Retired Mother, High Withdrawal Rate, Small Portfolio

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photoshoppedunicorn
Posts: 14
Joined: Tue Mar 31, 2015 10:30 am

Retired Mother, High Withdrawal Rate, Small Portfolio

Post by photoshoppedunicorn » Thu Jan 10, 2019 10:44 am

Greetings! I could use some good advice! About 4 years ago we moved all my retired mother's money out of a managed Merrill Lynch account because the advisor was collecting high fees and not being helpful at all. All of her investments are now with USAA, mainly in a taxable USAA brokerage account (largely due to the ML advisor having directed her to cash out all her retirement plans instead of rolling them into IRA accounts) plus one traditional IRA account.

[EDIT: I'm removing all information regarding the retirement facility as I'm not getting any advice on her taxable portfolio, which is all I was looking for. Also removing the information on her Required IRA Distribution since that is being misunderstood.]

I would really like to get some advice and take action on her portfolio to readjust it to something that will work for her long term.

Emergency funds:
No real emergency fund, but $2,750 cash in savings account, currently $90,500 cash in brokerage account, $7,800 cash in IRA

Debt:
No Debt

Monthly Income:
$1993 social security
$382 state pension
$88 old employer pension

Total Monthly Income = $2463/month income
Current Monthly Expenses = $2435
Anticipated Expenses in one year After Moving = $4460

Tax Filing Status: Single
Tax Rate: 0% Federal, 0% State - she's owed nothing since retiring
State of Residence: Maryland
Age: 70

Desired Asset allocation: 50% stocks / 50% bonds
Desired International allocation: 15% of stocks

Not sure about this stuff, so I could use some help deciding. I mostly still see that people should have an asset allocation based on their age (70% bonds at age 70), but I had read in a few places that it's no longer always recommended. Maybe it would make sense for someone who accumulated substantial assets and wants to freeze that number to eliminate risk, but I think my mother needs to continue to try to grow her assets to sustain the lifestyle she wants.

Most of what is in the taxable investment account was an inheritance from her parents that included a tax-exempt bond ladder. At one point she mentioned to the ML advisor that the portfolio wasn’t producing as much income as it used to, so ML sold off some of the bonds and bought most of the random assortment of funds listed below plus a bunch of single stocks. The Vanguard funds and two USAA bond indexes are what we bought after selling the single stocks and some of the worst-performing funds after moving the money. We never finished moving everything because of indecision paralysis and generalized fear. We were also unclear on what would happen with taxes if we sold too much at once in a taxable account.

Current retirement assets: $511,000 ($422k taxable account, $89k IRA)

$422k Taxable
21% cash ($90,505) - would be $50k but left extra in cash for home repairs/move
22% Nuveen Santa Barbara Div Growth Fd Cl I (NSBRX)(0.71%)
17% Vanguard Target Retirement 2020 (VTWNX) (0.13%)
14% USAA Tax Exempt Long Term Retail (USTEX) (0.47%)
14% USAA Tax Exempt Intermed Term Retail (USATX) (0.51%)
6% MFS Global Equity Fd Class (MWEIX) (0.92%)
6% local county bonds

$89k Rollover IRA at USAA
9% cash ($7,777)
91% Vanguard Target Retirement 2020 (VTWNX) (0.13%)

House
$400,000. Paid off, property taxes are included in the monthly expenses. Planning to repair, sell, and move. All net proceeds will be used to buy in to retirement community ~$375k.

Questions:

1. We need help figuring out what an appropriate asset allocation would look like to meet her need to spend 6% of the taxable portfolio per year. I don't think 70% bonds will work for this situation, especially since the bond funds she's invested in seem to only go down.

2. We need help figuring out if selling what's currently in the taxable portfolio and buying investments we are more comfortable with will likely trigger a large tax bill (this is kind of where we stalled last time - we sold all the single stocks she had and some that seemed to be performing badly, but then got nervous and stopped.)

3. Can anyone help me do the math to figure out what it's going to mean that the community fee goes up by 3% each year? I'm not sure whether that's going to be ok because that's basically just inflation and it's already accounted for in the withdrawal rate or not?

4. Are there any good resources, other than this site, for people who are managing money in retirement? Most of what I find is written for young people who are saving for retirement. I have difficulty find anything geared towards people who are already retired who didn't manage to save enough while they were still working.

Thank you so much in advance to everyone who responds regarding the portfolio or my specific questions!
Last edited by photoshoppedunicorn on Thu Jan 10, 2019 1:58 pm, edited 2 times in total.

jucor
Posts: 168
Joined: Tue Jun 02, 2015 8:35 am

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by jucor » Thu Jan 10, 2019 11:06 am

If I'm understanding this correctly, she is proposing to move into a retirement community with a $375k buy-in and a $4000+ monthly fee?

How big is the apartment? If smaller/cheaper units are available seriously consider those. Have you investigated lower cost communities, even if slightly less convenient or luxurious?

Does the community have a "no move-out" feature? My 92 year old mother is in a community in which, should it be necessary, her buy-in (which would otherwise revert to her estate) will be drawn down to pay her monthly fees if she runs out of money, and she will not be kicked out even if that is exhausted (although she might be moved to a studio unit in that case). This would be essential in your mother's case -- as it would assure her and you that she'd be secure even if she outlives her money.

GT99
Posts: 89
Joined: Wed Jun 20, 2018 5:26 pm

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by GT99 » Thu Jan 10, 2019 11:32 am

jucor wrote:
Thu Jan 10, 2019 11:06 am
If I'm understanding this correctly, she is proposing to move into a retirement community with a $375k buy-in and a $4000+ monthly fee?
This is how I interpreted it. If that's correct, it's insane. Doing some quick googling tells me the national median for assisted living is under $4000 per month. That's for places that are basically rentals (i.e. no $375k buy-in) with far more services than what I would thing of as a retirement community.
Something seems off here, but if those numbers are correct, then she is absolutely moving into a place she can't afford - unless she has basically no expenses above the cost of the facility and doesn't have any high healthcare costs.

KingRiggs
Posts: 33
Joined: Wed Dec 12, 2018 12:19 pm
Location: Indiana

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by KingRiggs » Thu Jan 10, 2019 11:43 am

It appears the monthly is $2880. She can cover $800/month, leaving $2k per month, $24k per year, by my reading. A little more reasonable...

My in-laws moved into a community for 300k buy-in, $1800/month. When they die, the 300k is gone...Not sure how standard that arrangement is.

Topic Author
photoshoppedunicorn
Posts: 14
Joined: Tue Mar 31, 2015 10:30 am

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by photoshoppedunicorn » Thu Jan 10, 2019 11:46 am

photoshoppedunicorn wrote:
Thu Jan 10, 2019 10:44 am
The fee to the retirement community will also go up by 3% per year and I'm not really confident in how to calculate what that will do to her needed withdrawal rate. The starting number is about $2880/month
It's $2880/month. After accounting for everything that is included (property taxes, waste removal, utilities, cable, lawn service, etc.) here total expenses will go up by $2000/month.

90% of the buy in is refunded 4 months after she departs, by whichever means. I'm checking on whether any of the buy-in can be used to cover fees in an emergency situation. Edit: If the money runs out, they have a residents' beneficial fund, they will also use the refundable amount from the apartment, and they can also take people on Medicaid in the nursing home section if needed.

SuzBanyan
Posts: 202
Joined: Thu Jun 02, 2016 11:20 am

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by SuzBanyan » Thu Jan 10, 2019 11:59 am

photoshoppedunicorn wrote:
Thu Jan 10, 2019 11:46 am
photoshoppedunicorn wrote:
Thu Jan 10, 2019 10:44 am
The fee to the retirement community will also go up by 3% per year and I'm not really confident in how to calculate what that will do to her needed withdrawal rate. The starting number is about $2880/month
It's $2880/month. After accounting for everything that is included (property taxes, waste removal, utilities, cable, lawn service, etc.) here total expenses will go up by $2000/month.

90% of the buy in is refunded 4 months after she departs, by whichever means. I'm checking on whether any of the buy-in can be used to cover fees in an emergency situation.
Your mother may be a good candidate for a Single Premium Immediate Annuity (SPIA), which may pay her about 6% of the invested amount for life. So, $450K invested in an SPIA would return about $2700 per month for life. With SS and her pensions, that is about $5600 per month, some of which (SS) is adjusted for inflation.

Is this a continuing care community that includes nursing home care if needed? You mentioned she has long term care insurance. Is the cost of this included in you calculations? Is this covered by the community already?

What happens if the sale of her home nets less than $375K?

Jack FFR1846
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Joined: Tue Dec 31, 2013 7:05 am

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by Jack FFR1846 » Thu Jan 10, 2019 12:53 pm

This sounds extremely expensive. My wife's aunt recently moved to a full assisted living facility. No buy in and just about $4k a month includes absolutely everything but doctor visits, dental and prescriptions. 3 meals a day, transportation to events, doctor's appointments, or wherever she wants to go. This is in Massachusetts, so I'd have to guess that this place is in the Bay area or, New York metro as I can't even think of another place with higher costs. Maybe Beverly Hills or Greenwich, CT.
Bogle: Smart Beta is stupid

FoolMeOnce
Posts: 400
Joined: Mon Apr 24, 2017 11:16 am

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by FoolMeOnce » Thu Jan 10, 2019 1:38 pm

To be clear, her expenses after housing and "water, gas, electric, phone, cable, internet, law care, property taxes, etc." will be $1,580 ($4460-2880) - is that right? Can she reduce this a bit?

Also, you seen to make some rounding errors that make the situation appear worse. Her anticipated expenses ($4,460) minus income ($2,750) leaves a shortfall of $1,710 per month, not $2,000.

Even at $2,000, $24k annual withdrawal out of a $511k portfolio is 4.7%, not 6%. This is fairly reasonable for someone 70 years old. At $1,710 per month, $20,520 annual withdrawal is 4%.

Her portfolio is not very well diversified. She should have plenty of room for tax-free long term capital gains to get out of those positions and into a total market index over a few years. How much in the taxable account is gains versus basis?

I would not go below 30% stocks, from what I've read here. Probably worth considering going to 40-50%. Rebalance through withdrawals: when stocks are down, withdraw the funds she needs from bonds; when stocks are up, withdraw from stocks.

FoolMeOnce
Posts: 400
Joined: Mon Apr 24, 2017 11:16 am

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by FoolMeOnce » Thu Jan 10, 2019 2:03 pm

I think I see your math a little more clearly now. You are included RMD's in the total $2,750 income you listed. While income for tax purposes, they are not exogenous income for calculating necessary withdrawals but instead come from the portfolio. Ignoring this gets her to $2,463 income, and the $2,000 per month shortfall you wrote about ($1,997). Got it, my mistake.

I still don't see how you calculate a 6% withdrawal rate.

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

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by delamer » Thu Jan 10, 2019 2:40 pm

One option for the taxable:

Put 10 years of expenses — roughly $240,000, I believe — in cash and short-term bonds.

Invest the rest in an index stock fund(s). Put any dividends/capital gains from the fund(s) into cash to help replenish the expenses pile (this probably will be around $4000/year).

Monitor the stock fund and rebalance, meaning sell shares to maintain the 10 years of expenses. Do this over time and to minimize taxes; don’t sell any shares during a slump. The point is to not have to worry about the stock market’s gyrations to cover her expenses in the short term. You can sell stock when it makes sense for her long run security.

Sandi_k
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Location: SF Bay Area

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by Sandi_k » Fri Jan 11, 2019 1:54 am

photoshoppedunicorn wrote:
Thu Jan 10, 2019 10:44 am

4. Are there any good resources, other than this site, for people who are managing money in retirement? Most of what I find is written for young people who are saving for retirement. I have difficulty find anything geared towards people who are already retired who didn't manage to save enough while they were still working.
Yes - Jane Bryant Quinn's "How to Make Your Money Last." She's a gifted writer, and has a knack for making complicated financial stuff sound common sensical.

https://www.amazon.com/Make-Your-Money- ... money+last

Scrapr
Posts: 224
Joined: Sun May 09, 2010 9:19 am

Re: Retired Mother, High Withdrawal Rate, Small Portfolio

Post by Scrapr » Fri Jan 11, 2019 2:13 am

Jack FFR1846 wrote:
Thu Jan 10, 2019 12:53 pm
This sounds extremely expensive. My wife's aunt recently moved to a full assisted living facility. No buy in and just about $4k a month includes absolutely everything but doctor visits, dental and prescriptions. 3 meals a day, transportation to events, doctor's appointments, or wherever she wants to go. This is in Massachusetts, so I'd have to guess that this place is in the Bay area or, New York metro as I can't even think of another place with higher costs. Maybe Beverly Hills or Greenwich, CT.
agreed. I would look for a different type of Assisted Living. Parents just transitioned through AL & Memory care. No buy in. About $5k/mo in AL

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