Investment Help Needed for a Friend

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Topic Author
Alana888
Posts: 72
Joined: Thu Apr 10, 2014 3:50 am

Investment Help Needed for a Friend

Post by Alana888 » Tue Jun 11, 2019 10:07 pm

This post is a question on how to advise a friend who has recently asked me to help him with his investments

His info~
Emergency fund: $9000, about 3 months expenses
Debt: Mortgage on rental property $220K at 4.6%
Tax Filing Status: single
Tax Rate: 12% Federal, 9% State
State of Residence: CA
Age: 62
Desired Asset allocation: 40% stocks / 60% bonds, CD, Cash
Desired International allocation: not sure
Current assets
Taxable
$120K in American Mutual Fund (AMRMX) ER 0.57% Class A shares with front load
$60 K in CD
$6500 in savings account will be contributed to Roth Ira later this year

Roth IRA
$7500 – this was also in American Mutual fund but I advised him to move it to Vanguard because of the high fees, not sure what to invest it in at Vanguard

Rental Properties
1 owned individually, breaking even, worth about $450K with about $225 mortgage owed at 4.6%
2 owned with 2 siblings, his share worth about $200K, no mortgage

His income has not allowed much for savings and likely won’t in the future, so all of the above have been accumulated through inheritance or gifts from family.
His mother left him and his siblings 3 rental properties when she died. One has been sold and his share of the profit went to pay off his debt with $60,000 remaining, currently in a 2 year CD earning 2.8%.

The 2 other family rental properties are breaking even (income and expenses) and can only be sold with the agreement of all siblings which is not going to happen right now,. If they were all sold now, his share would be about $200K, but who knows what the situation will be whenever everyone is ready to sell.
He has another rental property that he owns individually with about $200K in equity. He might live in that house some day so doesn’t want to sell it right now.

The money in the American Mutual fund is yearly birthday gifts from his father.
The fund is 88% stock and the fees are high (ER 0.57% Management fees .24%, other expenses .09%, Service 12b-1 .24%)
I don’t like this fund because of the very high fees and also at his age to have such a high percentage of his assets in stock feels too risky. Preserving capital is his highest priority.

The hesitancy in selling this American Fund despite its undesirability is
1- the tax hit – his father opened this account for him about 28 years ago so there is likely significant capital gains and
2- he receives a $9600 a year ACA health insurance subsidy so we don’t want him to fall over the ACA cliff as a result of selling this fund.

I advised him to stop reinvesting the dividends and capital gains distributions in the American Mutual fund.
I also advised him to move the Roth IRA from the American Mutual Fund to Vanguard (in kind) though I am not sure what invest it at Vanguard, Perhaps Total Bond Fund? I understand that bonds are not the best for a Roth IRA but given the already too high allocation to stocks (he has very low risk tolerance) , I don’t know what would be better, though I am open to suggestions.

He has asked his father to contribute any future gifts to another fund, but his father was not amenable to that and since these contributions of about $3k a year are a gift, he respects his fathers right to give whatever gift he chooses. His father also has investments in American Mutual fund so there may be some ease and benefit in transferring funds from his account to my friends.
I thought of recommending taking the $ out the American fund as soon as his father deposits them, (last in first out cost basis to eliminate any income) but the front load charges eliminate much of the gift if the $ are withdrawn it right away. Dad is 90 years old so these contributions wont continue forever and when he dies all his assets go to his much younger wife and then to her family, so not that much more is anticipated in the future

His goal is to move more toward a 50/50 or even 40/60 stock/bond, CD allocation and get out of as much of the American Fund as possible without falling off the ACA cliff. Since his income is freelance and unpredictable he cant know what the rest of his income will be until the end of the year, but best guess is likely around $40K. Its been a little challenging trying to find out how much of the American Mutual Fund he can sell and still stay under the ACA limit as finding out the cost basis has been challenging. Since he is 62 years old, it will be easier to get out of this fund in 3 years when Medicare kicks in and he doesn’t have to worry about the ACA subsidy, but if there is any way to get out of it sooner, that would be great

I realize he is not is a good position financially for his age but I would like to help him make the most of what he has with a level of risk he is comfortable with.
Please let me know if there is anything I am missing

Thank you for your time

User avatar
Watty
Posts: 16087
Joined: Wed Oct 10, 2007 3:55 pm

Re: Investment Help Needed for a Friend

Post by Watty » Tue Jun 11, 2019 11:50 pm

Alana888 wrote:
Tue Jun 11, 2019 10:07 pm
Please let me know if there is anything I am missing
What is his housing situation?

He has about $225K in home equity in the rental he owns by himself so it might make sense to sell that and then buy a much less expensive property for cash that he could live in. It can vary a lot but at least for me having a pid off house made my retirement numbers work a lot better.

What is his Social Security situation?

If he was ever widowed or divorced after being married ten years he may also be able to claim SS based on the ex spouses history. He should check out this website to get a suggested SS claiming strategy.

https://opensocialsecurity.com/

Alana888 wrote:
Tue Jun 11, 2019 10:07 pm
He has asked his father to contribute any future gifts to another fund, but his father was not amenable to that and since these contributions of about $3k a year are a gift, he respects his fathers right to give whatever gift he chooses. His father also has investments in American Mutual fund so there may be some ease and benefit in transferring funds from his account to my friends.
If his father is transferring shares into his account, and not cash, then the cost basis would be what his father paid for the shares possibly decades ago. He will need that when he eventually sells the mutual fund. If so then he should check to see if he can get the cost basis information from his father, or his broker, while he is still alive.

Topic Author
Alana888
Posts: 72
Joined: Thu Apr 10, 2014 3:50 am

Re: Investment Help Needed for a Friend

Post by Alana888 » Wed Jun 12, 2019 10:01 am

Thank you for the reply. There are no homes for for anywhere near $225K in the area the home is in so no chance of buying a less expensive property and the mortgage payment on this house is less than a rental would be in this area. Right now he rents in another area for work.. Selling the property isn't an option right now for many reasons, too many to go into. I am more interested in feedback about the other investments. There are no ex spouses and his social security will be low in retirement, maybe a few hundred per month.

I am concerned to hear that his cost basis on the American shares will be what his father paid for the shares probably 50 years ago. That makes these gifts much less valuable than I'd thought since a large amount will go to taxes when the shares are sold.
Thank you for the info

HomeStretch
Posts: 488
Joined: Thu Dec 27, 2018 3:06 pm

Re: Investment Help Needed for a Friend

Post by HomeStretch » Wed Jun 12, 2019 10:42 am

To help guide his financial decisions, your friend needs to get a handle on his projected annual retirement income (social security, rental income, portfolio withdrawals) as well as his projected annual retirement expenses, including healthcare and taxes.

If he withdrew/earned $24,000 (4%) annually from his investments/rental properties and had social security of $12,000, he would cover $36k in annual retirement expenses, assuming his expenses remain the same as they currently are.

He should plan on continuing to work to fund his living expenses, increase his social security benefit and make sure he has enough credits to be eligible for Medicare.

Your friend has $203k in cash/cd/investments and $425k real estate equity for a total of $628k net worth.
1. Increase his emergency fund to 6 months living expenses in a high-yield savings account.
2. You gave your friend good advice to move his accounts to Vanguard and stop reinvesting American Fund dividends. He should pull together cost basis info and start selling high cost fund as his tax/ACA situation allows.
3. 2019 roth contribution limit > age 50 is $7,000. He should make the contribution now rather than hold in a taxable account to reduce taxable interest income.
4. Invest the remaining funds/CD when it matures in low cost, self-managed indexed funds using a conservative allocation.
5. Unless very profitable, consider selling 2 rental properties owned with siblings sooner rather than later.
6. Consider selling primary residence when he moves back and rent or look for lower cost condo to reduce his housing costs in retirement.

Topic Author
Alana888
Posts: 72
Joined: Thu Apr 10, 2014 3:50 am

Re: Investment Help Needed for a Friend

Post by Alana888 » Wed Jun 12, 2019 11:52 am

To help guide his financial decisions, your friend needs to get a handle on his projected annual retirement income (social security, rental income, portfolio withdrawals) as well as his projected annual retirement expenses, including healthcare and taxes.

If he withdrew/earned $24,000 (4%) annually from his investments/rental properties and had social security of $12,000, he would cover $36k in annual retirement expenses, assuming his expenses remain the same as they currently are.
This is assuming he could somehow earn 4% on the equity in the properties which isn't the case. As I mentioned the shared properties cannot be sold right now and they just break even. His personal property is less expensive than any rental would be in the area, but it still might make sense to sell it after 65, but right now losing the ACA subsidy would offset the benefit of selling.

He should plan on continuing to work to fund his living expenses, increase his social security bbeneite he has enough credits to be eligible for Medicare.

Your friend has $203k in cash/cd/investments and $425k real estate equity for a total of $628k net worth.
1. Increase his emergency fund to 6 months living expenses in a high-yield savings account.
2. You gave your friend good advice to move his accounts to Vanguard and stop reinvesting American Fund dividends. He should pull together cost basis info and start selling high cost fund as his tax/ACA situation allows.
3. 2019 roth contribution limit > age 50 is $7,000. He should make the contribution now rather than hold in a taxable account to reduce taxable interest income.
Yes that is the plan though I am not yet sure what to invest the Roth IRA in as already most of his portfolio is in stock. I am also waiting to see if it might be beneficial to put the $7K into a tIRA instead to enable him to sell more of the American Mutual Fund without falling off the ACA cliff. These are the decisions I am requesting advice about.
4. Invest the remaining funds/CD when it matures in low cost, self-managed indexed funds using a conservative allocation.
Yes I am thinking best to have whatever is not stuck in the American Mutual Fund in a bond fund or CD to balance the total AA to againe more conservative. What would you suggest?
5. Unless very profitable, consider selling 2 rental properties owned with siblings sooner rather than later.
Not an option even though they are not profitable.
6. Consider selling primary residence when he moves back and rent or look for lower cost condo to reduce his housing costs in retirement.
Yes perhaps a good plan for later,

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grabiner
Advisory Board
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Re: Investment Help Needed for a Friend

Post by grabiner » Wed Jun 12, 2019 10:46 pm

Alana888 wrote:
Tue Jun 11, 2019 10:07 pm
Tax Rate: 12% Federal, 9% State
State of Residence: CA
You''ll need to recheck these numbers. The bottom of the 9.3% CA tax bracket is well above the top of the 12% federal tax bracket, so unless your friend has much higher CA than federal income (HSA contribution and a lot of income from the HSA? Non-CA municipal bonds?), his CA tax rate is 6% or 8%.
Wiki David Grabiner

Topic Author
Alana888
Posts: 72
Joined: Thu Apr 10, 2014 3:50 am

Re: Investment Help Needed for a Friend

Post by Alana888 » Thu Jun 13, 2019 6:44 am

his CA tax rate is 6% or 8%.
Yes 8% CA tax rate is correct, not 9%

HomeStretch
Posts: 488
Joined: Thu Dec 27, 2018 3:06 pm

Re: Investment Help Needed for a Friend

Post by HomeStretch » Thu Jun 13, 2019 7:38 am

Alana888 wrote:
Wed Jun 12, 2019 11:52 am
To help guide his financial decisions, your friend needs to get a handle on his projected annual retirement income (social security, rental income, portfolio withdrawals) as well as his projected annual retirement expenses, including healthcare and taxes.

If he withdrew/earned $24,000 (4%) annually from his investments/rental properties and had social security of $12,000, he would cover $36k in annual retirement expenses, assuming his expenses remain the same as they currently are.
This is assuming he could somehow earn 4% on the equity in the properties which isn't the case. As I mentioned the shared properties cannot be sold right now and they just break even. His personal property is less expensive than any rental would be in the area, but it still might make sense to sell it after 65, but right now losing the ACA subsidy would offset the benefit of selling.

He should plan on continuing to work to fund his living expenses, increase his social security bbeneite he has enough credits to be eligible for Medicare.

Your friend has $203k in cash/cd/investments and $425k real estate equity for a total of $628k net worth.
1. Increase his emergency fund to 6 months living expenses in a high-yield savings account.
2. You gave your friend good advice to move his accounts to Vanguard and stop reinvesting American Fund dividends. He should pull together cost basis info and start selling high cost fund as his tax/ACA situation allows.
3. 2019 roth contribution limit > age 50 is $7,000. He should make the contribution now rather than hold in a taxable account to reduce taxable interest income.
Yes that is the plan though I am not yet sure what to invest the Roth IRA in as already most of his portfolio is in stock. I am also waiting to see if it might be beneficial to put the $7K into a tIRA instead to enable him to sell more of the American Mutual Fund without falling off the ACA cliff. These are the decisions I am requesting advice about.
4. Invest the remaining funds/CD when it matures in low cost, self-managed indexed funds using a conservative allocation.
Yes I am thinking best to have whatever is not stuck in the American Mutual Fund in a bond fund or CD to balance the total AA to againe more conservative. What would you suggest?
5. Unless very profitable, consider selling 2 rental properties owned with siblings sooner rather than later.
Not an option even though they are not profitable.
6. Consider selling primary residence when he moves back and rent or look for lower cost condo to reduce his housing costs in retirement.
Yes perhaps a good plan for later,
Whatever he does right now isn’t going to make much of a difference as he is constrained by the ACA subsidy MAGI limit and most of his assets are tied up in a CD, real estate (that is not profitable and won’t be sold now) and American Funds (which can only be sold probably slowly due to ACA MAGI limit).

His best plan may be to:
- keep working, save as much as he can, maximize his social security and make sure he is Medicare eligible at age 65. Get info on expected SS benefit.
- Increase his emergency fund to 6 months ($18k) living expenses in a high yield savings account.
- Invest the roth balance of $7,500 in Vanguard Total Bond Market VBTLX (for now to bring equity % down) and exchange it to Vanguard Total Stock Market VTSAX as he divests the American Fund. Good idea to make current year $7k contribution to a traditional IRA to create room to sell more American Funds.
- Reinvest American Funds dividends in VTSAX. Get cost basis info and sell as he can.
- Reinvest the CD when it matures in Taxable in VBTLX.

Topic Author
Alana888
Posts: 72
Joined: Thu Apr 10, 2014 3:50 am

Re: Investment Help Needed for a Friend

Post by Alana888 » Thu Jun 13, 2019 7:44 am

His best plan may be to:
- keep working, save as much as he can, maximize his social security and make sure he is Medicare eligible at age 65. Get info on expected SS benefit.
- Increase his emergency fund to 6 months ($18k) living expenses in a high yield savings account.
- Invest the roth balance of $7,500 in Vanguard Total Bond Market VBTLX (for now to bring equity % down) and exchange it to Vanguard Total Stock Market VTSAX as he divests the American Fund. Good idea to make current year $7k contribution to a traditional IRA to create room to sell more American Funds.
- Reinvest American Funds dividends in VTSAX. Get cost basis info and sell as he can.
- Reinvest the CD when it matures in Taxable in VBTLX.
Thank you. This is just the kind of input I was looking for

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CAsage
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Re: Investment Help Needed for a Friend

Post by CAsage » Thu Jun 13, 2019 10:13 am

Try to find out exactly what the Unrealized Capital Gains are for that American Fund. Then he can sell little bits each year, to keep under whatever income he needs to not exceed the ACA limits. One can usually specify what tax lot (i.e. shared purchased on date NNN) to sell, so you can control the capital gains. If there happen to be any shares with lower gain (due to higher purchase price), sell those to get out more cash. See if any of the siblings are willing to buy him out in the future....
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Topic Author
Alana888
Posts: 72
Joined: Thu Apr 10, 2014 3:50 am

Re: Investment Help Needed for a Friend

Post by Alana888 » Fri Jun 14, 2019 7:41 am

Thank you. That is good plan and what i will advise him to do. Thanks for the tip about selling the expensive shares for less gain now.
None of the siblings can afford to buy the others out.

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