Advice for my mother's investments

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Winston101
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Advice for my mother's investments

Post by Winston101 » Mon Feb 11, 2019 3:55 pm

I took over management of my parent's investments when my dad died recently. Although Mom is owner, trustee and/or beneficiary of all investments, she's 96 and has no interest in the details. She just wants to live comfortably until she dies. I've already consolidated eight different investment accounts from three different brokers into two Fidelity accounts: a taxable account worth about $550K and an IRA worth $225K. Next step is to consolidate a longish list of individual stocks and mutual funds into a few conservative index funds and/or other fixed income assets.

Mom needs about $2700 per month to close the gap between her expenses and her Social Security income. Due to required minimum distributions, this will initially come from her IRA. But as she draws down her IRA, more will need to come from her taxable account. Her expenses will increase if/when she transitions to assisted living or a nursing home. Due to health issues, this could be sooner than later. If she goes into a nursing home, the gap between her expenses and social security could be closer to $7000 per month -- or $84K per year. So, her financial goals are to protect principle and generate some income to supplement her Social Security. I've already moved some money in her taxable account into a municipal bond fund for some tax exempt income. Although I have four siblings in the mix, we all agree that it is not a priority for Mom to leave money to her kids. The priority is for her to be happy and comfortable until the end.

At this point, I'm thinking that her investments should be 4 buckets:
1) $100K - liquid, short-term assets (money market?)
2) $100K - assets with a one year term (Bonds, CDs?)
3) $100K - assets with a two year term
4) $475K - assets with a three year term

Does this strategy make sense? Are there any fixed income funds that you'd recommend? How about individual bonds? Other suggestions?

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willthrill81
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Re: Advice for my mother's investments

Post by willthrill81 » Mon Feb 11, 2019 4:59 pm

Why does she need tax-exempt income? Based on the information you've provided, her tax bracket is probably 12%. But even if it's 22%, taxable bonds are likely to do better than tax-exempt.

Goals like "protect principal and generate some income" are not particularly worthwhile from an asset allocation standpoint, but it does sound like you desire for her portfolio to be quite conservative, which is fine.

While I know that her advanced age is probably the driving force behind her thinking, keep in mind that it's rarely recommended to have lower than a 25% stock allocation. If her death was imminent, and there were other factors driving the need for minimal volatility, that would be different, but it doesn't seem that either of those factors is present here.

I believe that a 25% allocation to a broad market stock index fund like VTSAX and a 75% allocation to some mixture of short- and intermediate-term, including total bond market, bond funds would be very reasonable for her.

I see no need whatsoever for her to own individual bonds, unless you wanted to start a TIPS ladder.

Regarding the RMDs, remember that whatever she doesn't need for spending purposes now can simply be reinvested in the taxable account.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

123
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Re: Advice for my mother's investments

Post by 123 » Mon Feb 11, 2019 5:16 pm

I've handled an almost identical situation for an elderly relative in their 90's and various types of fixed income fit the bill nicely without any exposure to stock/equity investments. I found that various CD's (brokered are much easier than dealing with a bunch of banks) and treasury bills and notes worked out well. At Fidelity you may want to look into FZDXX as a "purchased" MMF for loose cash. FZDXX has a minimum initial purchase of $100K but you can make subsequent buys and sells for less. I found that generally there wasn't much reason to get "excited" about seeing attractive CD rates from outside banks because usually within a week or two there was a similar brokered rate and term available as a brokered CD from the same or a similar bank. An advantage Fidelity has on treasuries is that you can set them up for automatic reinvestment so even a 4 week bill can be attractive in some situations. As you've likely discovered it's much easier to "bulk up" fixed income placements into $100K+ chunks, otherwise there can just get to be too many little pieces to keep track of.

Years ago when interest rates were more "normal" I had over 75% of a relative's $1M+ portfolio in various 2 year notes in Treasury direct. They were happy with fixed income that was free of state tax. And no annoying visits to banks to open and close accounts!

I wouldn't bother with individual bonds. Why subject her to potential credit risk of the issuer?

Peace of mind is important to those in their 90's. These people were aware of the depression and stock market risk. Why should you have to apologize for taking stock market risk with their money?
Last edited by 123 on Mon Feb 11, 2019 5:24 pm, edited 1 time in total.
The closest helping hand is at the end of your own arm.

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willthrill81
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Re: Advice for my mother's investments

Post by willthrill81 » Mon Feb 11, 2019 5:18 pm

123 wrote:
Mon Feb 11, 2019 5:16 pm
Peace of mind is important to those in their 90's. These people were aware of the depression and stock market risk. Why should you have to apologize for taking stock market risk with their money?
No apology is needed. Historically, a 25/75 portfolio had a smaller drawdown and higher return than a 0/100 portfolio. That's a win/win, regardless of your age.

The "peace of mind" from an all fixed income portfolio in most cases is illusory.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

123
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Re: Advice for my mother's investments

Post by 123 » Mon Feb 11, 2019 5:27 pm

willthrill81 wrote:
Mon Feb 11, 2019 5:18 pm
The "peace of mind" from an all fixed income portfolio in most cases is illusory.
I totally agree. But sometimes the elderly, and the not so elderly, get great comfort from their illusions.
The closest helping hand is at the end of your own arm.

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willthrill81
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Re: Advice for my mother's investments

Post by willthrill81 » Mon Feb 11, 2019 5:30 pm

123 wrote:
Mon Feb 11, 2019 5:27 pm
willthrill81 wrote:
Mon Feb 11, 2019 5:18 pm
The "peace of mind" from an all fixed income portfolio in most cases is illusory.
I totally agree. But sometimes the elderly, and the not so elderly, get great comfort from their illusions.
True, but the OP said that she "has no interest in the details."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

delamer
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Re: Advice for my mother's investments

Post by delamer » Mon Feb 11, 2019 6:25 pm

Be careful about selling stocks in a taxable account. You need to determine the cost basis for each holding and determine the taxable gain and tax due.

It might be better, given your mother’s very advanced age, to hold onto the stocks — especially if they are diversified across industries.

clip651
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Re: Advice for my mother's investments

Post by clip651 » Mon Feb 11, 2019 6:28 pm

Go slowly with her taxable account. If the various stocks and mutual funds you mentioned are in taxable, you need to figure out her capital gains for each holding, as well as her tax situation before liquidating those holdings and buying other investments. You could cost her a lot of money in taxes by selling taxable investments that aren't needed for spending currently. Selling stocks and mutual funds may still be necessary in order to make her portfolio more appropriate for her, but slow down and figure out the details with respect to the tax situation before you make changes.

Similarly, after satisfying her yearly RMD for her IRA, it may make more sense to spend from taxable for any other money she wants to spend for the year. Or it may not - details matter here, so that you can plan withdrawals for her in a tax efficient way.

If you want detailed suggestions on her situation, you'll need to provide more detail. Post her investments in this format:

viewtopic.php?f=1&t=6212

You'll learn a lot by gathering the information. And you'll provide those replying to your thread with enough information to make useful suggestions.

best wishes to you and your mother,
cj

clip651
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Re: Advice for my mother's investments

Post by clip651 » Mon Feb 11, 2019 7:12 pm

I meant to add -

Sorry to hear about the death of your father.

If your mother and father were filing taxes as married filing jointly, your mother can still do that for the tax year of his death. She will have to file as a single for the tax year following his death (unless she is a qualifying widow), and this can be a significant change in tax brackets, etc. Just something else to be aware of for her financial planning. (e.g. if he died in 2018, 2018 taxes can still be MFJ. 2019 taxes will be single)

billfromct
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Re: Advice for my mother's investments

Post by billfromct » Mon Feb 11, 2019 8:11 pm

Did you check to see if survivor benefits from your Dad's SS will be more compared to her present SS benefit?

bill

Topic Author
Winston101
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Re: Advice for my mother's investments

Post by Winston101 » Tue Feb 12, 2019 6:17 pm

Thanks to those you have posted feedback! In response to some of the comments:
- Income from Mom's municipal bond fund is exempt from both Fed and State tax (muni's are in her home state). She has dividend income in addition to social security, which puts her in the 22% Fed income tier and 7% State. If changes to her portfolio reduce dividends enough to drop her to a lower tax bracket, I'll reassess the muni bond fund. Thanks for the heads-up on this.
- Regarding keeping 25% of portfolio in equities; I'm warming up to this idea. For sure we'll keep one stock in particular that Dad bought 20+ years ago and is still growing. Capital gains on this will be significant. The balance of the 25% could go into a total market index fund.
- Regarding the effect of capital gains on taxes; Unfortunately, Mom's current portfolio has a quite a few stocks and funds that will sell at a loss. One of Dad's brokers liked to push high dividend funds that looked good at the time, but their value has nose-dived over the last few years. These losses will more than offset capital gains except for the one stock that she'll keep.
- Mom is getting Dad's Social Security survivor benefits which were considerably larger than her own.

At this point, my biggest question is: Individual bonds or bond funds for investments with a one and two year terms (and maybe three year term)? As noted, it's easy to buy and sell bonds and CDs through my the Fidelity account. On the other hand, bond funds make life a lot easier -- although there's the risk that a fund value will be down just when needed.

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willthrill81
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Re: Advice for my mother's investments

Post by willthrill81 » Tue Feb 12, 2019 6:46 pm

Winston101 wrote:
Tue Feb 12, 2019 6:17 pm
Thanks to those you have posted feedback! In response to some of the comments:
- Income from Mom's municipal bond fund is exempt from both Fed and State tax (muni's are in her home state). She has dividend income in addition to social security, which puts her in the 22% Fed income tier and 7% State. If changes to her portfolio reduce dividends enough to drop her to a lower tax bracket, I'll reassess the muni bond fund. Thanks for the heads-up on this.
It would be a good idea to compare the returns of the muni bond fund to the taxable bond fund less income taxes at this point to see which is preferable.
Winston101 wrote:
Tue Feb 12, 2019 6:17 pm
- Regarding the effect of capital gains on taxes; Unfortunately, Mom's current portfolio has a quite a few stocks and funds that will sell at a loss. One of Dad's brokers liked to push high dividend funds that looked good at the time, but their value has nose-dived over the last few years. These losses will more than offset capital gains except for the one stock that she'll keep.
A high dividend stock fund "nosedived over the last few years?" The last few years have been very good to stocks, notwithstanding the last few months. I'd double-check on that.
Winston101 wrote:
Tue Feb 12, 2019 6:17 pm
At this point, my biggest question is: Individual bonds or bond funds for investments with a one and two year terms (and maybe three year term)? As noted, it's easy to buy and sell bonds and CDs through my the Fidelity account. On the other hand, bond funds make life a lot easier -- although there's the risk that a fund value will be down just when needed.
There's no reason to prefer individual bonds over a bond fund unless you're buying directly from the Treasury, something like Treasury notes or TIPS.

Regarding the term, there's very little difference in yields or risk with a one or three year maturity bond fund. At this point, short-term TIPS and CDs might be a really good combination.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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BL
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Re: Advice for my mother's investments

Post by BL » Tue Feb 12, 2019 7:20 pm

I believe both money markets and munis are better at Vanguard, but whether it would be worth opening an account there is hard to say; Simplicity vs. slightly better yield for the same risk. I like Prime MM at 2.47% SEC or 2.50% APY currently, but the federal mm is good as well.

Anywhere from 10 - 25% equities should work. At her age, I wouldn't increase (rebalance) into equities at all.

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