Help for mother-in-law

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lormor
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Joined: Mon Jun 11, 2018 2:44 pm

Help for mother-in-law

Post by lormor »

You knowledgeable folks have been so helpful in the past I hope I can call on you again.

My mother in law is selling her house and moving to an assisted living center. She currently lives on SS and distributions from a small Vanguard IRA. The home sale is expected to net her about $700,000, and her plan is to deduct $70,000 per year for the assisted living so she can stay there 9-10 years. Her question to me and mine to you folks:

She want to invest the $700,000, obviously it has to be in a taxable account. To reduce her tax liability, I would think she would need to be invested in a conservative growth index fund as opposed to VWIAX, which has more stock trades that trigger capital gains taxes. Are we on the right track or does it not matter if she was in Vwiax or a similar index fund like VSCGX?
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Watty
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Re: Help for mother-in-law

Post by Watty »

A three fund portfolio might allow you to manage the taxes if they are a problem.

https://www.bogleheads.org/wiki/Three-fund_portfolio

The first thing I would do would be to do some dummy tax returns to figure out her tax situation. Some of the assisted living expenses might be deductible and her other taxable income might not be that high so she may not be in a high tax bracket anyway.
water2357
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Re: Help for mother-in-law

Post by water2357 »

Generally assisted living is not covered by Medicaid (check to be sure for MIL's state). I'd be most concerned about preserving principal, so the money is on hand to pay for assisted living, i.e. limit the probability of any significant loss that can't be recovered in a very short time.

She may need assisted living for several years and then need long term care which is covered by Medicaid or she may still just need assisted living for 10 years. But 5 to 10 years is not much time to recover from a really significant loss. And if the loss is as bad as back in 2008, there won't be enough money to pay for more than a couple years of assisted living. Once the principal starts disappearing, paying for care just swallows up everything.

Also, you need to factor in inflation on the assisted living expense. Any care/medical related expenses increase at a greater rate than general inflation. If you can, find an assisted living facility that can also provide long term care and that will allow her to transfer to long term care if needed and accept Medicaid, usually this will be a nonprofit facility.
niagara_guy
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Re: Help for mother-in-law

Post by niagara_guy »

Check the tax implications of selling the house.

I use VFIAX in taxable as most of the dividends are qualified hence lower taxes and very tax efficient. I agree with doing dummy tax return (I use last year's tax software, close enough).

I might have an asset allocation for her of 50/50 stock/bonds or maybe 40/60, depending on her age and risk tolerance.
dbr
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Re: Help for mother-in-law

Post by dbr »

The mean of the duration if her spending is five years or a little less.

I don't think any allocation to stocks would be a good idea.

Probably the "bombproof" investment would be a TIPS ladder with rungs maturing in each of the future ten years, if the maturities can be found to do that. At this time TIPS in the 5-10 year maturity are pretty much at zero real yield so the cost of buying an inflation indexed ladder is zero. You would have to decide how likely in increase in costs exceeding inflation might be. An important consideration is that if medical needs increase the costs could increase a lot.

I don't think a low risk investment for this spending at a significantly positive real return for the next ten years exists right now.
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Wiggums
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Re: Help for mother-in-law

Post by Wiggums »

You are drawing 10% a year from the $700k. If you to mhold 20% stock with newly invested money, I would worry about a significant downturn where we don’t see the highs for a long time. She can easily lose 10% which is one years care. That would be upsetting to your MIL unless you are in a position to cover her care.
Last edited by Wiggums on Fri May 13, 2022 11:24 am, edited 1 time in total.
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arcticpineapplecorp.
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Re: Help for mother-in-law

Post by arcticpineapplecorp. »

niagara_guy wrote: Fri May 13, 2022 9:46 am Check the tax implications of selling the house.
this is a good point. if she's single there's only a $250k exclusion from cap gains. what was her original cost basis for the home? If she has cap gains on the sale of the home, she won't be investing $700k, she'd be investing $700k minus cap gains taxes.
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miket29
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Re: Help for mother-in-law

Post by miket29 »

dbr wrote: Fri May 13, 2022 9:55 amProbably the "bombproof" investment would be a TIPS ladder with rungs maturing in each of the future ten years, if the maturities can be found to do that. At this time TIPS in the 5-10 year maturity are pretty much at zero real yield so the cost of buying an inflation indexed ladder is zero.
Another vote for doing exactly this. It's what Bernstein called a "liability matching portfolio". Investing in the market with planned heavy withdrawals to empty the account in a decade means she faces extreme sequence-of-returns risk. The fly in the ointment is that held in a taxable account the par value adjustment and dividend of TIPS are taxable.

You should be able to find TIPS for what you need on the secondary market. Current rates are at https://www.wsj.com/market-data/bonds/t ... _tips_full
delamer
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Re: Help for mother-in-law

Post by delamer »

miket29 wrote: Fri May 13, 2022 11:57 am
dbr wrote: Fri May 13, 2022 9:55 amProbably the "bombproof" investment would be a TIPS ladder with rungs maturing in each of the future ten years, if the maturities can be found to do that. At this time TIPS in the 5-10 year maturity are pretty much at zero real yield so the cost of buying an inflation indexed ladder is zero.
Another vote for doing exactly this. It's what Bernstein called a "liability matching portfolio". Investing in the market with planned heavy withdrawals to empty the account in a decade means she faces extreme sequence-of-returns risk. The fly in the ointment is that held in a taxable account the par value adjustment and dividend of TIPS are taxable.

You should be able to find TIPS for what you need on the secondary market. Current rates are at https://www.wsj.com/market-data/bonds/t ... _tips_full
Also agree.

What is the actual cost of the assisted living facility? Other than medical insurance premiums, healthcare prescriptions and co-pays, and a small personal allowance, she won’t have much in the way of expenses other than the assisted living fees.

So take total annual expenses, subtract annual Social Security benefits, and what’s left needs to come from her portfolio.

Her portfolio is the IRA plus the house sale proceeds. The way the total portfolio is invested should reflect her needs.
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