Help with Mother's Portfolio

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suewolf
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Location: Pennsylvania

Help with Mother's Portfolio

Post by suewolf » Sat Sep 09, 2017 11:43 am

I could use your expertise with my mother's portfolio. I've just taken it over and am trying to make sense of it. I've spent the last few days reviewing statements, her checking account and credit card bills for last year. I won't bore you with all the details of her current investments since I know they need to be changed. But here's background and facts:

Mom is 85 years old, in relatively good health and sound mind but health is starting to deteriorate. Getting harder to walk and she'll likely give up on driving within a year. Plan is to sell her suburban home of 55 years and move to an independent living place close to me (also affiliated with an assisted living place next door which is appealing to her). Dad died about 7 years ago and the house is just getting too much for her to take care of. The appeal of independent living is: social interactions , meal preparation, the security of "everything" taken care of, easy access to medical facilities if needed, security knowing someone is checking in on you daily.

Income: NJ Pension: 33k/yr; Social Security: 16k/hr; RMD's about 10k$/yr. So after withholdings (after tax) about 60k$/yr with interests/dividends is deposited into her checking account.

Last year her average Federal taxes paid were 18% of her Adjusted gross income.

No loans, no mortgage. She is a retired NJ teacher.

Her assets are currently in the following accounts:

Tax deferred accounts: (469k$: equities/fixed/cash: 47%/52%/1%)
Wells Fargo Traditional IRA: 61k$ (mutual funds)
Vanguard "Traditional IRA": 92k$ (mutual funds)
Vanguard "Traditional IRA brokerage account - Sweep Account": 40k$(mutual funds)
Vanguard "Rollover IRA": 30K$(mutual funds)
Vanguard 403(b)7: 66k$(mutual funds)
Great American annuity contracts: 180k$ (these are currently paying 4% interest guaranteed and are set only to throw off RMD's. Have not been annuitized. Surrender value is about 60% of the actual value; surrender value is what you get if you want a lump sum; To get full actual value, you have to annuitize - 5 year minimum).

Taxable accounts 148k$ (equities/fixed/cash: 30%/22%/48%)
Vanguard taxable account: 71k$ (Mutual funds)
Vanguard Living Trust account: 37k$ (these were assets that were jointly owned when Dad died, now in a trust; mutual funds)
Wells Fargo Brokerage account: 22k$ (mutual funds)
Discover bank 2 yr CD: 18 k$

Checking accounts: 70k$ (all cash)
Wells Fargo Money market: 55k$ (she uses this like a checking / savings account)
Wells Fargo checking: 15 k$

House: 220k$ (owned by Trust; amount expected net of selling and transaction costs)

She'll be moving from NJ to PA. Her will is straightforward: I'm the executor and everything gets split 50/50 with my sister. Both of us are fine financially and all grand kids are "launched" and financially independent.

So she's done a great job of saving and investing over the years since this totals about 900 k$.
But asset allocation is not so good: Current overall portfolio is 29% Stocks / 31% bonds / 16% cash / 24% real estate.

The Trust was set up after Dad died to avoid NJ estate tax. I think that's largely a non issue now since the state raised the minimum NJ estate value to well over 2 MM$. According to a couple sources (SS, livingto100), she's expected to live to 91 - 92 years old.

Goals:
1) Simplify - way too many different accounts and individual investments (many of the accounts listed above have multiple investments)
2) Match her investments with her outflows in terms of risk. Once she moves, she'll have a significant portion of her expenses as a fixed cost. She needs to stop playing the game since she's already won (investments). I want to remove as much market risk as is prudent - the upside potential need is trivial while the downside of losing asset value is significant.
3. Better match taxable and tax deferred accounts with appropriate investments.
4) Minimize expenses; maximize returns given the low risk tolerance appropriate for her age

So regardless of the individual investments she's currently in, I want to change what she's invested in - especially once the house sells.

Specific questions:

1) Consolidation of tax deferred accounts: any reason why I can't just move the Wells Fargo IRA into Vanguard IRA? Any tax or other consequences of the move?
2) Consolidation of Vanguard tax differed accounts: I don't understand why she has so many different IRA's? Traditional IRA, Rollover IRA, Traditional IRA with sweep. Very confusing. why can't I collapse these into a single IRA account?
3) Should I just eliminate the trust (incur lawyer fees) and then consolidate all IRA's?
4) What should her future portfolio look like? I estimate she'll need to take about 10k$ per year from her investments to meet daily expenses. Approximately 70% of her expenses will be to the independent living place - so is "fixed" - a given. The rest of her expenses are also relatively constant: food and clothing mostly.
5) Should I treat tax deferred different than taxed accounts and if so how? Does moving to roth IRA make any sense (backdoor or otherwise)?
6) Anything else I should be concerned about?

I'm very inclined toward getting everything out of Wells Fargo and Great American (annuitize over 5 years to reinvest elsewhere). So my plan is to sell or transfer everything in one place - Vanguard most likely. If I go the CD route - perhaps Ally (I personally have accounts with them and am very satisfied)

I'm inclined toward a simple CD ladder to lock her in. I'm aware of the FDIC limit of $250k per account for insurance. Maybe Vanguard total market fund for 10% of portfolio. Her appetite for risk is near zero and her greatest fear is being a burden on my sister and I. She'd like to leave money to the grandkids but frankly that's not my goal (it's preservation of capital in case she needs it for skilled nursing or other medical issue likely to come along). I'm not that concerned with inflation because frankly her time horizon is not that long. Both her pension and SS rise with COLA. With a 5 - 10 year planning time, I'm a bit concerned with bonds since it will take a bond fund 5 - 7 years to recover returns once interest rates start to rise (whenever that will be). Of course a SPIA is possible as well - but not sure the advantage over simple CD ladder.

I so appreciate your time to read, think a bit and provide your feedback. I'm open to your suggestions - and if I've left something out, please let me know. It's nice to know I'm not alone in this and have access to this community. Thank you in advance.

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Alexa9
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Re: Help with Mother's Portfolio

Post by Alexa9 » Sat Sep 09, 2017 11:55 am

I would try to simplify accounts and holdings as much as possible. Tell Vanguard you want to rollover the Wells Fargo IRA. It's very simple. You could also use just a couple fund: Lifestrategy Conservative Growth and Lifestrategy Income. I like CD ladders in retirement as well. You should be able to get someone at Vanguard to help you.

Minty
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Re: Help with Mother's Portfolio

Post by Minty » Sat Sep 09, 2017 11:59 am

Quick questions: Are there capital gains in the taxable accounts? And what are the costs associated with the new living situation? i.e., is there a buy-in, or is this a month-to-month situation?
Core Four with nominal bonds and TIPS.

suewolf
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Location: Pennsylvania

Re: Help with Mother's Portfolio

Post by suewolf » Sat Sep 09, 2017 12:28 pm

Minty - yes there will be some capital gains with the sale of all the assets. But this will need to be done eventually anyway. I'm thinking Mom's tax bracket is lower than both my own and my sister's so better to pay it now than as an inheritance.

There's no buy in costs with the independent living. Only a month to month situation. given the current monthly rent, she'll need about 10k$ per year (today's dollars) from her investments to continue living in a consistent fashion than she currently is.

thanks for the feedback Alexa9.

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Steelersfan
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Re: Help with Mother's Portfolio

Post by Steelersfan » Sat Sep 09, 2017 1:06 pm

suewolf wrote:
Sat Sep 09, 2017 12:28 pm
Minty - yes there will be some capital gains with the sale of all the assets. But this will need to be done eventually anyway. I'm thinking Mom's tax bracket is lower than both my own and my sister's so better to pay it now than as an inheritance.
If she holds the assets until she passes the cost basis gets reset and there will be no capital gains tax for those who inherit them if they sell shortly thereafter.

Minty
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Re: Help with Mother's Portfolio

Post by Minty » Sat Sep 09, 2017 1:58 pm

My 2 cents is that your thinking is on the right track. I suspect the Wells Fargo products are expensive, so for that reason as well as convenience it would be nice for them to be consolidated into Vanguard. If your mother needs 10K per year, she is set for the next seven years with cash on hand. In terms of investments, (1) a little stock, short terms bonds, plus a CD ladder, or (2) a conservative all-in-one fund as Alexa9 mentioned, plus a CD ladder, sound perfectly reasonable. I'd hesitate to go all cash, because hopefully we are talking about a 15 year timeline or more, in which case inflation is not out of the question.

I would be inclined not to pay to eliminate the trust, but to spend it down first when you are drawing from taxable. If you keep the taxable investments for the potential step up in basis, you might stop reinvesting any taxable dividends and distributions so at least you are not putting more into what I assume are equities.

How much more would assisted living cost? Can they do skilled nursing there? Those questions might inform the SPIA issue. It might well be that liquid investments in hand would be more useful than an additional income stream.
Core Four with nominal bonds and TIPS.

delamer
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Re: Help with Mother's Portfolio

Post by delamer » Sat Sep 09, 2017 2:31 pm

I am not a tax or estate attorney, but you need to understand the inheritance tax laws and other estate/tax issues in PA as they apply to your mother while living and her estate.

She is changing her state of residence, so what she had set up in NJ may not be appropriate anymore.

I am not suggesting that she not move, but I would make sure you understand all the implications of changing her residence before you make any decisions about selling the house, the trust,and changing her portfolio.

It isn't clear from your post if your mother needs $10,000 from her portfolio to cover her new expenses, in addition to the RMDs and dividends/interest that she is already receiving. It probably wouldn't make much difference in the recommendations you get, but worth clarifying.

delamer
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Re: Help with Mother's Portfolio

Post by delamer » Sat Sep 09, 2017 2:32 pm

Steelersfan wrote:
Sat Sep 09, 2017 1:06 pm
suewolf wrote:
Sat Sep 09, 2017 12:28 pm
Minty - yes there will be some capital gains with the sale of all the assets. But this will need to be done eventually anyway. I'm thinking Mom's tax bracket is lower than both my own and my sister's so better to pay it now than as an inheritance.
If she holds the assets until she passes the cost basis gets reset and there will be no capital gains tax for those who inherit them if they sell shortly thereafter.
This would not be true for the assets held in the trust if it is a credit bypass trust, which sounds like it might be the case.

suewolf
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Location: Pennsylvania

Re: Help with Mother's Portfolio

Post by suewolf » Sat Sep 09, 2017 2:50 pm

Thanks for the suggestions thus far.

Delamer: the 10k$/yr is indeed needed from the investments to cover her living expenses (in addition to the pension, SS and RMD's).

Minty: Assisted living would be north of an additional 48k$/yr (incremental to independent living) and skilled nursing an additional 100k$/yr. The scenarios I've run indicate she could handle a finite number of years of both.

One thing I forgot to mention is that she has 2 years worth of Long term Care insurance. So in theory, the first two years of assisted living would be covered. The policy escalates with inflation each year and the upper limit is reasonable given today's costs. So I think she's OK. Thanks Minty for bringing up the subject. And it's a good thing to consider re: SPIA.

Steelerfan / delamer: Good point on the trust - I'll research.

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Steelersfan
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Re: Help with Mother's Portfolio

Post by Steelersfan » Sat Sep 09, 2017 4:27 pm

I don't know what the state tax situation is in NJ, but in PA both Social Security and pensions are not subject to PA income taxes. That may give her a little boost.

delamer
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Re: Help with Mother's Portfolio

Post by delamer » Sun Sep 10, 2017 9:59 am

It may be that a portion of her fees will be deductible as a medical expense on her tax return. The facility should be able to give you details.

spencer99
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Re: Help with Mother's Portfolio

Post by spencer99 » Sun Sep 10, 2017 7:36 pm

Suewolf,

I may be missing something but something doesn't sound right about a $10,000 RMD on an 85 year olds's 500k tax deferred portfolio.

S

suewolf
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Location: Pennsylvania

Re: Help with Mother's Portfolio

Post by suewolf » Wed Sep 13, 2017 8:59 pm

spencer99 wrote:
Sun Sep 10, 2017 7:36 pm
Suewolf,

I may be missing something but something doesn't sound right about a $10,000 RMD on an 85 year olds's 500k tax deferred portfolio.

S
It's true. The RMD is from her Vanguard accounts (short term invest grade inv, primecap admiral, inflation protected sec, total int'l stock and prime money market and Wells Fargo American funds/ Invesco Comstock fund). Not sure why it doesn't sound right, but these figures are straight from her tax statement backed up by 1099's from Vanguard and Wells Fargo.

Any other suggestions regarding the portfolio?

spencer99
Posts: 292
Joined: Thu Apr 01, 2010 5:17 pm

Re: Help with Mother's Portfolio

Post by spencer99 » Wed Sep 13, 2017 10:04 pm

suewolf wrote:
Wed Sep 13, 2017 8:59 pm
spencer99 wrote:
Sun Sep 10, 2017 7:36 pm
Suewolf,

I may be missing something but something doesn't sound right about a $10,000 RMD on an 85 year olds's 500k tax deferred portfolio.

S
It's true. The RMD is from her Vanguard accounts (short term invest grade inv, primecap admiral, inflation protected sec, total int'l stock and prime money market and Wells Fargo American funds/ Invesco Comstock fund). Not sure why it doesn't sound right, but these figures are straight from her tax statement backed up by 1099's from Vanguard and Wells Fargo.

Any other suggestions regarding the portfolio?
Apologies if I was presumptuous Suewolf. I know you have a better handle on this than me.

My comment was based on the following:

> Tax-deferred portfolio value of roughly $500,000
> Age 85 IRS RMD divisor of 14.8
> 500,000/14.8 = almost $34,000

Reference: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

There must be something else I'm not getting.

As far as other suggestions regarding the portfolio ... nothing more than simplify as much as you are able. Fewer custodians, fewer accounts, no more than necessary duplication, simpler account types, etc. My plan which may or not be applicable is to consolidate everything at Vanguard, minimize to a three-fund portfolio post retirement, and at some point probably convert everything to a single balanced fund. (Acknowledge that this is easier for me than others because I do not have taxable investments).

Whether that's the best plan for you is a maybe. You have taxable investments in the mix and if some of your mother's IRAs are inherited you will not be allowed to consolidate. But the directionality of simplicity is worthwhile.

Good luck,

S

delamer
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Re: Help with Mother's Portfolio

Post by delamer » Thu Sep 14, 2017 2:30 pm

spencer99 wrote:
Wed Sep 13, 2017 10:04 pm
suewolf wrote:
Wed Sep 13, 2017 8:59 pm
spencer99 wrote:
Sun Sep 10, 2017 7:36 pm
Suewolf,

I may be missing something but something doesn't sound right about a $10,000 RMD on an 85 year olds's 500k tax deferred portfolio.

S
It's true. The RMD is from her Vanguard accounts (short term invest grade inv, primecap admiral, inflation protected sec, total int'l stock and prime money market and Wells Fargo American funds/ Invesco Comstock fund). Not sure why it doesn't sound right, but these figures are straight from her tax statement backed up by 1099's from Vanguard and Wells Fargo.

Any other suggestions regarding the portfolio?
Apologies if I was presumptuous Suewolf. I know you have a better handle on this than me.

My comment was based on the following:

> Tax-deferred portfolio value of roughly $500,000
> Age 85 IRS RMD divisor of 14.8
> 500,000/14.8 = almost $34,000

Reference: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

There must be something else I'm not getting.

As far as other suggestions regarding the portfolio ... nothing more than simplify as much as you are able. Fewer custodians, fewer accounts, no more than necessary duplication, simpler account types, etc. My plan which may or not be applicable is to consolidate everything at Vanguard, minimize to a three-fund portfolio post retirement, and at some point probably convert everything to a single balanced fund. (Acknowledge that this is easier for me than others because I do not have taxable investments).

Whether that's the best plan for you is a maybe. You have taxable investments in the mix and if some of your mother's IRAs are inherited you will not be allowed to consolidate. But the directionality of simplicity is worthwhile.

Good luck,

S
It could be that dividends/capital gains/interest are making up the remainder of the RMD.
Last edited by delamer on Thu Sep 14, 2017 5:45 pm, edited 1 time in total.

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Peter Foley
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Re: Help with Mother's Portfolio

Post by Peter Foley » Thu Sep 14, 2017 2:49 pm

My thinking is in line with what a few others have said. Consolidate the accounts at Vanguard, sell the house, and put those proceeds in the taxable account. I would aim for an asset allocation of 30% to 40% equities and the balance in bond funds, CD's, cash etc.

If at some point your mother ends up in an assisted living facility, her itemized deductions might drop her taxable income to zero. That would provide an opportunity to spend more from tax deferred accounts leaving the taxable account to grow. Based on her total assets it is likely that her taxable account will pass to her heirs. Therefore I would not sell equities in that account unless those with long term capital gains could be sold free from both federal and state taxes.

NotWhoYouThink
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Re: Help with Mother's Portfolio

Post by NotWhoYouThink » Thu Sep 14, 2017 3:17 pm

Still something missing with RMDs, $10K is too low. Has she been taking out too little? Who does her taxes?

suewolf
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Re: Help with Mother's Portfolio

Post by suewolf » Thu Sep 14, 2017 7:57 pm

NotWhoYouThink wrote:
Thu Sep 14, 2017 3:17 pm
Still something missing with RMDs, $10K is too low. Has she been taking out too little? Who does her taxes?
Taxes have been done by an accountant. But since your rule of thumb made perfect sense, I looked back at last years tax return and found the error of my ways.

IRA distributions: 11.9 k$

total tax deferred
Wells Fargo IRA: 63k$. RMD: 3.5k$
Vanguard IRAs: 162k$. RMD: 8.4k$
Vanguard 403(b); 65 k$
Great American annuity (not annuitized): 180 K$

The accountant characterized the distribution from the annuity (11k$) and the 403(b) of 3.8 k$ with the pensions and annuity line.

So the total income looks like this:
- IRA;s 11.9 K$ (per above)
- Pension:
- NJ Pension: 35.2 k$
- Great american annuity: 11 k$
- Vanguard 403(b): 3.8K$

So now I understand your confusion.

In my original post I had left out some income since some of the Annuity and 403(b) distributions had been reinvested.

So really, income should state:
Income: NJ Pension: 33k/yr; Social Security: 16k/hr; RMD's about 10k$/yr. Annuities and 403(b) distributions: 15k$, Interest and dividend: 1.8k$ or about 76k$ of income, assuming we no longer reinvest RMDs, annuity and 403(b) distributions.

Thank you for catching that. I was too busy matching her check book to realize she reinvested distributions. What I was doing was liquidating the annuity in my head (so we make sure we capture full value instead of surrender value) and therefore eliminating it as a future income stream.

But my primary question remains:
- what's the best way to proceed? one approach is to sell everything then put into a CD ladder. Should I do this for both taxable and tax deferred accounts? should convert to Roths now? Should I have anything (even 20%) in equities as some have suggested?

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Peter Foley
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Re: Help with Mother's Portfolio

Post by Peter Foley » Thu Sep 14, 2017 11:14 pm

suewolf wrote:
But my primary question remains:
- what's the best way to proceed? one approach is to sell everything then put into a CD ladder. Should I do this for both taxable and tax deferred accounts? should convert to Roths now? Should I have anything (even 20%) in equities as some have suggested?
You ask 4 questions:
1. and 2. Emphatically no! Do not sell everything and put it into a CD ladder. This would be especially bad for the taxable accounts. You would create a tax liability for her assets that can easily be avoided.
3. You might consider partial Roth conversion if your mother can do so and remain in the 15% tax bracket. This is unlikely given her income unless she has high cost health care in some year.
4. Yes you should have something in equities. Some experts consider 25% the minimum that should be invested in equities. Since your mother can easily live off her pension, SS benefits, RMDs, and her bond allocation, she could easily have 30% to 40% in equities as I previously stated.

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