Evaluate my mother's portfolio

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investordjfh
Posts: 18
Joined: Sun Apr 29, 2012 12:00 am

Evaluate my mother's portfolio

Post by investordjfh » Tue Aug 07, 2018 10:32 pm

In Sept. 2016, I asked for an evaluation of my mother's portfolio. At the time, nedsaid and Duckie helped provide really valuable information and insight. 2 years later, I thought to provide an update and ask folks if they have further thoughts.

Emergency funds = $25K (in checking/money market account), covering 8 months of expenses
Estimate Home Value: $420k
Debt: Mortgage ~ $135K @ 3.625% fixed 30 year mortgage, I think about 27 more years to go.
Tax Filing Status: Single
Estimated 2018 Tax Bracket: 22% Federal, 8% State CA
Age: 64
Desired Asset allocation: (40% stocks/60% bonds)
Intl allocation: 12.55% of stocks
Annual Salary: $65k pre-tax
Rental income: 12K annually

Estimated SSN benefit/month
At full retirement age (66): $1.5K
At age 70: $2.3K a month

Current portfolio: $765K ($635K in retirement accounts; $130k in cash @ 1.8%;)

Taxable
17% Cash (1.8% APR)
6% Company ESPP

Non-Taxable
7% Vanguard Inflation-Protected Securities Fund Investor Shares VIPSX - Traditional IRA
2% Vanguard Total International Bond Index Fund Admiral Shares VBTLX - Traditional IRA
1% Vanguard Real Estate Index Fund Admiral Shares VGSLX - Traditional IRA

10% Vanguard Total International Stock Index Fund Institutional Shares VTSNX - 401k
40% Vanguard Total Bond Market Index Fund Institutional Plus Shares VBMPX - 401k
17% Spartan® 500 Index Fund - Fidelity Advantage Institutional Class FXAIX - 401k

Her Traditional IRA is with Vangurad

Her 401k Options:
Company STOCK FUND ER 0.0018
FID 500 INDEX IPR (FXAIX) ER 0.015
FID CONTRAFUND K (FCNKX) ER 0.61
FID OTC K (FOCKX) ER 0.72
TRP INST LG CAP VAL (TILCX) ER 0.57
TRP INST LGCAP GRTH (TRLGX)ER 0.56
FID LOW PRICED STK K (FLPKX)ER 0.69
VANG EXT MKT IDX INS (VIEIX)ER 0.07
DFA US SM CAP VALUE (DFSVX)ER 0.52
FID DIVERSIFD INTL K (FDIKX)ER 0.87
MFS GLOBAL EQUITY R4 (MWELX)ER 0.97
VANG TOT INTL STK IS (VTSNX)ER 0.1
INVS GLB REAL EST R5 (IGREX)ER 0.91
FID FREEDOM K 2005 (FFKVX)ER 0.49
FID FREEDOM K 2010 (FFKCX)ER 0.53
FID FREEDOM K 2015 (FKVFX)ER 0.56
FID FREEDOM K 2020 (FFKDX)ER 0.58
FID FREEDOM K 2025 (FKTWX)ER 0.61
FID FREEDOM K 2030 (FFKEX)ER 0.65
FID FREEDOM K 2035 (FKTHX)ER 0.67
FID FREEDOM K 2040 (FFKFX)ER 0.67
FID FREEDOM K 2045 (FFKGX)ER 0.67
FID FREEDOM K 2050 (FFKHX)ER 0.67
FID FREEDOM K 2055 (FDENX)ER 0.67
FID FREEDOM K 2060 (FDKNX) ER 0.67
FID FREEDOM K INCOME (FFKAX) ER 0.44
FID PURITAN K (FPUKX) ER 0.48
MIP II CL ER 0.33
VANG TOT BD MK IS PL (VBMPX) ER. 0.04
FIMM GOVT INST (FRGXX) ER 0.18

What's she does:
Maxes out 401K + catchup
Maxes out traditional IRA + catchup
Maxes out employer ESPP and sells quarterly
I have her full financial durable power of attorney, living will, last will healthcare proxy
I've been added to her mortgage account and financial accounts, both for control purpose and as beneficiary

What we're doing next
1. Going through some effort to figure out how to remodel her home in the next year, so she can maintain her independence as she ages (bathroom, kitchen, some new furniture, washer/dryer, HVAC. Estimated budget = $50K.

2. Putting her home in a trust to make probating easier.

3. Prepare for signing up for Medicare, contact three months before your 65th birthday to sign up for Medicare".

4. Estate planning to transfer about $8k of assets annually to me, as her only son.

Details

1. She's planning for retirement, next year. She wants to retire at age 65 from her job.

2. I currently estimate her expenses post retirement at $3k-4k, and assuming she lives to 92, she's got a 70% chance of not entirely running out of money. So the plan is to not get SSN benefit until age 70, draw down her own money. And then apply for SSN.

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Peter Foley
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Re: Evaluate my mother's portfolio

Post by Peter Foley » Tue Aug 07, 2018 11:01 pm

I don't understand the reasoning behind the estate planning steps you are considering so I won't go there.

Cash in taxable. Your mother can get better yields by using a combination of on line savings and short term CDs. It is worth making the changes if you intend to hold this much cash. I would also be inclined to purchase 10K in I-bonds in each of the next two years.

Non taxable: The amounts held in the International Bond and REITs are not large enough to make a difference in return nor to add to her diversification. I would dump them both and add to the total bond fund.

delamer
Posts: 5478
Joined: Tue Feb 08, 2011 6:13 pm

Re: Evaluate my mother's portfolio

Post by delamer » Tue Aug 07, 2018 11:32 pm

If she withdraws $42,000 annually for 5 years once she retires, that will leave her with about $550,000 once Social Security starts (assuming the account grows at the inflation rate).

At that point, she’ll have $27,600/year in SS. At a safe withdrawal rate of 4%, that means $22,000/year from her assets.

So she should be OK. I am not sure why you calculate only a 70% survival rate for her assets. And she has the house as a backup in the event she needs long-term care of has high medical bills.

I don’t think the $8,000 gift to you is a good idea though. Her estate is way the amount taxed by the federal government, so she does not need to do estate planning for that. I certainly wouldn’t start gifts until she begins SS and is less dependent on her portfolio, at least. Check out “sequence of returns” risk.

Jablean
Posts: 186
Joined: Sat Jun 02, 2018 2:38 pm

Re: Evaluate my mother's portfolio

Post by Jablean » Wed Aug 08, 2018 1:35 am

Make sure the cost of setting up a trust for one beneficiary isn't more than the cost of probate. Everyone always want's to avoid probate like it's the boogyman when in most states it's not.

JoeRetire
Posts: 1342
Joined: Tue Jan 16, 2018 2:44 pm

Re: Evaluate my mother's portfolio

Post by JoeRetire » Wed Aug 08, 2018 6:49 am

investordjfh wrote:
Tue Aug 07, 2018 10:32 pm
2. Putting her home in a trust to make probating easier.
Are you her only heir? What are you imagining will be difficult about probate?
4. Estate planning to transfer about $8k of assets annually to me, as her only son.
What's the point in that?
Do you need the money now? How is this related to estate planning?
2. I currently estimate her expenses post retirement at $3k-4k, and assuming she lives to 92, she's got a 70% chance of not entirely running out of money.
How did you come up with 70% ? Seems low.
So the plan is to not get SSN benefit until age 70, draw down her own money. And then apply for SSN.
Makes sense.

If she has an ex or deceased ex, you may want to look into starting spousal/survivor benefits before 70 and potentially switching over to her own benefits once reaching 70.

ExitStageLeft
Posts: 723
Joined: Sat Jan 20, 2018 4:02 pm

Re: Evaluate my mother's portfolio

Post by ExitStageLeft » Wed Aug 08, 2018 11:12 am

It looks like you and your mother have done a great job getting her ready to transition into retirement.

Is there an asset that you did not list that is produicing the rental income? Or is that from renting out part of the house?

Disregarding the rental income, your mother is in great shape. A FIRECalc scenario using 30 years, current investable assets, 40/60 allocation and social security at age 70 shows 97.5% success when initial spending is $50,000 per year.

megabad
Posts: 362
Joined: Fri Jun 01, 2018 4:00 pm

Re: Evaluate my mother's portfolio

Post by megabad » Wed Aug 08, 2018 12:14 pm

investordjfh wrote:
Tue Aug 07, 2018 10:32 pm
In Sept. 2016, I asked for an evaluation of my mother's portfolio. At the time, nedsaid and Duckie helped provide really valuable information and insight. 2 years later, I thought to provide an update and ask folks if they have further thoughts.
Portfolio looks good to me. Simple and low expense.

What's she does:
Maxes out 401K + catchup
Maxes out traditional IRA + catchup
Maxes out employer ESPP and sells quarterly
I have her full financial durable power of attorney, living will, last will healthcare proxy
I've been added to her mortgage account and financial accounts, both for control purpose and as beneficiary
These all seem wise to me, assuming she is in agreement.

What we're doing next
1. Going through some effort to figure out how to remodel her home in the next year, so she can maintain her independence as she ages (bathroom, kitchen, some new furniture, washer/dryer, HVAC. Estimated budget = $50K.
Assuming the home is of appropriate designed for elderly, this may be money well spent. We had an older relative that insisted on remodeling her home at age 70. It was an old Victorian with 3 floors and very steep steps. No bedroom on first floor. She had to move post knee replacement about 1 year after remodel and did not recover anywhere near the expense on sale.
2. Putting her home in a trust to make probating easier.
As above poster indicated, not sure what the thinking is here and may not be overly necessary, but I do not know your whole situation.
3. Prepare for signing up for Medicare, contact three months before your 65th birthday to sign up for Medicare".
Do this when appropriate. Enrollment period requirements can depend on when she stops work.
4. Estate planning to transfer about $8k of assets annually to me, as her only son.
Once again, as above poster indicated, not sure what the thinking is here and I would likely recommend against this, but I do not know your whole situation.
Details

1. She's planning for retirement, next year. She wants to retire at age 65 from her job.

2. I currently estimate her expenses post retirement at $3k-4k, and assuming she lives to 92, she's got a 70% chance of not entirely running out of money. So the plan is to not get SSN benefit until age 70, draw down her own money. And then apply for SSN.
I think it is wise to push SS until 70 for "longevity insurance" reasons. I think she is likely going to be ok financially barring a large expense (ie. another home remodel, long term care, etc), but the future is unpredictable (maybe you have used more conservative figures for real portfolio growth than I do in planning). She is likely beyond the age where it is wise to investigate LTC insurance. She is much better off than the vast majority of retirees and I know numerous older folks that are able to live off only a small SS. I would not stress too much.

investordjfh
Posts: 18
Joined: Sun Apr 29, 2012 12:00 am

Re: Evaluate my mother's portfolio

Post by investordjfh » Thu Aug 09, 2018 8:44 pm

Thanks so much to everyone's comments. Sorry for the slow reply, but I got really busy at work. So I'm responding to each person.
Peter Foley wrote:
Tue Aug 07, 2018 11:01 pm
Cash in taxable. Your mother can get better yields by using a combination of on line savings and short term CDs. It is worth making the changes if you intend to hold this much cash. I would also be inclined to purchase 10K in I-bonds in each of the next two years.

Non taxable: The amounts held in the International Bond and REITs are not large enough to make a difference in return nor to add to her diversification. I would dump them both and add to the total bond fund.
The money sits in a 1.75% online savings account. I've considered short-term CDs, but thinking that interest rates are going up, I've just kept it there. It was just easier. Furthermore, with the planned remodeling, she'll need some cash.

Regarding the International Bond and REITs, rather than dumping, would it make sense to increase for diversification benefits?
delamer wrote:
Tue Aug 07, 2018 11:32 pm
I don’t think the $8,000 gift to you is a good idea though. Her estate is way the amount taxed by the federal government, so she does not need to do estate planning for that. I certainly wouldn’t start gifts until she begins SS and is less dependent on her portfolio, at least. Check out “sequence of returns” risk.
This amount has to do with specifically, preparing for a worse case scenario for California MediCal qualification and recovery.
Jablean wrote:
Wed Aug 08, 2018 1:35 am
Make sure the cost of setting up a trust for one beneficiary isn't more than the cost of probate. Everyone always want's to avoid probate like it's the boogyman when in most states it's not.
I've spoken to several lawyers and the estimated cost for legal and fees for a simple house in trust is about $1.5k. However, I'm even considering if she should just transfer the asset earlier to me, as I'm her only son.
ExitStageLeft wrote:
Wed Aug 08, 2018 11:12 am
It looks like you and your mother have done a great job getting her ready to transition into retirement.

Is there an asset that you did not list that is produicing the rental income? Or is that from renting out part of the house?

Disregarding the rental income, your mother is in great shape. A FIRECalc scenario using 30 years, current investable assets, 40/60 allocation and social security at age 70 shows 97.5% success when initial spending is $50,000 per year.
It's a two bedroom, two bathroom condo. She rents the other room to someone in her 60s, that's the rental income.

Would you be kind to explain what a FIRECalc scenario means? I googled it, and come to this website: https://www.firecalc.com/ Is this it?
megabad wrote:
Wed Aug 08, 2018 12:14 pm
1. Going through some effort to figure out how to remodel her home in the next year, so she can maintain her independence as she ages (bathroom, kitchen, some new furniture, washer/dryer, HVAC. Estimated budget = $50K.
Assuming the home is of appropriate designed for elderly, this may be money well spent. We had an older relative that insisted on remodeling her home at age 70. It was an old Victorian with 3 floors and very steep steps. No bedroom on first floor. She had to move post knee replacement about 1 year after remodel and did not recover anywhere near the expense on sale.
Great point. I helped her purchase the condo several years ago. It's a ground floor unit, in a gated community. No year, just a patio, so could be easy for even wheel chair. All the major stores, Walmart, groceries, movies, etc. are only 5 minute drive and at most 15 minute walking distance. That's why the wish to remodel.

Thanks again to everyone!

ExitStageLeft
Posts: 723
Joined: Sat Jan 20, 2018 4:02 pm

Re: Evaluate my mother's portfolio

Post by ExitStageLeft » Fri Aug 10, 2018 1:17 am

investordjfh wrote:
Thu Aug 09, 2018 8:44 pm
...
Would you be kind to explain what a FIRECalc scenario means? I googled it, and come to this website: https://www.firecalc.com/ Is this it?
Yes. that's it. If you go to that web page and scroll down to the Start Here block, you'll see input boxes for spending level, total assets, and number of years. If you leave everything at the default, you'll see that at one can spend at a $30,000 spending level (4% of initial assets) and have a 95% success rate when looking at historical market returns.

You can change other information too using the tabs under the top banner. I went to Other Income and input the social security estimate and I went to Portfolio to change the asset allocation to 40/60 from the default of 75/25. Any time you click the Submit box it will pop up another window showing how the portfolio would have performed at different times in the past.

I can't do it justice with this short comment. It is worth spending some time understanding how it works and getting a feel for what can impact the success rate the most.

Jablean
Posts: 186
Joined: Sat Jun 02, 2018 2:38 pm

Re: Evaluate my mother's portfolio

Post by Jablean » Fri Aug 10, 2018 1:42 am

No you don't want her to transfer the house to you unless it was recently purchased. As a gift you take on her cost (ie low) and if/when you sell then you have to account for all the growth. As a beneficiary who inherits when she passes you receive a step up in cost (ie current value). I still don't see the value of a trust just to have you inherit the house.

Culbretd
Posts: 42
Joined: Sat Mar 24, 2018 4:06 am

Re: Evaluate my mother's portfolio

Post by Culbretd » Fri Aug 10, 2018 3:14 am

Jablean wrote:
Wed Aug 08, 2018 1:35 am
Make sure the cost of setting up a trust for one beneficiary isn't more than the cost of probate. Everyone always want's to avoid probate like it's the boogyman when in most states it's not.
What state do you live in? Avoiding probate is always best IMO. Never heard any good stories with things going easy when dealing with probate. Almost like someone saying they enjoyed their trip to the DMV.

Jablean
Posts: 186
Joined: Sat Jun 02, 2018 2:38 pm

Re: Evaluate my mother's portfolio

Post by Jablean » Fri Aug 10, 2018 8:01 am

Culbretd wrote:
Fri Aug 10, 2018 3:14 am
Jablean wrote:
Wed Aug 08, 2018 1:35 am
Make sure the cost of setting up a trust for one beneficiary isn't more than the cost of probate. Everyone always want's to avoid probate like it's the boogyman when in most states it's not.
What state do you live in? Avoiding probate is always best IMO. Never heard any good stories with things going easy when dealing with probate. Almost like someone saying they enjoyed their trip to the DMV.
Do a quick search here on Bogleheads and lots of easy probate stories, but it does depend on the state and if the use the uniform probate code or not.

Thrifty1
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Joined: Tue Nov 12, 2013 9:15 am

Re: Evaluate my mother's portfolio

Post by Thrifty1 » Fri Aug 10, 2018 8:21 am

Here in Illinois I had an attorney file a transfer on death deed for my condo. This is a way to avoid probate and the deed is revocable and does not affect a later sale.

NotWhoYouThink
Posts: 1961
Joined: Fri Dec 26, 2014 4:19 pm

Re: Evaluate my mother's portfolio

Post by NotWhoYouThink » Fri Aug 10, 2018 8:42 am

This amount has to do with specifically, preparing for a worse case scenario for California MediCal qualification and recovery.
However, I'm even considering if she should just transfer the asset earlier to me, as I'm her only son.
If you want to do Medicaid planning, pay an experienced elder care attorney to put the plan in place for you, don't try to wing it because you probably won't do it right. Or just leave the assets in her name and if she needs care she can pay for it.

Note that many people have found that for seniors that need long term care, the best care can be obtained from places that do not accept Medicaid on day one, but which require that you are able to pay for at least the first year or two of care yourself before transitioning to Medicaid funding. Impoverishing your mother before she needs care might help you but hurt her.

Culbretd
Posts: 42
Joined: Sat Mar 24, 2018 4:06 am

Re: Evaluate my mother's portfolio

Post by Culbretd » Fri Aug 10, 2018 3:02 pm

Jablean wrote:
Fri Aug 10, 2018 8:01 am
Culbretd wrote:
Fri Aug 10, 2018 3:14 am
Jablean wrote:
Wed Aug 08, 2018 1:35 am
Make sure the cost of setting up a trust for one beneficiary isn't more than the cost of probate. Everyone always want's to avoid probate like it's the boogyman when in most states it's not.
What state do you live in? Avoiding probate is always best IMO. Never heard any good stories with things going easy when dealing with probate. Almost like someone saying they enjoyed their trip to the DMV.
Do a quick search here on Bogleheads and lots of easy probate stories, but it does depend on the state and if the use the uniform probate code or not.
Sadly no stories from South Carolina. I know several years back when my grandfather died an my dad was executor the probate here was very difficult to deal with. Multiple trips there with nothing explained.

Also good to know that if you inherited a house you get a step up basis as opposed to a trust. I did not know that. Learn something here every day.

investordjfh
Posts: 18
Joined: Sun Apr 29, 2012 12:00 am

Re: Evaluate my mother's portfolio

Post by investordjfh » Sat Aug 11, 2018 10:55 pm

Culbretd wrote:
Fri Aug 10, 2018 3:14 am
Jablean wrote:
Wed Aug 08, 2018 1:35 am
Make sure the cost of setting up a trust for one beneficiary isn't more than the cost of probate. Everyone always want's to avoid probate like it's the boogyman when in most states it's not.
What state do you live in? Avoiding probate is always best IMO. Never heard any good stories with things going easy when dealing with probate. Almost like someone saying they enjoyed their trip to the DMV.
This is in California. Everyone I've spoken to recommends doing a simple Trust in California, to avoid probate where possible.
NotWhoYouThink wrote:
Fri Aug 10, 2018 8:42 am
If you want to do Medicaid planning, pay an experienced elder care attorney to put the plan in place for you, don't try to wing it because you probably won't do it right. Or just leave the assets in her name and if she needs care she can pay for it.

Note that many people have found that for seniors that need long term care, the best care can be obtained from places that do not accept Medicaid on day one, but which require that you are able to pay for at least the first year or two of care yourself before transitioning to Medicaid funding. Impoverishing your mother before she needs care might help you but hurt her.
Thanks for the note. I have been talking to MediCal planning folks in California. It isn't very clear and finding a good elder care attorney has been incredibility difficult. I've asked for referrals from LA, Orange County, and San Diego county law association, but most folks on estate, will, etc. and not specifically elder care law. This transfer of asset is based on the best info I found.

investordjfh
Posts: 18
Joined: Sun Apr 29, 2012 12:00 am

Re: Evaluate my mother's portfolio

Post by investordjfh » Sat Aug 11, 2018 11:00 pm

Jablean wrote:
Fri Aug 10, 2018 1:42 am
No you don't want her to transfer the house to you unless it was recently purchased. As a gift you take on her cost (ie low) and if/when you sell then you have to account for all the growth. As a beneficiary who inherits when she passes you receive a step up in cost (ie current value). I still don't see the value of a trust just to have you inherit the house.
Thanks. I didn't know this. I found more info here: https://finance.zacks.com/taxes-inherit ... 11196.html

But the house has already appreciated substantially since I helped purchase it for her for $245K. Are you suggesting I don't take the gain and wait until the further growth in value?

Jablean
Posts: 186
Joined: Sat Jun 02, 2018 2:38 pm

Re: Evaluate my mother's portfolio

Post by Jablean » Mon Aug 13, 2018 11:07 pm

I don't know anything about trusts so I won't go there let's just look at inherited things like stock.

Say your mom had stock or mutual funds that she bought for $5000 and gives them to you when they are worth $10,000. You don't want to keep them because you want to go on a ski vacation to the Alps so you sell them. You owe tax on the $5,000 gain (sales value minus her cost).

Instead your mother sadly passes a few years later when the stocks/funds are worth $15,000 and you inherit them as a beneficiary. You still want to sell. Will you owe tax on the $10,000 gain? No. When you inherit them your cost because the date of death value so if you sell them you are taxed on zero dollars or more likely the small gain or loss between the date you inherit and the date you sell.

The same thing applies to the house if it is gifted while she is alive or if you inherit after her death. If you live in the house for at least two of five years before you sell it you probably won't have to pay tax because there's a $500,000 or so leeway on profit from selling your house if you've lived there. So if you live there not much of a problem either way, but if you don't live, or won't live in the house before you sell it yourself then tax will applied.

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