Parents' Investment plan--ages 75, both with illness, contemplating retirement home

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northernisland
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Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by northernisland » Fri Jun 07, 2019 6:41 am

Hi All! It's been a while since I posted here. My parents are both 75, still married, live in the south, and both facing diseases with iffy prognosis (dad is newly diagnosed with cancer, where the survival rate is around 50/50 and mom has major challenges moving around and has a kind of heart hypertension that has her on oxygen). I am not asking for any medical advice.

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INCOME/INVESTMENTS

Income: They both have social security and pensions. Dad says they're receiving around $70,000/year. If something happened to him, it would only drop to around $60,000 for mom. Pension is safe.

They own a house (~$200,000)

All of their investments are in taxable accounts at Vanguard, split roughly 60/40 between Total Stock and Total Bond and the total is around $600,000. They say they haven't needed to use this and have been living on income to this point.

---------------

My parents are considering moving into a retirement home, especially because surgery could have him in the hospital for a month and he now does most of the housework. They've found a good retirement home where they can either pay in and get discounts or pay month-to-month (around $4000/month) and there's also a skilled nursing. Brother and I are a little concerned because it is a ways away. One possibility might be for them to try it for a few months when he does his surgery and see how it goes.

Dad is wanting to move ~$200,000 out of the Total Stock. He talked to an investor who is recommending something that sounds like an annuity (where it would be partially invested in the market but supposedly safer). As soon as I get the info tomorrow I will post here.

Dad is wanting me and my brother involved, plans to put us on their bank account, and share all their investment info. Brother doesn't have much invested, and I had encouraged dad to do Vanguard a decade ago (and he's been happy).

QUESTIONS:
-Do you have advice on the best way to withdraw Total Stock? He is feeling that the portfolio is misbalanced now and wants lower risk. Should they just accept that there will be capital gains and move the whole $200,000 now? (Their goal is to be more like 60/40 or 70/30 bonds/stocks.)
-I am also thinking that it's in his interest to be in a safer investment for the near future as they figure out the retirement home--money market, bank account, bonds, etc. Is this right? I don't totally understand what the advisor is recommending, but am skeptical.
-What questions can I ask about the financial advisor's recommended investment to give clarity to my parents?

Many thanks!

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ruralavalon
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by ruralavalon » Fri Jun 07, 2019 7:29 am

northernisland wrote:
Fri Jun 07, 2019 6:41 am
Hi All! It's been a while since I posted here. My parents are both 75, still married, live in the south, and both facing diseases with iffy prognosis (dad is newly diagnosed with cancer, where the survival rate is around 50/50 and mom has major challenges moving around and has a kind of heart hypertension that has her on oxygen). I am not asking for any medical advice.

----------------
INCOME/INVESTMENTS

Income: They both have social security and pensions. Dad says they're receiving around $70,000/year. If something happened to him, it would only drop to around $60,000 for mom. Pension is safe.

They own a house (~$200,000)

All of their investments are in taxable accounts at Vanguard, split roughly 60/40 between Total Stock and Total Bond and the total is around $600,000. They say they haven't needed to use this and have been living on income to this point.

---------------

My parents are considering moving into a retirement home, especially because surgery could have him in the hospital for a month and he now does most of the housework. They've found a good retirement home where they can either pay in and get discounts or pay month-to-month (around $4000/month) and there's also a skilled nursing. Brother and I are a little concerned because it is a ways away. One possibility might be for them to try it for a few months when he does his surgery and see how it goes.
Is this an endowment home where (1) one alternative is that you pay a large one-time payment to buy care for life, and (2) another alternative is pay as you go, a fixed rental every month as long as you live there?


northernisland wrote:
Fri Jun 07, 2019 6:41 am
Dad is wanting to move ~$200,000 out of the Total Stock. He talked to an investor who is recommending something that sounds like an annuity (where it would be partially invested in the market but supposedly safer). As soon as I get the info tomorrow I will post here.
This sounds vaguely like an equity indexed annuity.

Beware, that is a very poor investment product. Finra alert "Equity-Indexed Annuities—A Complex Choice".

Who is the advisor? An insurance broker, stock broker, CFP, CFA, CPA, attorney, some other occupation?


northernisland wrote:
Fri Jun 07, 2019 6:41 am
Dad is wanting me and my brother involved, plans to put us on their bank account, and share all their investment info. Brother doesn't have much invested, and I had encouraged dad to do Vanguard a decade ago (and he's been happy).
Have your parents set up durable health care powers of attorney, and durable powers of attorney for property?

That might be a good idea.

northernisland wrote:
Fri Jun 07, 2019 6:41 am
QUESTIONS:
-Do you have advice on the best way to withdraw Total Stock? He is feeling that the portfolio is misbalanced now and wants lower risk. Should they just accept that there will be capital gains and move the whole $200,000 now? (Their goal is to be more like 60/40 or 70/30 bonds/stocks.)
-I am also thinking that it's in his interest to be in a safer investment for the near future as they figure out the retirement home--money market, bank account, bonds, etc. Is this right? I don't totally understand what the advisor is recommending, but am skeptical.
-What questions can I ask about the financial advisor's recommended investment to give clarity to my parents?

Many thanks!
It's good that you are skeptical, I think there is reason to question the annuity until the terms are completely understood.

Right now I don't see a reason to withdraw the $200k from the total stock market index fund.

What do your parents want to achieve by rearranging their investments?

If they want guaranteed income to pay the $4k monthly charge at the home, they could consider a Single Premium Immediate Annuity (SPIA). For rates see: www.immediateannuities.com. But with their health issues they need medical underwriting for the annuity to make any sense.

If they simply want a more conservative portfolio then a higher fixed income allocation (bond fund, money market fund) is the better idea.
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Skiandswim
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by Skiandswim » Fri Jun 07, 2019 12:48 pm

I might consider walking your parents through the Vanguard Portfolio Questionnaire given the changes in their health and potential move. The proposed $200,000 shift would create a 27/73 portfolio versus the 64/40 now.

https://personal.vanguard.com/us/FundsInvQuestionnaire

The capital gains will have no direct impact on their SS benefits. However, the investment income will increase their adjusted gross income (AGI), which can make more of their SS benefit taxable, resulting in less after-tax SS benefits. Since investment income increases AGI, this can increase the amount they pay for Medicare Part B premium, which will reduce the amount you actually receive from SS. Phasing any portfolio capital gains over two years or more might be beneficial (unclear on actual CG).

Assisted living costs have been increasing 5-7% per year. The initial monthly cost will likely exceed investment returns or SS cost of living increases. Creating a simple budget might help them assess the situation a few years from now.

InMyDreams
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by InMyDreams » Fri Jun 07, 2019 1:13 pm

Your question list doesn't mention the move to the "retirement home", but -
* Yes, my experience, and that of friends, places a premium on some place close to relatives.
* Have you checked out the retirement home? If it offers skilled nursing, then it should have reviews by the state and/or medicare.
* Have they shopped around? Some senior living places, not CCRCs, offer an age in place experience, that would allow your parents to stay in one apartment until they truly needed 24 hr nursing care.
* There is a growing practice of senior care managers - someone who really looks at the needs and knows whats available in community. I have not used such a service, only heard about them.

Best wishes - I'm sure your parents appreciate your caring and concern.

delamer
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by delamer » Fri Jun 07, 2019 1:29 pm

Presumably your parents would sell their home if they moved to the retirement community.

If so, that would give them an immediate infusion cash that would reallocate their portfolio to 45% stocks, 20% cash, and 35% bonds.

So my recommendation would be to make no portfolio changes until they decided 1) if they are going to move and 2) if they decide to move, if they are going do a deposit or month-to-month.

You’ll find very little support for annuities on this forum, with the exception of single premium immediate annuities (SPIA). Other annuities are high in fees and the “return” they guarantee is partially composed of their own contributions.

Are they spending the interest/dividends thrown off by their portfolio or reinvesting it? If they are reinvesting it, directing it toward a money market fund would be a way to accumulate some cash.

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BL
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by BL » Fri Jun 07, 2019 1:39 pm

If they sell their house that could be put into the bond side: money market, CD/certificates, short term bonds or total bond.

If that isn't going to happen soon, perhaps selling some, but not all this year, might help lower AA without too big CGs or IRMAA. A couple years ago, bringing modified AGI over 170k would mean higher Medicare part B costs a couple years later. Not sure what the exact numbers are now, but AGI of 214k was a bigger step up in Medicare. You can Google to get these numbers.

Can you get access to latest 1040 return? Then you could check what they are now, and estimate what changes might happen with various choices. Also, tax bracket will likely go up when one person passes.

Do not buy that Annuity!

BarbBrooklyn
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by BarbBrooklyn » Fri Jun 07, 2019 4:21 pm

I think that since they are a couple with "midlevel" assets and health issues, they would be well advised to consult with a certified (NAELA or CELA) level eldercare attorney.

Applying for Medicaid benefits when there is a spouse involved is not a DIY project; there are complex rules which differ by state about qualifications and look backs. It may be that neither of your parents ever qualifies for Medicaid. But since we can't predict how long anyone is going to live, I think it behooves us to say "gee, we never know" and check ou the regs.
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Watty
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by Watty » Fri Jun 07, 2019 7:24 pm

northernisland wrote:
Fri Jun 07, 2019 6:41 am
Income: They both have social security and pensions. Dad says they're receiving around $70,000/year. If something happened to him, it would only drop to around $60,000 for mom. Pension is safe.

.....

They've found a good retirement home where they can either pay in and get discounts or pay month-to-month (around $4000/month) and there's also a skilled nursing.
$4K a month is $48K a year and they have $60-$70K in income.

If they sell the house they will have $800K in investments. If it is getting a 2% dividend then that is another $16K a year. That would bring their total up to $86K a year without touching their principal.

I may have missed it but if they move to the retirement home then what will their expenses be other than the $48K a year? I would suspect that as long as they need that level of care they would be OK financially.

northernisland wrote:
Fri Jun 07, 2019 6:41 am
All of their investments are in taxable accounts at Vanguard, split roughly 60/40 between Total Stock and Total Bond and the total is around $600,000.
.....
-Do you have advice on the best way to withdraw Total Stock? He is feeling that the portfolio is misbalanced now and wants lower risk. Should they just accept that there will be capital gains and move the whole $200,000 now? (Their goal is to be more like 60/40 or 70/30 bonds/stocks.)
That would mean that they have $360K in stocks and $240K in bonds now. If they sell the house for $200K and bought bonds with it then they would have $360K in stocks and $440K in bonds for a total of $800K. That is 55% bonds and 45% stocks and so they could get to the a 65/35 asset allocation by moving $80K from stocks to bonds.

It was not clear if any of the money was in retirement account where taxes are not an issue but if so then they could just move the money in the retirement account and not have to pay any taxes.
northernisland wrote:
Fri Jun 07, 2019 6:41 am
Dad is wanting to move ~$200,000 out of the Total Stock. He talked to an investor who is recommending something that sounds like an annuity (where it would be partially invested in the market but supposedly safer). As soon as I get the info tomorrow I will post here.
I would suspect that it is some sort of complex high cost variable annuity that will make the sales person a large commission and saddle them with high fees for years to come.

Be very cautious about this. They try to sell all sorts of complex investments that are called variations of annuities but usually the only type that should be considered by most people are Single Premium Immediate Annuities(SPIA) which is essentially like buying a pension. Because of their health issues they likely have a lower than average life expectancy for a 75 year old so these would not be a good choice for them.

One promise of these is that they will provide ongoing income but if their pensions and interest cover their expenses then they would just be taking that income, paying taxes on it, and then investing it since they have no need to the income. At best an annuity is like an insurance policy and there is no need to pay for insurance when you do not have any need for it. It would be like buying car insurance when you don't drive.

(Few disclaimers: 1) One in a blue moon a complex annuity can make sense for estate planning for people that have an order of magnitude more than your parents have. 2) A SPIA can be a valid choice for some people in better health when steady income is actually needed.)
northernisland wrote:
Fri Jun 07, 2019 6:41 am
-What questions can I ask about the financial advisor's recommended investment to give clarity to my parents?
1) Please provide a written statement saying that you have a fiduciary responsibility to my parents. If they do not give you this then they are just a salesperson so that would be the end of the conversation. It should be a simple statement that is clear, if they give you a long complex document that is full of legalese then they are dodging the question.

2) Please give me a written stating how you are compensated. No one works for free so there is nothing inherently wrong with them making some income from providing a service but you need to know that what they are making is reasonable. With some annuities they may make up to 10% commision the first year which is why they sell them so hard. For a $200K annuity the salesperson might get paid up to $20K.

3) The brochure that they will likely give you will have examples of a bunch of income numbers. Ask them to show you in the literature the details of how those number are calculated. Often there are many problems with the numbers they show since they will just be overly optimistic projections and not guarantees. A guaranteed return can also be tricky since the guaranteed often is misleading and that 7% return might really be a 1% actual return and they would also give you back 6% of your money each year. Given that inflation might be 3% or higher that is pretty worthless. The "guarantee" might also only apply to a small fraction of your investment, or just for a limited time.

You need to see the details of this in writing and understand how it works based on what you read, not what they say. It is common for annuity salespeople to outright lie but since you don't have a recording of them lying there is no way that you can prove that they lied. Even if you could there will likely be a clause in the contract that prevents you from sueing and instead you would have to use an arbitrator that they picked.

I could go on but you get the idea.
northernisland wrote:
Fri Jun 07, 2019 6:41 am
Dad is wanting me and my brother involved, plans to put us on their bank account, and share all their investment info. Brother doesn't have much invested, and I had encouraged dad to do Vanguard a decade ago (and he's been happy).
Don't put your names on the accounts unless a lawyer that specializes in elder care law tells you what to do.

It can be a mess if you or your brother dies, gets divorced, gets sued, etc. If you have college age kids then those accounts may also need to be listed on any college financial aid statements and that could prevent your kids from getting financial aid or low cost student loans.

They will need for someone like you or your brother to have things like a power of attorney and medical directives, etc, so you can handle their finances and healthcare decisions for them if they are unable to do that.

One pitfall with this is that some companies like Vanguard want the power of attorney document to be done on their form so you should check on that. Another is that in some states a special power of attorney may be needed for real estate transactions, like selling their house.

An elder care lawyer can help you set these up.

One other thing to keep in mind is that on an IRA account the beneficiary will normally override whatever their wills say so those need to be right and they may need to be updated if one of them dies.

Wakefield1
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by Wakefield1 » Fri Jun 07, 2019 8:13 pm

northernisland wrote:
Fri Jun 07, 2019 6:41 am


Dad is wanting to move ~$200,000 out of the Total Stock. He talked to an investor who is recommending something that sounds like an annuity
-What questions can I ask about the financial advisor's recommended investment to give clarity to my parents?

Many thanks!
As others have said be very skeptical when dealing with commissioned salesmen.
Wonder how much of that $200,000 would go straight into the salesman's pocket?

MnD
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by MnD » Sat Jun 08, 2019 8:31 am

Change nothing with investments, currently 60/40. Very appropriate and no need to create tax liabilities.
Income is more than sufficient and like others have said, a likely home sale could be added to cash/fixed income and move the overall portfolio needle closer to 50/50. Go Month to month on the retirement home versus a lump-sum buy-in given their diagnoses/prognosis - pulmonary hypertension and 50/50 survival cancer.

The indexed annuity "suggestion" is a predatory grab attempt by someone taking advantage of older persons having health crises and fear uncertainty associated with that. Do _whatever_ you can to convince your father to separate his association from this individual. Assume they will be persistent and not give up easily. Good luck and sorry to hear of your parents health situation.

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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by Tyler Aspect » Sat Jun 08, 2019 5:09 pm

60% stock / 40% bond portfolio is appropriate for long term investment. Doubly Ok since your parents have pension and social security meaning they do not have to tap it.

Do not buy any annuity product at this time. Annuity salesman are bad news, often preying on the elderly population to sell high commission products.
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northernisland
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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by northernisland » Mon Jun 10, 2019 1:37 pm

Hi All,

I just wanted belatedly to say I am *so grateful* for the advice and you all were a big help. I looked at the actual numbers and it was more like 400,000 in taxable stocks, 200,000 in taxable bonds, and then another 90,000 in stocks in roths and iras. Their big concerns were feeling stressed out by the current asset allocation (with the market run up) and some caution about capital gains. It did help to remind them that their pensions + house provide some extra safety, and I also realized that moving stocks-->bonds in their IRAs would save them some capital gains but provide a more conservative asset allocation.

What they will do is sell 100,000 in stocks (capital gains should be around 7,000), and then move most of the stocks in their roths and iras into bonds. For the 100,000 they sell in stocks, they are moving 30,000 to their bank account for upcoming expenses and then 70,000 may just stay in the money market.

You all also called it on the weird Nationwide annuity. It uses their made-up index from late 2016 that they back-test to claim it would have been stable through 2008, etc. It would have complicated taxes, been harder to get out of, annoying for heirs, etc. I showed dad some of the threads here on the equity indexed annuities. It was especially annoying in that they probably don't have 10 years so what they really want is access to money in case they need to do a retirement home/medical expenses/etc.

You all / bogleheads have saved them probably tens of thousands of dollars out of the gate on capital gains, commissions, and fees, and even more in the years ahead. Thank you so much!

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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by Beehave » Mon Jun 10, 2019 2:07 pm

Some annuities provide income and are implicitly bets on longer than average longevity. Othrs shelter assets for future, long-term growth. It seems your parents have adequate income for current needs, and are looking in the very near future to significantly larger expense for care that an annuity will not cover by itself. An annuity does not look like what your parents need - - there are just too many implicit fees, tie-ups of assets, and bets on the future that just seem a bad fit here.

If an annuity is out, then the idea of moving some money out of Total Stock makes sense. Your parents do not now need to focus on long-term growth or income. Their focus on having that nest egg in the past (so that it grew to wheret is today) has enabled thm to have that asset now in the present. They need to be secure in the use of their current income and use that nest egg in addition to handle these new, medically necessitated expenses.

It seems likely to me that money withdrawn from pre-tax retirement funds and capital gains from mutual fund accounts and regular income from dividends may all be offset by tax deductible expenses for your parents' care in the facility they plan to move to. I'd suggest carefully researching the tax deductibility of the care they are and will be receiving, documenting it carefully, and then shifting assets from Total Stock fund to short-term bond or ultra short term bond or money market or short term laddered CD and/or cash. They should retain some stock (maybe 20-30%????) because hopefully they overcome their current diffiulties and live a long time and need some growth of assets. But they need a solid supply of ongoing funds now. I'd suggest securing those funds by selling off the stocks and holding safe bonds or cash to pay for the upcoming expenses and making sure to understand what taxes on theeir income need to be paid and which do not.

Above is my opinion as an amateur, hope it is helpful - - others may well have more expertise and better understanding in which case listen to them!!!

Best wishes to all, hope things work out well.

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Re: Parents' Investment plan--ages 75, both with illness, contemplating retirement home

Post by ruralavalon » Mon Jun 10, 2019 2:28 pm

northernisland wrote:
Mon Jun 10, 2019 1:37 pm
Hi All,

I just wanted belatedly to say I am *so grateful* for the advice and you all were a big help. I looked at the actual numbers and it was more like 400,000 in taxable stocks, 200,000 in taxable bonds, and then another 90,000 in stocks in roths and iras. Their big concerns were feeling stressed out by the current asset allocation (with the market run up) and some caution about capital gains. It did help to remind them that their pensions + house provide some extra safety, and I also realized that moving stocks-->bonds in their IRAs would save them some capital gains but provide a more conservative asset allocation.

What they will do is sell 100,000 in stocks (capital gains should be around 7,000), and then move most of the stocks in their roths and iras into bonds. For the 100,000 they sell in stocks, they are moving 30,000 to their bank account for upcoming expenses and then 70,000 may just stay in the money market.

You all also called it on the weird Nationwide annuity. It uses their made-up index from late 2016 that they back-test to claim it would have been stable through 2008, etc. It would have complicated taxes, been harder to get out of, annoying for heirs, etc. I showed dad some of the threads here on the equity indexed annuities. It was especially annoying in that they probably don't have 10 years so what they really want is access to money in case they need to do a retirement home/medical expenses/etc.

You all / bogleheads have saved them probably tens of thousands of dollars out of the gate on capital gains, commissions, and fees, and even more in the years ahead. Thank you so much!
It is good to see that they will not be hoaxed into the equity indexed annuity, and will simply rebalance a bit and free up some cash at the cost of a fairly modest capital gain.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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