the situation.

And yes I am 100% with you on simplifying to low fee index funds either a 3 fund portfolio or just a 1 fund target date / life strategy. I just want to check any tax implications first in regards to capital gains before I start selling off the current assets to purchase those funds with the proceeds.

@Dottie57

I will look at the annuities again and see what is possible there.

Thank you both for your thoughts.

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arcticpineapplecorp.
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Re: Helping Parents with Retirement

Post by arcticpineapplecorp. » Sat Aug 11, 2018 9:33 pm

Welcome to the group. You've got your parents' best interests at heart, which is more than I can say for their advisor. You've also got your work cut out for you.

The IRAs would be easy (no tax consequences) of moving from one (or two) IRAs from Richy Rich Advisor to Vanguard. I would start there first.

The taxable account is another story. If you move/sell taxable investments there may be tax consequences. So go slowly there. If you sell taxable investments for a gain (more than they originally purchased) there may be capital gains taxes (depending on their income and the amount of the gain). Sometimes it may be advantageous to instead wait for a decline and sell at a loss (and then move money over) to claim the loss against other (or future) gains. Or at least be aware of what the potential tax consequences will be if you switch over now. You can read more here: https://www.bogleheads.org/wiki/Tax_loss_harvesting
https://www.bogleheads.org/wiki/Capital ... stribution

The master limited partnershp is expensive and probably unecessary considering their lower income. I believe MLPs are for high earners, which doesn't sound like your parents. ALPS TRUST ETF ALERIAN MLP 1.40% That's an MLP (master limited partnership). You can read more here (pros and cons): https://seekingalpha.com/article/311692 ... estor-view
https://www.thestreet.com/story/1154437 ... r-ira.html
https://seekingalpha.com/article/399424 ... mlp-stocks

Those articles above state that MLPs are not suitable for IRAs, mostly because the tax breaks MLPs receive are not gotten in IRAs because IRAs are already tax deferred. So the first question I'd ask Richy Rich Advisor is what is a MLP doing in my parent's IRA when it's not "suitable" there (i.e., it would have been better in a taxable account than a tax deferred one). And it's possible some MLPs can lose 100% of the investment. And you have those articles to back you up. I'm specifically referencing the term "suitable" because Richy Rich Advisor is not likely a fiduciary. Ask him to take the fiduciary pledge and I bet you he won't (http://www.fiduciarypledge.com/wp-conte ... Pledge.pdf). Therefore, he only has to put people in products that are "suitable". That fund alone is costing them 1.4% (or more in opportunity costs, actual losses possibly, liquidity, etc.) but morningstar lists the expense ratio as 0.85% (source: https://www.morningstar.com/etfs/arcx/amlp/quote.html) so that's something to question.

Also, I would never pay 1.03% for a world bond fund (goldman sachs). Bonds aren't paying much, so whatever return that's getting, a healthy portion of the return is going back to the fund manager in the form of fees. If bonds are returning "around" 3%, then doesn't that mean your parents are putting up 100% of the capital, taking 100% of the risk, but only getting 67% of the return? (paraphrasing Jack Bogle there). Something to consider.

Are you sure the Putnam Short Duration Income (FDS TR) is really 0.00%? When I go to: https://www.putnam.com/individual/mutua ... come-fund/ it lists fees anywhere from 0.29% to 0.80% (depending on the "class"). You might want to double check that.

Anyway, you don't list what their overall asset allocation is. Are they 50/50 stocks and bonds or 30/70 or some other amount? This is important to know so if/when you move money over to Vanguard you maintain the same asset allocation, that is, if they are even aware of the amount of risk they're taking with their portfoflio. Are you?

1.4% annual fee for Richy Rich advisor is high. The average for many advisors is around 1% (or less). He must be adding 0.4% extra value to your parents that other advisors don't provide, right? (being sarcastic there). Also remember that the fees you listed (expense ratios) are usually in addition to the 1.4% Richy Rich Advisor is charging them. I hate to see people taken advantage of, especially seniors. Can you tell?

Have you looked up the advisor to see if there are any complaints/infractions? Go here and check Richy Rich Advisor out:
https://www.adviserinfo.sec.gov/
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

DrDexter
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Joined: Sun Apr 16, 2017 2:19 pm

Re: Helping Parents with Retirement

Post by DrDexter » Sat Aug 11, 2018 10:43 pm

Thanks @arcticpineapplecorp great information.

I didn't realize that you don't need to pay any capital gains when switching the funds inside the IRAs. That is great news, because right now 85% of their total non-annuity money is in the IRAs and only 15% is in the taxable account. So that gives me some additional confidence I can not just move the holdings to Vanguard, but I can actually switch which funds they are in. That will save them some additional money by getting rid of some of the funds that have high expense ratios.

You are right the Putnam Short Duration Income (FDS TR) is not 0% expense ratio, I think for some reason at the time I originally looked it up I couldn't find it.

As you mentioned, I will move a bit slower on selling anything in the taxable, because I need to research the capital gains considerations first.

Sorry I didn't list the asset allocation originally, here is what it is. I am sorry there is this "OTHER" bucket, but I didn't know what to call things like the MLP and Hedge funds, etc. On the statement they are listed as Alternative Assets. Thanks for the info on the MLP,

Overall (including both IRAs and taxable)
OTHER 26.07%
US STOCK 25.37%
INTL STOCK 26.02%
BONDS 22.54%


Inside each account (% below are of that account, not the total portfolio of all accounts)
IRA #1
OTHER 25.06%
US STOCK 29.29%
INTL STOCK 29.42%
BONDS 16.23%

IRA #2
OTHER 27.10%
US STOCK 22.22%
INTL STOCK 23.33%
BONDS 27.35%

TAXABLE
OTHER 25.59%
US STOCK 24.29%
INTL STOCK 24.93%
BONDS 25.20%

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FiveK
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Re: Helping Parents with Retirement

Post by FiveK » Sat Aug 11, 2018 11:33 pm

arcticpineapplecorp. wrote:
Sat Aug 11, 2018 9:33 pm
Welcome to the group. You've got your parents' best interests at heart, which is more than I can say for their advisor. You've also got your work cut out for you.
+1 to that!

DrDexter, you have already received much good advice.

Reading between the lines, you will likely be doing your parents' tax returns now. It can't hurt to look at a 2018 estimate now. The "what if?" worksheets of TurboTax, TaxAct, etc., or the personal finance toolbox spreadsheet are some good options. It's even possible that some capital gains in the taxable account would incur zero federal tax. Take a look....

Most annuities sold by "advisors" are indeed terrible. Even worse, they come in many different versions so you'll need to understand the specific details of each. Have your parents already "annuitized" their contributions, or are they withdrawing an amount (usually 10%/yr) that may be withdrawn penalty-free without having annuitized their contributions?

NancyABQ
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Re: Helping Parents with Retirement

Post by NancyABQ » Sat Aug 11, 2018 11:48 pm

DrDexter wrote:
Sat Aug 11, 2018 10:43 pm
Thanks @arcticpineapplecorp great information.

I didn't realize that you don't need to pay any capital gains when switching the funds inside the IRAs. That is great news, because right now 85% of their total non-annuity money is in the IRAs and only 15% is in the taxable account. So that gives me some additional confidence I can not just move the holdings to Vanguard, but I can actually switch which funds they are in. That will save them some additional money by getting rid of some of the funds that have high expense ratios.
Since you are planning to totally change the investments in the IRAs anyway, you should look into whether it is less expensive to liquidate the portfolio to cash at the current custodian, vs. transferring in kind (i.e. transfer the money as cash, vs. transferring the current investments). I think the current custodian might charge you a fee to close those accounts, but might not charge trading fees on top of that. Just find out the costs of both methods before picking one (there are no tax consequences in the IRA, either way).

Also, I know you are aiming at Vanguard, but in my experience Schwab (and likely Fidelity) will most likely agree to reimburse the fee for closing the accounts and throw in some free trades or other deals. Just something to think about. You can't really go wrong with any of those (Fidelity, Schwab, Vanguard).

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celia
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Re: Helping Parents with Retirement

Post by celia » Sun Aug 12, 2018 12:08 am

FiveK wrote:
Sat Aug 11, 2018 11:33 pm
Reading between the lines, you will likely be doing your parents' tax returns now. It can't hurt to look at a 2018 estimate now.
I would start by looking at their 2017 return and the supporting documents. Start by seeing if there are other sources of income you weren't aware of. Figure out what tax bracket they are currently in and if they are near the top, middlle, or low end of the tax bracket.. Do you understand the return and could generate it or is it over your head?

Before you move any assets to Vanguard, you need to know the cost basis of each asset and if Vanguard (or the new custodian) is able to hold each asset with them. (Vanguard doesn't offer some of the high ER funds, as far as I know, but might be able to sell them.)

Since your father's health has taken a turn for the worse, it might be worth holding onto most of the assets in his taxable account until he dies, then the accounts will get a stepped-up basis.

And while you move accounts to a new custodian, fill out the custodian's Agent Authorization or DPOA form as a generic one is unlikely to be accepted at investment houses. The generic ones you likely have at the moment would likely work for dealing with the IRS, insurance companies, and their credit card companies.

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camillus
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Re: Helping Parents with Retirement

Post by camillus » Sun Aug 12, 2018 12:36 am

double post :happy
Last edited by camillus on Sun Aug 12, 2018 12:36 am, edited 1 time in total.

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camillus
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Re: Helping Parents with Retirement

Post by camillus » Sun Aug 12, 2018 12:36 am

Just want to encourage you, OP. I may be in your shoes one day.

Also, as was said above, moving the IRAs into low cost index funds will save more money on top of the management fee of the advisor.

After the rollover, say you save an average of 0.6% in fees on the holdings, added to the 1.4% management fee. You just found your parents 2% of their money back annually - or a third to a half of their annual withdrawal - free/found money. This is a real, tangible, significant, five-figure plus annual benefit to your parents.

EDIT --

Just had an "aha" moment. I have a solution for you regarding the taxable investments: a Donor Advised Fund, or "DAF".
https://www.bogleheads.org/wiki/Donor_advised_fund

You say your parents like to contribute to charities regularly. If they were to create a Donor Advised Fund, they could contribute appreciated stocks to this fund - pay no capital gains - and then "recommend" (send) donations to charities of their choosing, including their local church. So you could stop making donations from cash (funded from IRA distributions), and start making donations - tax free - from your taxable investments.

I know that Vanguard, Schwab, and Fidelity offer DAFs, but Vanguard has a much higher minimum initial balance at $25k. For that reason, I recommend that you target either Schwab or Fidelity as your one-stop investment house. Do some investigating, but afterwards your next step could be to roll the IRAs and set up a DAF at the same place.

It might be tricky to have your DAF receive stocks from a third party brokerage - wherever your taxable investments are now - but I would look into it by calling Schwab or Fidelity and asking basic those sorts of questions. I don't know how that works. Here is a place to start:
https://www.schwabcharitable.org/public ... ities.html

It might be fun & meaningful to you and your parents to work together to establish a "family foundation." :happy

Enjoy being a good son.
Last edited by camillus on Sun Aug 12, 2018 11:32 am, edited 1 time in total.

DC3509
Posts: 261
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Re: Helping Parents with Retirement

Post by DC3509 » Sun Aug 12, 2018 10:15 am

I am writing to encourage you as well.

When my dad (involuntarily) retired last year, my parents had a major decision to make on how to invest the lump sum payout he got from his pension. My parents listened to me discuss Vanguard, Bogle, etc. but still wanted to just "talk" to the local financial advisor in town. The local financial advisor was just like any other local financial advisor -- advising them to buy into risky funds with high expense ratios. It really ticked me off -- my parents have modest means and here was someone obviously trying to rip them off. Luckily, my parents realized I was right and the financial advisor was wrong and they let me help them get everything setup with Vanguard where we have a very good system right now. Yes, it has involved me getting into their finances but I feel like I averted a disaster and I don't regret it at all.

Many others here have written with more specific advice than I can give -- but you are doing great work OP and just wanted to pat you on the back!

student
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Re: Helping Parents with Retirement

Post by student » Sun Aug 12, 2018 10:19 am

When you transfer the IRA, don't forget to get a bonus. viewtopic.php?t=196884

DrDexter
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Re: Helping Parents with Retirement

Post by DrDexter » Sun Aug 12, 2018 2:47 pm

celia wrote:
Sun Aug 12, 2018 12:08 am
FiveK wrote:
Sat Aug 11, 2018 11:33 pm
Reading between the lines, you will likely be doing your parents' tax returns now. It can't hurt to look at a 2018 estimate now.
I would start by looking at their 2017 return and the supporting documents. Start by seeing if there are other sources of income you weren't aware of. Figure out what tax bracket they are currently in and if they are near the top, middlle, or low end of the tax bracket.. Do you understand the return and could generate it or is it over your head?

Before you move any assets to Vanguard, you need to know the cost basis of each asset and if Vanguard (or the new custodian) is able to hold each asset with them. (Vanguard doesn't offer some of the high ER funds, as far as I know, but might be able to sell them.)

And while you move accounts to a new custodian, fill out the custodian's Agent Authorization or DPOA form as a generic one is unlikely to be accepted at investment houses. The generic ones you likely have at the moment would likely work for dealing with the IRS, insurance companies, and their credit card companies.

Thanks, yes, I will also do their tax return for them. Great suggestion to get a copy of the 2017 return now to get a head start.
Yeah, determining the cost basis for each holding might be the more labor intensive part of this, I had to do it with my own portfolio before moving to Vanguard and it was particularly challenging since I had some very old stocks that were gifted to me from my grandfather which had meanwhile gone through multiple mergers and acquisitions, stock splits, etc and changed brokerage houses 5 times. Hopefully it will be simpler with my parents portfolio since I think most of this stuff is new-ish, seems like the current advisor purchased it all in the past few years.

But that is a great idea to start doing the tax simulators now and that should give me some further insights as to what the right moves might be. Also great suggestion @NancyABQ that if I do decide to liquidate to cash, trades are "free" at the with the current custodian (i.e. included as part of the 1.4% management fee). So it could be worth it to liquidate first because if I moved to Vanguard I would be paying $7 per trade. But in the grand scheme of things even if I end up paying ~$600 in trading fees to move stuff after moving to Vanguard, its not a huge sum compared to what I will be saving them by getting rid of the 1.4% management fee or what I might save in taxes. So I have to do the math and run some comparison scenarios and see what looks best.

Yeah as far as the DPOA forms, my experience has been what most others on Bogleheads have shared. While you do the generic forms and in theory institutions are supposed to accept them, so far everyone has wanted a supplemental form in addition to the generic forms. So that is a good point I will need to go ahead and start that process with Vanguard soon if I expect to move stuff over there soon.

DrDexter
Posts: 17
Joined: Sun Apr 16, 2017 2:19 pm

Re: Helping Parents with Retirement

Post by DrDexter » Sun Aug 12, 2018 2:51 pm

camillus wrote:
Sun Aug 12, 2018 12:36 am
Just want to encourage you, OP. I may be in your shoes one day.

Also, as was said above, moving the IRAs into low cost index funds will save more money on top of the management fee of the advisor.

After the rollover, say you save an average of 0.6% in fees on the holdings, added to the 1.4% management fee. You just found your parents 2% of their money back annually - or a third to a half of their annual withdrawal - free/found money. This is a real, tangible, significant, five-figure plus annual benefit to your parents.

EDIT --

Just had an "aha" moment. I have a solution for you regarding the taxable investments: a Donor Advised Fund, or "DAF".
https://www.bogleheads.org/wiki/Donor_advised_fund

You say your parents like to contribute to charities regularly. If they were to create a Donor Advised Fund, they could contribute appreciated stocks to this fund - pay no capital gains - and then "recommend" (send) donations to charities of their choosing, including their local church. So you could stop making donations from cash (funded from IRA distributions), and start making donations - tax free - from your taxable investments.

I know that Vanguard, Schwab, and Fidelity offer DAFs, but Vanguard has a much higher minimum initial balance at $25k. For that reason, I recommend that you target either Schwab or Fidelity as your one-stop investment house. Do some investigating, but afterwards your next step could be to roll the IRAs and set up a DAF at the same place.

It might be tricky to have your DAF receive stocks from a third party brokerage - wherever your taxable investments are now - but I would look into it by calling Schwab or Fidelity and asking basic those sorts of questions. I don't know how that works. Here is a place to start:
https://www.schwabcharitable.org/public ... ities.html

It might be fun & meaningful to you and your parents to work together to establish a "family foundation." :happy

Enjoy being a good son.

Really interesting idea and I will look into this. I'm definitely partial to doing everything with Vanguard for multiple reasons, but this could be interesting. Yeah +1 on saving an additional ~0.4% or so by getting rid of the higher expense ratio funds. My math is very similar to what you mention -- once you add up the 1.4% for the advisor + the 0.4% for the higher expense ratios, it's close to a 2% annual savings which seems very significant.

delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Helping Parents with Retirement

Post by delamer » Sun Aug 12, 2018 3:07 pm

I realize that you have a lot on your plate now with getting your parents’ accounts moved to Vanguard.

And you have received good advice above.

But once you have taken care of all that, I urge you to take a look at what will happen in terms of income and spending if you father should predecease your mother — especially given his poor health.

There will be some decrease in expenses, but probably a significant decline in Social Security income and maybe in the pension (depending on who earned it). My overall point is that you might want to encourage them to be a bit thriftier now to leave more in assets for your mother later. (I am in the no way suggesting that this will be an easy conversation to have.)

DrDexter
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Joined: Sun Apr 16, 2017 2:19 pm

Re: Helping Parents with Retirement

Post by DrDexter » Sun Aug 12, 2018 5:45 pm

delamer wrote:
Sun Aug 12, 2018 3:07 pm
I realize that you have a lot on your plate now with getting your parents’ accounts moved to Vanguard.

And you have received good advice above.

But once you have taken care of all that, I urge you to take a look at what will happen in terms of income and spending if you father should predecease your mother — especially given his poor health.

There will be some decrease in expenses, but probably a significant decline in Social Security income and maybe in the pension (depending on who earned it). My overall point is that you might want to encourage them to be a bit thriftier now to leave more in assets for your mother later. (I am in the no way suggesting that this will be an easy conversation to have.)
Hi, thanks for the honest assessment and that is a really good point I haven’t fully considered that scenario. I will do some more research and run some numbers to see what things look like if my mother outlives my father and how that changes the income picture. Thanks for this input.

denovo
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Re: Helping Parents with Retirement

Post by denovo » Sun Aug 12, 2018 6:30 pm

DrDexter wrote:
Sat Aug 11, 2018 7:30 pm
Hi

My retired father has recently fallen into poor physical and mental health, so he can no longer manage the finances for himself and my mother as he has done during his lifetime. I recently completed durable power of attorney paperwork for both of them and am set up legally to make decisions on their behalf with their consent.

1.Please update the post with their ages, give us a rough idea on income and assets. Not just percentages.

2. They can't afford to donate with that withdrawal rate. Zero them out. Charity begins at home.

3. Work on the annuities.

4. Fire the manager, actually do this now. Transfer to VG pronto.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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Peter Foley
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Re: Helping Parents with Retirement

Post by Peter Foley » Sun Aug 12, 2018 7:16 pm

Good suggestion regarding the use of the donor advised fund by camillus.

Just an FYI - Vanguard used to have much higher minimums to set up a donor advised fund than Schwab. I've been using the Schwab DAF for a few years and it was easy to set up and easy to make grants. It may be a reason to go with Schwab rather than Vanguard. Both offer a range of low cost index funds.

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Re: Helping Parents with Retirement

Post by dodecahedron » Sun Aug 12, 2018 8:29 pm

denovo wrote:
Sun Aug 12, 2018 6:30 pm

2. They can't afford to donate with that withdrawal rate. Zero them out. Charity begins at home.
I think this is an overly sweeping statement. For many people, the intangible benefit they get from contributing to charities they may care passionately about is a top priority in life.

We don't know where else the money is going, what else might more painlessly be cut if necessary.

There may be other "low hanging fruit," e.g., maybe a leaky toilet could be repaired that would greatly reduce their water bills, replacing incandescents with LEDs might reduce their electricity bills, etc.

That said, if charity is a priority, then the OP might consider suggesting to parents that they donate appreciated shares of high-expense funds in the taxable account rather than writing checks. This is by far the most tax efficient way to get rid of such high expense funds. Not all charities are set up to accept these types of gifts, however.

Another tax-efficient alternative would be to use Qualified Charitable Contributions (QCDs) out of the IRA. (This requires that the IRA owner be over 70 1/2.)

I concur with the suggestions above on getting deeply conversant with their tax situation. Structuring charitable donations so that they do not result in increasing AGI could be "low hanging fruit" that might greatly reduce their income tax bill. Effective marginal tax rates of retirees on SS can be surprisingly high.

More low-hanging fruit: check on income limits for any senior citizen property tax breaks for which they might potentially qualify. Again, you might be able to reduce their property taxes a lot by tax efficient strategies that keep their AGI low enough to qualify for such things.

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Re: Helping Parents with Retirement

Post by denovo » Sun Aug 12, 2018 8:58 pm

dodecahedron wrote:
Sun Aug 12, 2018 8:29 pm
denovo wrote:
Sun Aug 12, 2018 6:30 pm

2. They can't afford to donate with that withdrawal rate. Zero them out. Charity begins at home.
I think this is an overly sweeping statement. For many people, the intangible benefit they get from contributing to charities they may care passionately about is a top priority in life.

We don't know where else the money is going, what else might more painlessly be cut if necessary.

There may be other "low hanging fruit," e.g., maybe a leaky toilet could be repaired that would greatly reduce their water bills, replacing incandescents with LEDs might reduce their electricity bills, etc.



SWR is around 4, and OP's parents are at 6.4 percent. I doubt there's any little thing like changing light bulbs or the like that is going to bridge that gap.
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Re: Helping Parents with Retirement

Post by celia » Sun Aug 12, 2018 9:28 pm

delamer wrote:
Sun Aug 12, 2018 3:07 pm
My overall point is that you might want to encourage them to be a bit thriftier now to leave more in assets for your mother later. (I am in the no way suggesting that this will be an easy conversation to have.)
Since the dad is in poor health, he is not likely to be doing much spending, other than health-related expenses. However, there could be recurring expenses they don't really need like cable/Netflix/expensive phone plans, gym memberships, etc.

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Re: Helping Parents with Retirement

Post by dodecahedron » Sun Aug 12, 2018 9:40 pm

denovo wrote:
Sun Aug 12, 2018 8:58 pm
SWR is around 4, and OP's parents are at 6.4 percent. I doubt there's any little thing like changing light bulbs or the like that is going to bridge that gap.
You never know until you try. I am just saying that it is prematurely harsh to say "Zero out charity," when charity may be important to his parents. Over half the gap (1.4% out of the 2.4% gap) disappears just by getting rid of the financial advisor fees.

My summer electric usage is 1/3 of what it was before my husband died five years ago. (LEDs, replacing the ancient energy inefficient fridge with an energy efficient one that was smaller with fewer bells and whistles, opening windows strategically on cool nights rather than running AC continuously all summer, unplugging stuff that wasn't in use, being more careful about turning out lights when leaving rooms, enjoying more delightful time outside in shady spots in my yard allowing me not to run AC on hot days.) Water usage is way down too. (Got rid of pool, put in low maintenance plants in front yard.) Also successfully challenged my property tax assessment. Switched companies for homeowners/auto/umbrella insurance. Also learned to cook healthy enjoyable meals from low cost ingredients and eat out in restaurants much less frequently. Using the public library more and buying fewer books. Walking and taking inexpensive public transit more and driving less. Tax efficient investment location decisions have cut my income tax bill. Got rid of cable TV (after my husband died--he was the only watcher.) Got a cheaper phone plan. Applied for senior citizen property tax exemption as soon as I was eligible (this year!)

All these things have dramatically reduced my baseline household expenses, allowing me to donate more to charity, which is an important priority for me.

The OP's parents' situation may be quite different--we just don't know. Downsizing could be an option and/or a reverse mortgage. As Celia noted, there could be ongoing expenses for things like gym memberships that now go unused (just due to inertia).

I think the conclusion ought to be: take a careful look at where all expenses are going and how they fit with priorities and how they might be accomplished at lower cost (taking into account income taxes.) Don't just assume right away "Zero out charity."

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Re: Helping Parents with Retirement

Post by DrDexter » Mon Aug 13, 2018 6:08 pm

denovo wrote:
Sun Aug 12, 2018 6:30 pm


1.Please update the post with their ages, give us a rough idea on income and assets. Not just percentages.

2. They can't afford to donate with that withdrawal rate. Zero them out. Charity begins at home.

3. Work on the annuities.

4. Fire the manager, actually do this now. Transfer to VG pronto.
@denovo
Thanks for these points.

1. Added ages to the original post, mother 69, father 70. Rough income / assets: monthly budget is $5k / month income from the various sources. Assets are roughly mid 6 figures.

2. I will not be able to talk them out of tithing to their church, but there are some other donations I'm sure I can talk with them about stopping.

3. I will

4. In progress. Had them open up Vanguard accounts today, and starting the process of transferring the assets in-kind from the other brokerage.

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Re: Helping Parents with Retirement

Post by Peter Foley » Mon Aug 13, 2018 8:21 pm

You don't have to talk the out of tithing to their church. In fact, they may be able to increase the contributions. Meet with the pastor and talk to him/her about donating mutual fund shares directly if you do not want to go the donor advised fund route. Some of their holding have long term capital gains.

Also, you should be turning off dividend and capital gains reinvestments in their taxable account so that after a year all holdings have a long term capital gain basis.

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Re: Helping Parents with Retirement

Post by DrDexter » Mon Aug 27, 2018 5:04 pm

Related topic, but I started a new thread for it, since it is a topic all by itself.
In investigating their monthly expenses, one thing that I am trying to get rid of ASAP is they signed up for a vacation club, similar to a timeshare. I am also working on cleaning this up.
Just cross linking here
viewtopic.php?f=2&t=257567

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Re: Helping Parents with Retirement

Post by DrDexter » Sun Sep 09, 2018 7:39 pm

I am making some progress. The transfers are in progress from the current financial advisor to Vanguard, so that will save them 1.4% / year. I did in-kind transfers, but since I can move what is within the IRAs without any tax implications, I plan to move them into lower expense ratio funds, since their average right now is about 0.5% expense ratio across the various funds they are in.

3 questions here:

1. What do you think of the following proposed portfolio?

Previously they were in about 50/50 Stocks / Bonds and my parents seem comfortable with that asset allocation and level of risk and I am in agreement with that.

I was planning to put them into:

40% Total Stock Market Index
10% Total International Stock Market Index
50% Total Bond Market Index

Is it worth it to look at something like the Vanguard Managed Payout fund for tax or other reasons so I wouldn’t needed to be selling off assets as frequently? Or is it not worth it because I would be paying a higher expense ratio?

2. Where to prioritize withdrawing from?

I will work on getting the expenses down, but the situation they are currently in, they need to withdraw about $1,000 / month to supplement the income they get from their social security, pensions and part time work income.

They each have an individual IRA and they also have a taxable JTWROS account -- but the taxable account only has a very small amount compared to what is in the two IRAs.

I’m clear on minimum required distributions from the IRAs and they will need a little more than that minimum amount. So for the amounts that exceed the minimum required distribution, what do I need to consider in deciding where to withdraw from? For example, should I withdraw from the IRAs first and only tap into the joint taxable as a last resort? Or vice versa? Is it 100% dependent on tax implications and nothing else?

3. Timing for Withdrawals / selling assets?

I’ve done some searching around Bogleheads and see different theories, whether to do the withdrawals and re-balancing monthly, quarterly, or annually.

It appears some people are recommending to sell off once a year from whatever portion is needed to achieve the desired re-balance and then put 1 year funds into money market and do the monthly transfers to bank account from there. That makes sense to me unless there is any good reason not to do it this way.

What would you recommend?

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Re: Helping Parents with Retirement

Post by Peter Foley » Sun Sep 09, 2018 7:54 pm

In response to your questions:

1. I would be tempted to use a short term bond fund or a CD ladder for part of their bond allocation. Going that route would provide a bit more inflation protection.

2. This depends on their marginal tax rate. If they are in the 12% bracket, withdrawals from taxable if long term capital gains are not taxed would not be a bad approach. If one of your parents is a likely candidate for long term care and therefore itemized deductions that would reduce their taxable income substantially, that could be a motive for leaving some funds in a IRA where there is a chance that little for no tax will be paid on withdrawals in a year with a lot of medical expenses.

3. You can use the withdrawals to rebalance if you are so inclined. If you choose not to, look at least once a year take a look to make sure they have not drifted too far from your proposed asset allocation. (By the way, if you think they a cutting it a little close in terms of assets to support their retirement I would be inclined to go 40/60 rather than 50/50.)

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Re: Helping Parents with Retirement

Post by DrDexter » Sun Sep 09, 2018 8:05 pm

Peter Foley wrote:
Sun Sep 09, 2018 7:54 pm
In response to your questions:

1. I would be tempted to use a short term bond fund or a CD ladder for part of their bond allocation. Going that route would provide a bit more inflation protection.

2. This depends on their marginal tax rate. If they are in the 12% bracket, withdrawals from taxable if long term capital gains are not taxed would not be a bad approach. If one of your parents is a likely candidate for long term care and therefore itemized deductions that would reduce their taxable income substantially, that could be a motive for leaving some funds in a IRA where there is a chance that little for no tax will be paid on withdrawals in a year with a lot of medical expenses.

3. You can use the withdrawals to rebalance if you are so inclined. If you choose not to, look at least once a year take a look to make sure they have not drifted too far from your proposed asset allocation. (By the way, if you think they a cutting it a little close in terms of assets to support their retirement I would be inclined to go 40/60 rather than 50/50.)
Thanks for the input.

I will look into short term bond / cd ladder

They are in a higher tax bracket than 12%. One or both of them could be candidates for long term care.

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Re: Helping Parents with Retirement

Post by Dottie57 » Sun Sep 09, 2018 8:25 pm

NancyABQ wrote:
Sat Aug 11, 2018 11:48 pm
DrDexter wrote:
Sat Aug 11, 2018 10:43 pm
Thanks @arcticpineapplecorp great information.

I didn't realize that you don't need to pay any capital gains when switching the funds inside the IRAs. That is great news, because right now 85% of their total non-annuity money is in the IRAs and only 15% is in the taxable account. So that gives me some additional confidence I can not just move the holdings to Vanguard, but I can actually switch which funds they are in. That will save them some additional money by getting rid of some of the funds that have high expense ratios.
Since you are planning to totally change the investments in the IRAs anyway, you should look into whether it is less expensive to liquidate the portfolio to cash at the current custodian, vs. transferring in kind (i.e. transfer the money as cash, vs. transferring the current investments). I think the current custodian might charge you a fee to close those accounts, but might not charge trading fees on top of that. Just find out the costs of both methods before picking one (there are no tax consequences in the IRA, either way).

Also, I know you are aiming at Vanguard, but in my experience Schwab (and likely Fidelity) will most likely agree to reimburse the fee for closing the accounts and throw in some free trades or other deals. Just something to think about. You can't really go wrong with any of those (Fidelity, Schwab, Vanguard).
I moved to Fidelity a couple of years ago. I walked into the closest Fidelity office to me with my info and latest statement. All fees were waved for selling the funds I owned. The advisor I was assigned was great and he helped me tranfer the funds. I am sur either Schwab or Fidelity would be fine. Vanguard sounds like they aren’t as good at customer service.

Good luck.

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Re: Helping Parents with Retirement

Post by cas » Mon Sep 10, 2018 8:32 am

DrDexter wrote:
Sun Sep 09, 2018 7:39 pm

2. Where to prioritize withdrawing from?

They each have an individual IRA and they also have a taxable JTWROS account -- but the taxable account only has a very small amount compared to what is in the two IRAs.

I’m clear on minimum required distributions from the IRAs and they will need a little more than that minimum amount. So for the amounts that exceed the minimum required distribution, what do I need to consider in deciding where to withdraw from? For example, should I withdraw from the IRAs first and only tap into the joint taxable as a last resort? Or vice versa? Is it 100% dependent on tax implications and nothing else?
I've been in your position for a few years now, although my parents' financial mix is different, so things are different.

But, I did want to mention that I learned the trial-and-error way that tax considerations in retirement (especially after SS and RMDs) are much different than my own (working age) taxes. I wouldn't go so far as to say that tax implications are 100% of what drive withdrawal strategy, but there are a few things about taxes that I wish I had known at the beginning:

1. The way that taxation of social security phases in causes very odd tax behavior in certain income ranges. It sounds like your parents may be in or close to the relevant income range, although you'd have to do the calculations to figure that out. Depending exactly where your parents fall in relation to the SS "tax hump," that may influence whether you decide to pull from the (fully taxable IRA) or the (partially taxable) taxable account. For more information see: "Taxation of Social Security Benefits" https://www.bogleheads.org/wiki/Taxatio ... y_benefits (In particular, note in the examples how the marginal tax rate can be much higher than the nominal tax bracket rate.)

On the other hand, with large IRAs relative to the small taxable account, you may not have all that much flexibility. You can only do what you can do. Often you have to choose what is possible, rather than what is perfect.

2. From the numbers you have shared, it sounds like you could likely cut your parents' tax bill by $hundreds or possibly $thousands using QCDs (Qualified Charitable Distributions) from the IRAs to make donations (as opposed to pulling money from the IRAs, then later writing a check out of their checking account.) QCDs have become even more important to learn about with the new tax bill, which keeps most people from deducting their charitable contributions. QCDs are a way to take the new, larger standard deduction PLUS get the full deduction for charitable contributions. (And, if the SS "tax hump" is a factor for your parents, QCDs can help with that, too.)

However, there are lots of rules surrounding the QCDs (to start with, the person doing them has to be at least 70 1/2) - and I personally have never dealt with them. But it sounds like another topic that might be worth looking into (and is also a topic that touches upon decisions of when to pull from what account). See: "Qualified charitable distributions" https://www.bogleheads.org/wiki/Qualifi ... tributions - especially the Michael Kitces article and Morningstar video that are linked.

3. This shouldn't affect your parents while they are both living, but I'll give you head's up anyway. (It might become relevant if one parent passes.) Medicare premiums for Part B (doctor office visits & lab tests) and Part D (prescriptions) are dependent on income. This is called IRMAA (Income Related Medicare Adjustment Amount). The amount of the premium goes up in a "cliff" manner at very specific income (modified AGI) levels. Go $1 over the income "cliff" and suddenly you owe $hundreds to $thousands more in Medicare premiums. (The first relevant point is $170,000 for a couple filing taxes married-filing-jointly, so your parents probably aren't currently affected. But someone filing single gets to the first "cliff" at $85,000.) Anyway ... it is best to avoid going just barely over the "cliff", which can sometimes be managed by choosing which account to take money from (and by using QCDs).

(Side note: speaking of Medicare, that is another new topic for most working age adult children who start to assist their parent with managing finances. I think Medicare open enrollment is coming up soon. Given that your father is facing health challenges - and possibly has had prescription changes in the last year - you might want to look into whether your parents buy Medicare Pt D to cover prescriptions and whether that particular Part D plan provides suitable coverage for any prescriptions your father (or your mother) might be taking.) (It is also possible that they are getting prescription coverage via a Medicare Advantage plan or through retiree coverage from a former employer - or had it slip through the cracks and don't have prescription coverage at all. As I said - a whole 'nother complicated topic.)

4. You're already familiar with how the issue of taxes on capital gains might affect which account you want to draw from.

You sound like you are on top of all this, so maybe none of what I said is new. I wanted to give you a heads up, just in case.

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Re: Helping Parents with Retirement

Post by DrDexter » Mon Sep 10, 2018 10:55 am

@cas

Thank you, a lot of great info your post for me to look into. Others have already suggested I get started on the 2018 Tax return now and that might be a good way to get a better understanding of the tax situation, so I could more confidently answer about the tax implications of different strategies. Thanks to your links I now see what you mean by the "hump" and yes, I think they might be right in that range. So I will look into it in some more detail what the tax implications are and then make the call about where to withdraw from.

Also, definitely going to look into the Qualified Charitable Distributions as well as what they have for Part B / D Medicare coverage.

Thank you very much for the links for further reading. As you mention, while I spent a lot of time learning on Bogleheads for my own situation, there are lots of differences between my situation and the situation of my parents, so there are some new things to learn, so I really appreciate the tips you shared about some of the areas to look into in more detail.

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Re: Helping Parents with Retirement

Post by InMyDreams » Mon Sep 10, 2018 11:32 am

DrDexter wrote:
Mon Sep 10, 2018 10:55 am
what they have for Part B / D Medicare coverage.
Hopefully they also have either a Medigap policy or are enrolled in a MedAdvantage program.

I've run into people who think they don't need Medigap, that Medicare parts A & B are sufficient. But no Medigap or no MedAdvantage leaves you vulnerable to potentially huge, unlimited bills. There is no max out of pocket limit in Medicare parts A & B when they are stand alone.

Depending on where they live, there may or may not be a MedAdvantage program available. If available, they can represent cost savings, but they are usually restrictive. I personally don't intend to go that route, but if you choose the provider well, it can work.

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Re: Helping Parents with Retirement

Post by DrDexter » Mon Sep 10, 2018 5:09 pm

@InMyDreams Thank you for the additional info on Medicare. I just read https://www.bogleheads.org/wiki/Medicare that explains some basics but doesn’t go into too much detail. Can anyone recommend any good articles / books for more comprehensive info re: Medicare?

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Re: Helping Parents with Retirement

Post by startwithtruth » Tue Sep 11, 2018 4:56 pm

DrDexter wrote:
Mon Sep 10, 2018 5:09 pm
@InMyDreams Thank you for the additional info on Medicare. I just read https://www.bogleheads.org/wiki/Medicare that explains some basics but doesn’t go into too much detail. Can anyone recommend any good articles / books for more comprehensive info re: Medicare?
I really liked Philip Moeller's "Get What's Yours for Medicare", but, I haven't had a chance to use the knowledge yet (I'm several years away from Medicare); it's almost 2 years old though so you'd need to watch for any changes in the law since it was written.
https://www.amazon.com/Get-Whats-Yours- ... 899&sr=1-1

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