HELP - How to Allocate $5M in retirement funds

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Topic Author
mhsiao45
Posts: 18
Joined: Fri Jan 08, 2021 7:37 pm

HELP - How to Allocate $5M in retirement funds

Post by mhsiao45 »

Hello,

I'm looking for advice on how to help my recently widowed mother allocate her retirement funds. My father recently passed, and he used to handle all their finances. Or maybe everything looks OK, and I should leave it alone? Or perhaps consolidate things and make it simpler by moving things into target date funds? Or maybe even just go with the really simple 3 fund portfolio?

The folks at Fidelity where most of her retirement funds sit, are chomping at the bit to persuade her that they can manage all the money for her....for a hefty fee I'm sure. And I think all the fine folks on this forum can likely offer better, more cost effective advice, than the young green kid who was assigned to be her account manager.

She likely will barely need to even touch her retirement money, unless she needs to go into assisted living. But that likely won't be for another 5-10 years, as her health is pretty good right now. I'm estimating assisted living to be $10K/month worse case.

So realistically, most of her retirement money will likely end up going to her 2 children, and 3 grandchildren.
So she said she wants it to grow, and doesn't necessarily need it to be super conservative.


Here are the details.

INCOME: Between her pension, Social Security, and rental income, she NETS about $8500/month

Emergency funds: $200K

Debt: $0. Everything is paid off. My mom only pays for her monthly utilities, food, necessities etc. She lives a pretty simple life
I'm guessing her monthly credit card statement is about $2500 or so

Tax Filing Status: Widow

State of Residence: CA

Heath Insurance: She has good insurance from her past employer (University of California), and she is covered till she passes.

Age: 74

Desired Asset allocation: This is where I would like to get some inputs and suggestions on how to allocate

Total Current Portfolio: $5M, with breakdown below

IRA: $3.7M

FSKAX FIDELITY TOTAL MARKET INDEX FUND 17.98%
VTI VANGUARD IDX FUND 15.91%
FZDXX FIDELITY MMKT PREMIUM CLASS 14.21%
PIMIX PIMCO INCOME FUND INSTITUTIONAL FUND 8.87%
USMV ISHARES TR MSCI USA MIN VOL 8.55%
DODGX DODGE & COX STOCK 6.87%
FXAIX FIDELITY 500 INDEX FUND 5.21%
PFF ISHARES TR PFD AND INCM SEC 3.28%
SRE SEMPRA ENERGY 2.87%
FDGRX FIDELITY GROWTH COMPANY 2.85%
DODIX DODGE & COX INCOME 2.70%
ITOT ISHARES CORE S&P TOTAL US STOCK MARKET ETF 2.65%
LSBDX LOOMIS SAYLES BOND INSTL 2.15%
FSPSX FIDELITY INTERNATL INDEX FUND 2.11%
YACKX AMG YACKTMAN FUND I 2.09%
VEU VANGUARD INTL EQUITY INDEX FDS ALLWRLD EX US 0.95%
DWM WISDOMTREE TR INTL EQUITY FD 0.68%
SPAXX** FIDELITY GOVERNMENT MONEY MARKET 0.06%

TAXABLE ACCOUNT: $1M

FSKAX FIDELITY TOTAL MARKET INDEX FUND 25.12%
ITOT ISHARES CORE S&P TOTAL US STOCK MARKET ETF 19.16%
FZDXX FIDELITY MMKT PREMIUM CLASS 15.59%
IWV ISHARES RUSSELL 3000 INDEX FUND 11.26%
SPY SPDR S&P500 ETF TRUST TRUST UNIT DEPOSITARY RECEIPT 10.02%
FCSTX FIDELITY CA LIMITED TERM TAX-FREE BOND 6.61%
13063CGR5 CALIFORNIA ST GO BDS 03.87500% 11/01/2026 5.23%
FDRXX** FIDELITY GOVERNMENT CASH RESERVES 3.11%
13063C2D1 CALIFORNIA ST GO VAR PURP BDS 02.50000% 09/01/2032 3.07%
SRE SEMPRA ENERGY 0.82%
FCFXX FIDELITY CALIFORNIA MUNI MONEY MARKET 0.00%


ROTH IRA: $571K

FSKAX FIDELITY TOTAL MARKET INDEX FUND 61.49%
FXAIX FIDELITY 500 INDEX FUND 12.23%
ITOT ISHARES CORE S&P TOTAL US STOCK MARKET ETF 10.45%
FHLC FIDELITY MSCI HEALTH CARE INDEX ETF 3.72%
PONAX PIMCO INCOME FUND CL A 3.65%
FSPHX FIDELITY SELECT HEALTH CARE 3.55%
FDRXX** FIDELITY GOVERNMENT CASH RESERVES 2.44%
FIGRX FIDELITY INT'L DISCOVERY 1.34%
LSBRX LOOMIS SAYLES BOND RETAIL SHARES 1.12%
37023108 ANTHRACITE CAP INC NO STOCKHOLDER EQUITY 03/06/2015 0.00%
Last edited by mhsiao45 on Fri Apr 09, 2021 12:59 pm, edited 1 time in total.
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retired@50
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Location: Living in the U.S.A.

Re: HELP - How to Allocate $5M in retirement funds

Post by retired@50 »

mhsiao45 wrote: Wed Apr 07, 2021 11:33 pm Hello,

I'm looking for advice on how to help my recently widowed mother allocate her retirement funds.
I'm thinking... Way too complex in my opinion. Too many funds.

Since she's at Fidelity, I'd suggest you use the 3-fund portfolio and just use the low-expense ratio index funds they offer.
FSKAX for US Stocks.
FTIHX for International stocks.
FXNAX for US bonds.

I'd put the entire Roth account in FSKAX. I'd mix all 3 funds in the IRA and 401k as needed to create the desired asset allocation.

If in doubt, 50% stocks and 50% bonds is always a reasonable place to start. Maybe 25% of stocks overall could be in international, with the remaining 75% of stocks in the US stock index fund.

Since she's taking distributions from both the IRA and 401k, it might be even simpler to combine those accounts into the IRA.

Regards,
This is one person's opinion. Nothing more.
theorist
Posts: 821
Joined: Sat Sep 28, 2019 11:39 am

Re: HELP - How to Allocate $5M in retirement funds

Post by theorist »

mhsiao45 wrote: Wed Apr 07, 2021 11:33 pm Hello,

I'm looking for advice on how to help my recently widowed mother allocate her retirement funds. My father recently passed, and he used to handle all their finances. Or maybe everything looks OK, and I should leave it alone? Or perhaps consolidate things and make it simpler by moving things into target date funds? Or maybe even just go with the really simple 3 fund portfolio?

The folks at Fidelity where most of her retirement funds sit, are chomping at the bit to persuade her that they can manage all the money for her....for a hefty fee I'm sure. And I think all the fine folks on this forum can likely offer better, more cost effective advice, than the young green kid who was assigned to be her account manager.

She likely will barely need to even touch her retirement money, unless she needs to go into assisted living. But that likely won't be for another 5-10 years, as her health is pretty good right now. I'm estimating assisted living to be $10K/month worse case.

So realistically, most of her retirement money will likely end up going to her 2 children, and 3 grandchildren.
So she said she wants it to grow, and doesn't necessarily need it to be super conservative.


Here are the details.

INCOME: Between her pension, Social Security, and rental income, she NETS about $8500/month

Emergency funds: $200K

Debt: $0. Everything is paid off. My mom only pays for her monthly utilities, food, necessities etc. She lives a pretty simple life
I'm guessing her monthly credit card statement is about $2500 or so

Tax Filing Status: Widow

State of Residence: CA

Heath Insurance: She has good insurance from her past employer (University of California), and she is covered till she passes.

Age: 74

Desired Asset allocation: This is where I would like to get some inputs and suggestions on how to allocate

Total Current Portfolio: $5M, with breakdown below

IRA: $3.7M

FSKAX FIDELITY TOTAL MARKET INDEX FUND 17.98%
VTI VANGUARD IDX FUND 15.91%
FZDXX FIDELITY MMKT PREMIUM CLASS 14.21%
PIMIX PIMCO INCOME FUND INSTITUTIONAL FUND 8.87%
USMV ISHARES TR MSCI USA MIN VOL 8.55%
DODGX DODGE & COX STOCK 6.87%
FXAIX FIDELITY 500 INDEX FUND 5.21%
PFF ISHARES TR PFD AND INCM SEC 3.28%
SRE SEMPRA ENERGY 2.87%
FDGRX FIDELITY GROWTH COMPANY 2.85%
DODIX DODGE & COX INCOME 2.70%
ITOT ISHARES CORE S&P TOTAL US STOCK MARKET ETF 2.65%
LSBDX LOOMIS SAYLES BOND INSTL 2.15%
FSPSX FIDELITY INTERNATL INDEX FUND 2.11%
YACKX AMG YACKTMAN FUND I 2.09%
VEU VANGUARD INTL EQUITY INDEX FDS ALLWRLD EX US 0.95%
DWM WISDOMTREE TR INTL EQUITY FD 0.68%
SPAXX** FIDELITY GOVERNMENT MONEY MARKET 0.06%

401K: $1M

FSKAX FIDELITY TOTAL MARKET INDEX FUND 25.12%
ITOT ISHARES CORE S&P TOTAL US STOCK MARKET ETF 19.16%
FZDXX FIDELITY MMKT PREMIUM CLASS 15.59%
IWV ISHARES RUSSELL 3000 INDEX FUND 11.26%
SPY SPDR S&P500 ETF TRUST TRUST UNIT DEPOSITARY RECEIPT 10.02%
FCSTX FIDELITY CA LIMITED TERM TAX-FREE BOND 6.61%
13063CGR5 CALIFORNIA ST GO BDS 03.87500% 11/01/2026 5.23%
FDRXX** FIDELITY GOVERNMENT CASH RESERVES 3.11%
13063C2D1 CALIFORNIA ST GO VAR PURP BDS 02.50000% 09/01/2032 3.07%
SRE SEMPRA ENERGY 0.82%
FCFXX FIDELITY CALIFORNIA MUNI MONEY MARKET 0.00%


ROTH IRA: $571K

FSKAX FIDELITY TOTAL MARKET INDEX FUND 61.49%
FXAIX FIDELITY 500 INDEX FUND 12.23%
ITOT ISHARES CORE S&P TOTAL US STOCK MARKET ETF 10.45%
FHLC FIDELITY MSCI HEALTH CARE INDEX ETF 3.72%
PONAX PIMCO INCOME FUND CL A 3.65%
FSPHX FIDELITY SELECT HEALTH CARE 3.55%
FDRXX** FIDELITY GOVERNMENT CASH RESERVES 2.44%
FIGRX FIDELITY INT'L DISCOVERY 1.34%
LSBRX LOOMIS SAYLES BOND RETAIL SHARES 1.12%
37023108 ANTHRACITE CAP INC NO STOCKHOLDER EQUITY 03/06/2015 0.00%
Unless I’m mis-identifying some of the many listed holdings, it looks like her portfolio holdings are roughly 75/25 stocks to bonds. Given that her income from social security etc. is sufficient to cover her costs this may be fine, but this is far from being super-conservative. I’d say it is a good allocation for a rather conservative 30 year old or a moderately aggressive 50 year old, which may be right for her grandkids and kids. But for extra safety I’d at least consider dialing it down a bit.

That said, I’d also simplify for sure. Replacing this variety of funds with a 2035 target date fund (which is about 73% stocks now if you use the Vanguard version) — or 2030 or 2025 if you want less stock exposure (67% and 58% respectively) — would be one option. But those will continue to grow more conservative.

Another option would be to invest in e.g. Vanguard Lifestrategy Moderate Growth, which stays at 60/40 forever (or the more aggressive one which is at 80/20 if you wish).

Fidelity offers roughly similar options via the Fidelity Freedom target date funds. So if you prefer or have access to Fidelity instead, no problem.
123
Posts: 7092
Joined: Fri Oct 12, 2012 3:55 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by 123 »

I like retired@50's recommendations.

To reiterate and take it further:
1. Make Roth 100% Total Stock Market
2. Rollover the 401K account into the IRA account (merging them to simplify)
3. Invest the merged IRA account 100% in VBIAX Vanguard Balanced Index Fund (60% Stocks- 40% Bonds)

VBIAX is low expense 0.07%. It doesn't have international but she has hardly any now.

Think about how simple her statements would look with a single holding in each account!

Fidelity does charge a transaction fee of about $50 for each purchase of VBIAX (and many other Vanguard funds) so it can be beneficial to do large purchases (no fee to sell). The fee becomes inconsequential when you do large purchases in view of the savings on the expense ratio.
The closest helping hand is at the end of your own arm.
JoinToday
Posts: 949
Joined: Sat Mar 10, 2007 9:59 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by JoinToday »

1. I concur with previous posters on simplifying into a 3 fund portfolio

2. Is it too late to disclaim a portion of the Traditional IRA / 401K? Her RMDs are going to be substantial, especially since she doesn't really need the money. This doesn't make any sense if the heirs are in the top tax bracket, but if she were to disclaim a portion, her RMDs would be less, and the tax burden for the heirs would be stretched out (10 years for the portion disclaimed, plus 10 years for any inherited IRA in the future).

3. In California, marital property gets a stepped up basis. I would consider selling the rental to simplify my life, if the rental is a burden. Capital gains impact might be pretty low. If the heirs want the rental, keep it. But I would be looking to simplify my life.
I wish I had learned about index funds 25 years ago
okrylan
Posts: 6
Joined: Mon Mar 08, 2021 2:13 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by okrylan »

Simplify the funds. Will make everything much easier.
chicagoan23
Posts: 449
Joined: Thu Jan 29, 2015 4:34 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by chicagoan23 »

mhsiao45 wrote: Wed Apr 07, 2021 11:33 pm
She likely will barely need to even touch her retirement money....

So realistically, most of her retirement money will likely end up going to her 2 children, and 3 grandchildren.
So she said she wants it to grow, and doesn't necessarily need it to be super conservative.
Has she done any planning for the Required Minimum Distributions from the IRA and 401(k)? Unfortunately she will have to touch that money as it comes out through forced distributions. At age 74 and assuming her spouse was around that same age, those RMDs are going to start hitting right away.....probably around $300k to start, and then quickly going up from there.

She should never take one dollar out of her Roth. After taking her RMDs from the other accounts, she may want to look into doing Roth conversions from those accounts too, as it is probably better for her to pay income tax on those funds rather than having her heirs pay it (depending on their tax bracket). She should also consider aggressive annual gifting strategies (as those gifted funds will be replaced by pensions and RMDs anyway). $15,000 gift exclusion * 5 heirs = at least $75,000 per year.

There is no good reason for someone who is age 74, has heirs, has discretionary spending of $30k per year and has stable income of $100k+ per year to have any non-Roth retirement accounts at all, so the key concern is how to get that money transferred down.

After putting in place a solid estate plan and tax-minimizing gifting strategy, her investment allocations can be reconsidered. I like the suggestion of 100% stocks for the Roth.
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HomeStretch
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Re: HELP - How to Allocate $5M in retirement funds

Post by HomeStretch »

No need to use a Fidelity advisor for a fee.

+1 to simplifying the portfolio and using the fund choices/account placement per retired@50’s post. Changes may be made in the IRAs and 401k without tax consequences.

Your mom has healthcare through her employer. If she is eligible for Medicare, she may also have enrolled in Medicare Part A, which has $0 premiums.

At age 74, your mom is required to take annual Required Minimum Distributions (RMDs) from the traditional IRA and 401k. This year her RMDs will be ~$200k plus she has about $100k in income from SS/pension/rentals. With a total annual income of $300k and if her spending is less, a Taxable account at Fidelity could be used to invest the excess. Consider holding equity funds in the Taxable account for tax efficiency.

If your mom makes charitable contributions, she can use Qualified Charitable Distributions (QCD) from her traditional IRA. BH wiki page about QCDs:
https://www.bogleheads.org/wiki/Qualifi ... tributions

If your mom has not already done so, she should review and possibly update her estate plans (will, durable power of attorney, healthcare directives/representatives) as well as account beneficiaries. If you will be helping your mom with financial matters, it’s important that she has the durable power-of-attorney (DPOA) naming you or agent authorizations set up now with her financial institutions (Fidelity, bank, 401k). 401k plans do not always accept DPOAs. So it may be easier to rollover the 401k to the IRA (which simplifies RMDs too). The trade-off is that the 401k has better legal protections, how much better depends on your mom’s state.

Agree that your mom may want to consider gifting. As far as the Roth conversions suggested in another post, I would not consider that a priority right now. Your mom’s marginal Federal tax rate is high (35%). When deciding whether or not to make Roth conversions and, if so, how much to convert, she would need to consider the impact on her Federal/state tax rates and her heirs’ tax rates. If she needs long term care in the future, some or all may be tax deductible (above the medical threshold when itemizing) which will reduce income that is taxable. If your mom has named any qualified charities as beneficiaries, those funds do not need to be converted to Roth as the charities are tax-exempt.
Topic Author
mhsiao45
Posts: 18
Joined: Fri Jan 08, 2021 7:37 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by mhsiao45 »

123 wrote: Thu Apr 08, 2021 12:08 am I like retired@50's recommendations.

To reiterate and take it further:
1. Make Roth 100% Total Stock Market
2. Rollover the 401K account into the IRA account (merging them to simplify)
3. Invest the merged IRA account 100% in VBIAX Vanguard Balanced Index Fund (60% Stocks- 40% Bonds)

VBIAX is low expense 0.07%. It doesn't have international but she has hardly any now.

Think about how simple her statements would look with a single holding in each account!

Fidelity does charge a transaction fee of about $50 for each purchase of VBIAX (and many other Vanguard funds) so it can be beneficial to do large purchases (no fee to sell). The fee becomes inconsequential when you do large purchases in view of the savings on the expense ratio.
Thanks for above. Regarding VBIAX, is there another similar low expense fund you can recommend that does include some international?
Topic Author
mhsiao45
Posts: 18
Joined: Fri Jan 08, 2021 7:37 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by mhsiao45 »

chicagoan23 wrote: Thu Apr 08, 2021 4:47 am
mhsiao45 wrote: Wed Apr 07, 2021 11:33 pm
She likely will barely need to even touch her retirement money....

So realistically, most of her retirement money will likely end up going to her 2 children, and 3 grandchildren.
So she said she wants it to grow, and doesn't necessarily need it to be super conservative.
There is no good reason for someone who is age 74, has heirs, has discretionary spending of $30k per year and has stable income of $100k+ per year to have any non-Roth retirement accounts at all, so the key concern is how to get that money transferred down.

After putting in place a solid estate plan and tax-minimizing gifting strategy, her investment allocations can be reconsidered. I like the suggestion of 100% stocks for the Roth.
regarding your statement, "so the key concern is how to get that money transferred down." I agree, I'd like to understand the best way to approach this and suggest to her. She does plan to gift $75K total/year to her 5 heirs. Any suggestions on where to start researching? Or if you could help make suggestions, what other info would you need to know?
Thanks in advance
tibbitts
Posts: 13292
Joined: Tue Feb 27, 2007 6:50 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by tibbitts »

mhsiao45 wrote: Thu Apr 08, 2021 9:42 pm
chicagoan23 wrote: Thu Apr 08, 2021 4:47 am
mhsiao45 wrote: Wed Apr 07, 2021 11:33 pm
She likely will barely need to even touch her retirement money....

So realistically, most of her retirement money will likely end up going to her 2 children, and 3 grandchildren.
So she said she wants it to grow, and doesn't necessarily need it to be super conservative.
There is no good reason for someone who is age 74, has heirs, has discretionary spending of $30k per year and has stable income of $100k+ per year to have any non-Roth retirement accounts at all, so the key concern is how to get that money transferred down.

After putting in place a solid estate plan and tax-minimizing gifting strategy, her investment allocations can be reconsidered. I like the suggestion of 100% stocks for the Roth.
regarding your statement, "so the key concern is how to get that money transferred down." I agree, I'd like to understand the best way to approach this and suggest to her. She does plan to gift $75K total/year to her 5 heirs. Any suggestions on where to start researching? Or if you could help make suggestions, what other info would you need to know?
Thanks in advance
Well, it's true that the issue here is the deferred balance, especially with those RMDs coming out at single filing rates. It doesn't matter if she uses the Fidelity adviser or not, or if she has 25/75 or 75/25 or whatever. It matters how those RMDs are managed. And incidentally I see no issue with a "young green kid" and would only judge him/her after seeing the resulting recommendations. Everybody has to start somewhere, and it's fine to say "not with my money!", but exactly what money are these people supposed to start managing? Bogleheads always want advisers to be civil war veterans, but we've run out of them, so we have to make do. Nobody is going to pay these kids for years for managing virtual portfolios while they learn.
Doctor Rhythm
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Re: HELP - How to Allocate $5M in retirement funds

Post by Doctor Rhythm »

mhsiao45 wrote: Thu Apr 08, 2021 9:38 pm
123 wrote: Thu Apr 08, 2021 12:08 am I like retired@50's recommendations.

To reiterate and take it further:
1. Make Roth 100% Total Stock Market
2. Rollover the 401K account into the IRA account (merging them to simplify)
3. Invest the merged IRA account 100% in VBIAX Vanguard Balanced Index Fund (60% Stocks- 40% Bonds)

VBIAX is low expense 0.07%. It doesn't have international but she has hardly any now.

Think about how simple her statements would look with a single holding in each account!

Fidelity does charge a transaction fee of about $50 for each purchase of VBIAX (and many other Vanguard funds) so it can be beneficial to do large purchases (no fee to sell). The fee becomes inconsequential when you do large purchases in view of the savings on the expense ratio.
Thanks for above. Regarding VBIAX, is there another similar low expense fund you can recommend that does include some international?
Vanguard has “LifeStrategy” funds that maintain a constant stock to bond ratio, which include US stock, International stock, US bonds, and international bonds. The LifeStrategy
Moderate Growth fund (VSMGX) is 60% stock (roughly 1/3 of which is international) and 40% bonds. The Conservative Growth fund (VSCGX) flips the ratio to 40% stock and 60% bond. Expense ratios are 0.13% and 0.12% respectively, which is quite reasonable for balanced funds that have international holdings.

Out of curiosity, does she have any retirement accounts from her time at UC? 403b, 457, and DCP (401a) should have been available to her if she retired in the last 20 years or so.
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BL
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Re: HELP - How to Allocate $5M in retirement funds

Post by BL »

I have a lot of friends who are widows, and suggest you not push unnecessary changes for up to a year, as suggested by experts in that field. She has enough stress dealing with loss, and it can even affect one's health.

If spouse died this year (2021) then this year she would be able to file taxes as MFJ; from now on it is Single which is a higher rate. So later this year it might make sense to do some things that are taxable, otherwise she has lots of things that can wait. Some things will require immediate attention.

Agree to simplifying, but there is no rush to actually do it so soon. It is good to make a plan and stay away from the vultures. If she can't find the ideal funds at Fidelity, she could always move to Vanguard where there are lots of balanced funds and low cost index funds (or possibly buy a large amount at F. for one-time fee.) The Fidelity Freedom INDEX funds (not the easier to find non-index ones) are fine, and maybe a few other index funds at Fidelity. Don't let their advisors take over, if possible. (I would trust Vanguard for low-cost advisor and funds.) There are a couple Bogleheads in the adviser business so ask if you want names of someone to help set up a one-time plan by phone. They do not do the AUM advisor or commission business where there may be a conflict of interest.

If your father was older, she might want to check into the best ownership of the IRAs, etc. Perhaps she has already made them her own, in her name, which may be the best for RMDs. I would also encourage QCDs for any charities as no tax is owed on that (up to 100k/year) and it would satisfy RMD if withdrawn first.

By the way, annual gifting is not limited to the 15k/person. That is only the amount that doesn't required reporting. She could give it all away and simply file a form with that information on it without owing any taxes on the gift.

I am not advocating giving away too much! Encourage her to spend more on things that please her: travel, vacation with all the family, good food, etc.
Topic Author
mhsiao45
Posts: 18
Joined: Fri Jan 08, 2021 7:37 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by mhsiao45 »

Doctor Rhythm wrote: Thu Apr 08, 2021 11:17 pm
mhsiao45 wrote: Thu Apr 08, 2021 9:38 pm
123 wrote: Thu Apr 08, 2021 12:08 am I like retired@50's recommendations.

To reiterate and take it further:
1. Make Roth 100% Total Stock Market
2. Rollover the 401K account into the IRA account (merging them to simplify)
3. Invest the merged IRA account 100% in VBIAX Vanguard Balanced Index Fund (60% Stocks- 40% Bonds)

VBIAX is low expense 0.07%. It doesn't have international but she has hardly any now.

Think about how simple her statements would look with a single holding in each account!

Fidelity does charge a transaction fee of about $50 for each purchase of VBIAX (and many other Vanguard funds) so it can be beneficial to do large purchases (no fee to sell). The fee becomes inconsequential when you do large purchases in view of the savings on the expense ratio.
Thanks for above. Regarding VBIAX, is there another similar low expense fund you can recommend that does include some international?
Vanguard has “LifeStrategy” funds that maintain a constant stock to bond ratio, which include US stock, International stock, US bonds, and international bonds. The LifeStrategy
Moderate Growth fund (VSMGX) is 60% stock (roughly 1/3 of which is international) and 40% bonds. The Conservative Growth fund (VSCGX) flips the ratio to 40% stock and 60% bond. Expense ratios are 0.13% and 0.12% respectively, which is quite reasonable for balanced funds that have international holdings.

Out of curiosity, does she have any retirement accounts from her time at UC? 403b, 457, and DCP (401a) should have been available to her if she retired in the last 20 years or so.
Thanks for the recommendation on the LifeStrategy Fund from Vanguard. I see Morninstar rates VSMGX as 3 star only. I'm curious if you may have some insights on why that may be? I'm not saying Morningstar is the end all be all, nor do I understand how they rate.....but just curious on your thoughts. Thanks!
Topic Author
mhsiao45
Posts: 18
Joined: Fri Jan 08, 2021 7:37 pm

Re: HELP - How to Allocate $5M in retirement funds

Post by mhsiao45 »

BL wrote: Fri Apr 09, 2021 12:02 am I have a lot of friends who are widows, and suggest you not push unnecessary changes for up to a year, as suggested by experts in that field. She has enough stress dealing with loss, and it can even affect one's health.

If spouse died this year (2021) then this year she would be able to file taxes as MFJ; from now on it is Single which is a higher rate. So later this year it might make sense to do some things that are taxable, otherwise she has lots of things that can wait. Some things will require immediate attention.

Agree to simplifying, but there is no rush to actually do it so soon. It is good to make a plan and stay away from the vultures. If she can't find the ideal funds at Fidelity, she could always move to Vanguard where there are lots of balanced funds and low cost index funds (or possibly buy a large amount at F. for one-time fee.) The Fidelity Freedom INDEX funds (not the easier to find non-index ones) are fine, and maybe a few other index funds at Fidelity. Don't let their advisors take over, if possible. (I would trust Vanguard for low-cost advisor and funds.) There are a couple Bogleheads in the adviser business so ask if you want names of someone to help set up a one-time plan by phone. They do not do the AUM advisor or commission business where there may be a conflict of interest.

If your father was older, she might want to check into the best ownership of the IRAs, etc. Perhaps she has already made them her own, in her name, which may be the best for RMDs. I would also encourage QCDs for any charities as no tax is owed on that (up to 100k/year) and it would satisfy RMD if withdrawn first.

By the way, annual gifting is not limited to the 15k/person. That is only the amount that doesn't required reporting. She could give it all away and simply file a form with that information on it without owing any taxes on the gift.

I am not advocating giving away too much! Encourage her to spend more on things that please her: travel, vacation with all the family, good food, etc.
Thanks for the feedback. Totally agree, I am not pushing my mom. She told me she was now ready to start looking at the finances, so I'm just going at her rate. She was also considering Fee Only Financial advisors, so that is something I need to help her look into as well. Her Trust Attorney gave out a few names, so I need to look into them.

I'm curious on this quote "By the way, annual gifting is not limited to the 15k/person. That is only the amount that doesn't required reporting. She could give it all away and simply file a form with that information on it without owing any taxes on the gift." Do you have more info you can elaborate on? I'd like to pass it on to her to get her thoughts. I've been trying to encourage her to eventually start going on vacations with us, and I think she will once this pandemic starts to improve. She's just been so frugal all her life, that it's engrained in her blood. Hopefully i can start to change some of that and help her enjoy retirement more!
livesoft
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Re: HELP - How to Allocate $5M in retirement funds

Post by livesoft »

Since there is no taxable account listed, I would recommend one.single.fund and the exact.same.fund in each and every one of the accounts. This could be a Fidelity Freedom Index fund or even the 4-in-one fund like FFNOX.

Since it will not cost any taxes to switch or change things, there is probably no rush to do this and even after it is set up it can be changed.

However maybe something is not listed correctly because what is a Tax-free CA bond fund doing in the 401(k)?

3-fund is fine, but probably of no major advantage.
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Doctor Rhythm
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Re: HELP - How to Allocate $5M in retirement funds

Post by Doctor Rhythm »

mhsiao45 wrote: Fri Apr 09, 2021 12:08 pm
Doctor Rhythm wrote: Thu Apr 08, 2021 11:17 pm
mhsiao45 wrote: Thu Apr 08, 2021 9:38 pm
Thanks for above. Regarding VBIAX, is there another similar low expense fund you can recommend that does include some international?
Vanguard has “LifeStrategy” funds that maintain a constant stock to bond ratio, which include US stock, International stock, US bonds, and international bonds. The LifeStrategy
Moderate Growth fund (VSMGX) is 60% stock (roughly 1/3 of which is international) and 40% bonds. The Conservative Growth fund (VSCGX) flips the ratio to 40% stock and 60% bond. Expense ratios are 0.13% and 0.12% respectively, which is quite reasonable for balanced funds that have international holdings.

Out of curiosity, does she have any retirement accounts from her time at UC? 403b, 457, and DCP (401a) should have been available to her if she retired in the last 20 years or so.
Thanks for the recommendation on the LifeStrategy Fund from Vanguard. I see Morninstar rates VSMGX as 3 star only. I'm curious if you may have some insights on why that may be? I'm not saying Morningstar is the end all be all, nor do I understand how they rate.....but just curious on your thoughts. Thanks!
I would take it further and say that not only are Morningstar ratings not the end all, they are pretty meaningless. This is particularly true for balanced funds, where allocation can vary within a category. For example, let’s say I created an insane target date 2025 fund that has 90% stock allocation. It would have received a 5-star rating from Morningstar because of how high it’s recent returns were compared to all the other 2025 funds.

For the LifeStrategy funds, I’m guessing they are compared to other balanced funds with N% stock allocation. Vanguard’s funds have a large international allocation (which you asked for), and international stocks have lagged behind US stocks for a while now. Thus, the LifeStrategy moderate growth fund likely didn’t perform as well as the US-only VBIAX even though both are in the 50-70% stock band. Basically, if you want diversification, you have to accept that some part of your portfolio will underperform the rest.

ETA: regarding you gifting question. If her entire net worth is $5M, she can gift as much as she wants whenever she wants without incurring taxes, as she won’t reach the lifetime limit of $11.58M. A gift of over $15,000 per giver per recipient per year needs to be reported to the IRS and will be applied to the lifetime limit, but won’t be taxed. When you say she has 5 heirs, are these just her children or does it include the children’s spouses? She could give $15,000 to a son and another $15,000 to his spouse without needing to report it. Google “gift tax” to learn the details. Here’s a randomly selected explainer: https://www.thebalance.com/how-is-the-g ... ed-3505674
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BL
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Re: HELP - How to Allocate $5M in retirement funds

Post by BL »

OK, I believe the above response explains your question on giving over the 15k/person, which doesn't require reporting. It doesn't sound like she would approach the 11+ million limit, so all she would have to do is fill out the form. You can probably find the form on the IRS website so you can see for yourself. If she has a tax preparer, that person may be familiar with it. (I haven't used it myself, but wouldn't hesitate to do it if I chose to gift that much.) By the way, giving to charities doesn't count as gifting.

That link goes on to explain the tax rate for gifting, but remember that is after 11+ million has been given away, so it should not apply in your mother's position.

I see a couple bonds with due dates of 2026 and 2032 which are probably worth hanging onto since you can't get those rates these days. I have decided I am too old for bonds that don't earn much and may drop in value a few %. There is not much else around for fixed income, but I found a local bank that pays 0.7% on a 12-month CD. Others choose MYGA (annuities), I-Bonds (10k/person/year) (maybe jointly owned with heirs to make it easier for heirs to get them out from treasuryDirect.gov), etc.
Last edited by BL on Sat Apr 10, 2021 12:18 am, edited 1 time in total.
Katietsu
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Re: HELP - How to Allocate $5M in retirement funds

Post by Katietsu »

The exemption for the estate tax is scheduled to go down in 2025. Check to see if an estate tax return was filed for her spouse to allow her to take advantage of Portability.
Lawyerd
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Re: HELP - How to Allocate $5M in retirement funds

Post by Lawyerd »

As Katiesu mentioned, I believe it is IRS Form 706 to ensure portability.
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