Advising my mother

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Topic Author
DanM
Posts: 4
Joined: Wed Sep 12, 2007 2:23 pm

Advising my mother

Post by DanM »

Ok, I’m looking for some bogleheaded advice for my mother. Kind of a long story, she’s been a widow for about 5 years now and has had her money with a financial advisor who came “highly” recommended. I’m still young (late 20’s now), so haven’t known much about this stuff, but about a year ago started looking into what she’s invested in, and it’s not good. This guy is charging her a 1% annual fee, has her in a mixture of fixed annuities, variable annuities (IRA and Taxable), private reits, etc. This bozo has been raking in the fees coming and going for a while now. I’ve convinced her to leave this guy, but now I need to help her unravel this mess and advise her on where to put what’s left.

Here’s a rough estimate of what she has now, these are strewn across several different accounts.

Taxable
160k in Fixed annuity that was annuitized for 10 years about 2 years ago (8 years left)
200k in private Wells REIT, should go public or start to liquidate sometime in 2008
160k in Variable Annuity, allocated across several mutual funds

IRA
400k that used to be in a Variable Annuity, now just sitting in a Money Market
200k in High Load / High ER Mutual Funds
40k in other private REITS (Inland Western, Behringer Harvard), not sure how to liquidate these
30k in various 401k, 403b accounts from her jobs in the past.

Only debt is the house (120k mortgage, worth around 350k). She’s in her mid 50s, well educated and makes a good income as a counselor (25% tax bracket). The annuity is supposed to pay her mortgage (why didn’t they just pay it off??? guess he wouldn’t have gotten a commission). She plans on working at least part time for the foreseeable future. Anyway I’m advising her to liquidate the remaining Variable Annuity, the Wells REIT when we can get to it, pay off the house, move the rest (~250k) into a Vanguard account (Can’t touch the fixed annuity now that it’s been annuitized). Roll over all the retirement money (~670k) into one IRA account at Vanguard. She earns enough to live on comfortably right now, and with the annuity supplementing her income for the next 8 years, she will not need to touch any of this for at least that long. I’m trying to educate her, so I want to keep things fairly simple for now. Her risk tolerance is high; she doesn’t ever want to touch the IRA money, therefore I’m thinking we can go pretty aggressive:

30% in VTSMX – Total Stock Market Index
15% in VIMSX – Mid Cap Index
15% in NAESX – Small Cap Index
20% in VGTSX – Total International Index
20% in VBMSX – Total Bond Index

Any thoughts on this plan? Any experience on getting out of private/non-traded REITs? If not possible, can we still move them into the Vanguard IRA? Which funds should we put in taxable vs IRA accounts?

Thanks for any input,
Dan
Live Free or Diehard
Posts: 517
Joined: Wed Jun 27, 2007 1:12 pm

Re: Advising my mother

Post by Live Free or Diehard »

DanM wrote:She’s in her mid 50s, well educated and makes a good income as a counselor (25% tax bracket)... Anyway I’m advising her to liquidate the remaining Variable Annuity,...
If she liquidates the VA before age 59.5 she'll have to pay a 10% penalty on top of taxes on the gain. The 10% penalty would be 16K. Depending on how long she's had the VA (I'm assuming less than 5 years) she may have surrender charges. Check the contract on the surrender charges. If they're small or have reduced to 0% she could perform a Section 1035 exchange to a Vanguard VA to get lower expenses. Vanguard's VA has no surrender charges. Then she could liquidate it after she's age 59.5 to avoid the 16K penalty.
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ddb
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Joined: Mon Feb 26, 2007 12:37 pm
Location: American Gardens Building, West 81st St.

Re: Advising my mother

Post by ddb »

Live Free or Diehard wrote:If she liquidates the VA before age 59.5 she'll have to pay a 10% penalty on top of taxes on the gain. The 10% penalty would be 16K. Depending on how long she's had the VA (I'm assuming less than 5 years) she may have surrender charges. Check the contract on the surrender charges. If they're small or have reduced to 0% she could perform a Section 1035 exchange to a Vanguard VA to get lower expenses. Vanguard's VA has no surrender charges. Then she could liquidate it after she's age 59.5 to avoid the 16K penalty.
The 10% early withdrawal penalty applies only to gains, not the entire contract amount.

- DDB
grok87
Posts: 9275
Joined: Tue Feb 27, 2007 9:00 pm

Re: Advising my mother

Post by grok87 »

DanM wrote:Ok, I’m looking for some bogleheaded advice for my mother. Kind of a long story, she’s been a widow for about 5 years now and has had her money with a financial advisor who came “highly” recommended. I’m still young (late 20’s now), so haven’t known much about this stuff, but about a year ago started looking into what she’s invested in, and it’s not good. This guy is charging her a 1% annual fee, has her in a mixture of fixed annuities, variable annuities (IRA and Taxable), private reits, etc. This bozo has been raking in the fees coming and going for a while now. I’ve convinced her to leave this guy, but now I need to help her unravel this mess and advise her on where to put what’s left.

Here’s a rough estimate of what she has now, these are strewn across several different accounts.

Taxable
160k in Fixed annuity that was annuitized for 10 years about 2 years ago (8 years left)
200k in private Wells REIT, should go public or start to liquidate sometime in 2008
160k in Variable Annuity, allocated across several mutual funds

IRA
400k that used to be in a Variable Annuity, now just sitting in a Money Market
200k in High Load / High ER Mutual Funds
40k in other private REITS (Inland Western, Behringer Harvard), not sure how to liquidate these
30k in various 401k, 403b accounts from her jobs in the past.

Only debt is the house (120k mortgage, worth around 350k). She’s in her mid 50s, well educated and makes a good income as a counselor (25% tax bracket). The annuity is supposed to pay her mortgage (why didn’t they just pay it off??? guess he wouldn’t have gotten a commission). She plans on working at least part time for the foreseeable future. Anyway I’m advising her to liquidate the remaining Variable Annuity, the Wells REIT when we can get to it, pay off the house, move the rest (~250k) into a Vanguard account (Can’t touch the fixed annuity now that it’s been annuitized). Roll over all the retirement money (~670k) into one IRA account at Vanguard. She earns enough to live on comfortably right now, and with the annuity supplementing her income for the next 8 years, she will not need to touch any of this for at least that long. I’m trying to educate her, so I want to keep things fairly simple for now. Her risk tolerance is high; she doesn’t ever want to touch the IRA money, therefore I’m thinking we can go pretty aggressive:

30% in VTSMX – Total Stock Market Index
15% in VIMSX – Mid Cap Index
15% in NAESX – Small Cap Index
20% in VGTSX – Total International Index
20% in VBMSX – Total Bond Index

Any thoughts on this plan? Any experience on getting out of private/non-traded REITs? If not possible, can we still move them into the Vanguard IRA? Which funds should we put in taxable vs IRA accounts?

Thanks for any input,
Dan
Hi Dan,
Welcome to the Diehards. It is really best to manage all of the funds as if they were one portfolio. If I'm understanding correctly the fixed annuity is paying out for 8 more years, so I guess it's like a series of 8 zero coupon bonds. The Wells would be Real Estate (I would get out as soon as I can). What's in the Variable Annuity- probably mostly stock funds?

Having the complete picture would help in evaluating what asset allocation to use for the IRA to make the overall portfolio a sensible one...

Also please post the available funds in the variable annuity and their expense ratios.

cheers
grok
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White Coat Investor
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Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Post by White Coat Investor »

First of all, follow the adviser home and break his kneecaps. What a punk!

Second, don't change or sell anything until you understand the fee system. You may lose A LOT more money yet.

Third, I wouldn't advise anyone in their 50s to go 80/20. If she were the one on this board asking for advice I would recommend against it. But knowing that YOU are the one here soliciting advice for her, I would HIGHLY recommend against it. No reason to be more aggressive than 60/40 IMHO, but you know her circumstances better.

Fourth, visit with an attorney about suing the advisor. Surely recommending someone buy an annuity to pay the mortgage is advice worthy of going to court over.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
david99
Posts: 677
Joined: Sat Mar 03, 2007 11:56 am

Post by david99 »

I agree with EmergDoc --- there is no reason for your mother to be 80 stocks /20 bonds. She has a portfolio of over one million and the house is 2/3 paid off -- there is no need to take this kind of risk. Stocks can and will drop 50 %. Go with a 60/40 mix.

Regards,

David
Topic Author
DanM
Posts: 4
Joined: Wed Sep 12, 2007 2:23 pm

Post by DanM »

Thanks for the advice guys. I’m trying to figure out what we can do now with what she has, and eventually work towards the optimal allocations. I was considering the fixed annuity as “safe” money because it is guaranteed, so that is why I was going with an 80/20 split for the rest. Figuring the annuity in, it would be closer to 60% (stocks) / 40% (bonds and annuity).

I would love to dump the private REITS, I just am trying to figure out what is involved. The biggest problem that I have with this guy is that he didn’t explain to my mom what she was investing in. These private REITs are a nightmare with fees and they make it hard to get your money out before the designated investment term. The Wells REIT should be going public soon, so I’m thinking we should just hold on until then. The Inland Western, and Behringer Harvard are inside of an IRA, so that complicates things even further when we try to get rid of them. She didn’t know there was a difference between public and private REITs or why she was so heavily in this private one. She didn’t realize what an annuity was, or why her IRA money was in one either.

The remaining variable annuity is all in stocks. It’s pretty well diversified with a few large growth/value funds, a small value and international. I don’t have the info in front of me right now, but they all have high expenses, so I wasn’t planning on keeping it. I’ll have to look into the surrender charge and see if we need to look at a 1035 exchange. The IRA variable annuity was dumped by the advisor earlier this year because he wanted to put her in a different VA with a big “bonus” and higher “guaranteed” return. That is when my mother started looking at the fees involved and saw that something wasn’t right. She asked for my advice and that’s when I started digging.

We are moving slowly for now. We haven’t dumped the advisor completely because we want him to help us get out of some of this mess. I live several hours away, so I really can’t take care of all this myself. I’m just trying to get informed so I can explain the different options and advise her so that she can make some informed decisions.
InvestingMom
Posts: 503
Joined: Mon Aug 20, 2007 2:45 pm

Post by InvestingMom »

Very interesting. My mom does not have as much money but she too has been ripped off by a stock broker.
She also was talked into a nonpublicly traded REIT with Wells Capital. They ripped off 10% right off the top and in her case I don't believe the REIT is expected to go public for several years. He also bought half of it in a taxable account (REITs belong in nontaxable). Meanwhile the only way to get the money is to redeem it at a steep cost. I also have put it on the back burner but do intend to look at it after I straigten out the rest of her portfolio.
As far as asset allocation, it really is a personal choice. Since you mom is still relatively young and you indicate that she will not need the money for several years, I would not out of hand say her allocation is overly weighted at 80-20. It really depends on her risk tolerance.
In addition to the bogle books, random walk etc. I just recently read Paul Merrimans book, Live it up without outliving your money. I found it to be extremely helpful. He also has a web site at fundadvice dot com. He recommends of your equity allocation to put 50% in foreign. Of course there have been many discussions about this on this web site. Incidentally he also recommends a 60/40 allocation.
Topic Author
DanM
Posts: 4
Joined: Wed Sep 12, 2007 2:23 pm

Post by DanM »

Yeah, she's in the original Wells REIT, which has actually just changed it's name to Peidmont something or other. I'm hoping this means it's getting ready to go public so we can get out. She originally bought 20000 shares for $10, but they took about a 16% commission, and have been paying a dividend of around 7%, so who knows how much it's actually worth. She got an offer from an outside firm trying to buy her out for $9/share, but with the way real estate has gone up in the last few years, I would think it would be worth more. Anyway, I found a few articles about this Leo Wells character that convinced her she needed to get out.
grok87
Posts: 9275
Joined: Tue Feb 27, 2007 9:00 pm

Re: Advising my mother

Post by grok87 »

DanM wrote: Here’s a rough estimate of what she has now, these are strewn across several different accounts.

Taxable
160k in Fixed annuity that was annuitized for 10 years about 2 years ago (8 years left)
200k in private Wells REIT, should go public or start to liquidate sometime in 2008
160k in Variable Annuity, allocated across several mutual funds

IRA
400k that used to be in a Variable Annuity, now just sitting in a Money Market
200k in High Load / High ER Mutual Funds
40k in other private REITS (Inland Western, Behringer Harvard), not sure how to liquidate these
30k in various 401k, 403b accounts from her jobs in the past.
Dan,
Here's what I've come up with based on a roughly 60/40 portfolio (ignoring the real estate) across all of your Mother's accounts:

Fixed Annuity (Bond) 160
Wells REIT 200

Variable Annuity- Vanguard TSM Annuity 160

IRA
Vanguard TIPs 238
Vanguard Total International 178.5
TSM 166.5
SCV 87

Total 1190

Based on your comments, I've assumed you might be able to roll her existing variable annuity into Vanguard. I would recommend TSM (total stock market index) for this.

hope this helps
cheers
grok
Topic Author
DanM
Posts: 4
Joined: Wed Sep 12, 2007 2:23 pm

Post by DanM »

Thanks for the break down. Just a few questions, why no mid-caps? are they covered by TSM, or are they just not good in the risk/reward department. Why go with the Small-Cap Value instead of the whole Small-Cap Index?
grok87
Posts: 9275
Joined: Tue Feb 27, 2007 9:00 pm

TSM and Small Cap Value

Post by grok87 »

Dan,
Both TSM and Small Cap Value have midcaps. TSM is 20% in midcaps and Small Cap Value is 37% in midcaps (as per morningstar).

The idea behind the TSM / Small Cap Value combo is that you have the total market as your core and then tilt towards small and value with Small Cap Value.

Also there is a bit of a consensus that small cap growth is the black hole (worst spot) in the morningstar style box. So going with small cap value helps avoid the small growth stocks in the small cap index.

cheers
grok
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