Planning for 64 year-old mom's investment future

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langelgjm
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Planning for 64 year-old mom's investment future

Post by langelgjm »

I’ve had some recent discussions with my mom (64, retired) about her future. She currently lives alone in a paid-off house in a LCOL area. She will likely sell the house this year, then rent an in-law apartment in a MCOL area from my cousin indefinitely. This will put her much closer to the rest of her family as well and I think makes sense.

She is in good financial shape. She already receives Social Security which covers more than half her expenses (my dad was significantly older and died in 2020 so this played a role). She has about 10X expenses in a traditional IRA and about 30X expenses in a taxable account. Her expenses will probably increase a bit when she starts renting, so let’s call these 7X and 22X.

However, she has no interest or ability to manage her investments. My parents always paid a financial planner, and she continues to do so. She’s aware that it is costly (they charge about 0.8% AUM fee) but was not aware of additional expenses such as mutual fund expense ratios. The planner has both the IRA and taxable account in 15 different funds, with a weighted average expense ratio of 0.55%. Altogether, the amount she pays in AUM fees and mutual fund fees is starting to approach the amount she receives from Social Security!

She trusts me and is aware of how I manage my portfolio. I have a retired uncle who is also a Boglehead in style, and she often talks with him and he has also encouraged her to be more aware of fees, etc. So she is open to trying something different. However, I want to be cautious and avoid making any sudden changes.

Her planner is encouraging her to invest additional funds (such as maturing savings bonds, house proceeds, etc.) with them. I told her, yes, you should invest them, but let’s consider setting up a separate brokerage account for this “new money” to 1) avoid the AUM fee, and 2) choose a simpler selection of less expensive funds. She is interested in trying this idea.

This may be the start of a slow transition away from the financial planner. E.g., start by not giving the planner any “new money”; then eventually transfer out the traditional IRA; and finally deal with the taxable account. At some point I will likely take over managing her investments completely, though that may still be 15 years away.

In order to maintain her overall asset allocation, the “new money” brokerage account will need both stocks and bonds. For stocks, I plan to use about 70% VTSAX and 30% VTIAX which is roughly her current domestic/international split.

For bonds, I am not sure what the best option is. I don’t have any bond funds in taxable accounts, so I’m not sure how much to be concerned about the tax implications for her of holding, say, VBTLX in taxable. She already has substantial annual dividends and capital gains from her current taxable account, but her marginal tax rate isn’t high enough to justify munis. I like I bonds for the tax deferral but I may need to rebalance her account over time. Though, if we were to transfer out her traditional IRA in a few years, I’d use that as the primary place to hold bonds, so I don’t want to go overboard with bonds in taxable.

Any feedback for me, either on the plan in general or specifically on how to handle bonds? On the one hand she doesn’t currently need to make any changes, but on the other hand she pays a lot in fees and it’s hard for me to swallow that, especially given that she could live for another 30 years and have larger end-of-life expenses.
"Simplicity is the master key to financial success." - John Bogle | "If I am what I have and if what I have is lost, who then am I?" - Erich Fromm
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retired@50
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Re: Planning for 64 year-old mom's investment future

Post by retired@50 »

langelgjm wrote: Wed Jan 19, 2022 9:33 am Any feedback for me, either on the plan in general or specifically on how to handle bonds?
Can you influence what's in the traditional IRA?

If so, then suggest adding more bonds to that account, if there is any room. This could reduce the need for bonds in a taxable account.

If not, then just add VBTLX to a taxable account if her tax bracket is low enough.

VBTLX in a taxable account probably won't present a long-term capital gains problem in the years ahead.

Regards,
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dbr
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Re: Planning for 64 year-old mom's investment future

Post by dbr »

I agree it is not harmful to hold a bond fund in taxable for now. The taxable interest is so low it is not a tax problem and bond funds don't accumulate unrealized gain that is expensive to liquidate if you want to change the fund selection.

The fees are a huge problem. This goes back to the concept of a safe withdrawal rate. If you use 4% for an SWR, then that translates to needing a portfolio that is 25x expenses. Expenses means actual spending plus taxes. If there are investment expenses, say 1% then that has to be taken off the withdrawals. At that point the SWR is really only 3% or 33x expenses is needed. If you are one of the conservative people that think 4% is optimistic and take 3.5% as a better number, then the real number is 2.5% or 40x expenses is required.

Note the cost is not just the .8% AUM but also the expense ratios of the funds she is in. If those are perhaps .7%, then the total is 1.5%. Subtract that from 3.5% and you get 2% and your mother needs 50x in the portfolio to support spending.
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langelgjm
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Re: Planning for 64 year-old mom's investment future

Post by langelgjm »

Thanks for the replies. I will take a closer look at using VBTLX in the taxable account, and yes, it would be great to be able to liquidate that completely in a few years, move it into stocks, and use the traditional IRA for bonds.

The fees are definitely substantial, she was surprised when I showed her how much they are in total (adding AUM to ERs) and the compounding effect of that over the next 20 to 30 years.

It is not a make-or-break matter, though - to clarify, when I gave portfolio as a multiple of expenses, that's total expenses, including what Social Security covers. If I exclude expenses covered by Social Security, and assume more expenses in the MCOL renting situation, the traditional IRA is more like 11X, and the taxable account more like 34X. She also has a 4X variable annuity (I know :oops: ) and a long-term care insurance policy. As I learned all of this over the past few years I've become more confident in her financial stability.

But the fees just seem like a lot of money to leave on the table that could be used if she wants to do some more traveling, or more charitable giving, or just have more buffer for end of life.
"Simplicity is the master key to financial success." - John Bogle | "If I am what I have and if what I have is lost, who then am I?" - Erich Fromm
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langelgjm
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Re: Planning for 64 year-old mom's investment future

Post by langelgjm »

Updating this thread with some more info and questions.

Mom's house is under contract and settlement is this week. She's going to invest the proceeds of the house sale at roughly 2/3 stocks, 1/3 bonds. This is in line with the asset allocation in her other accounts. (I realize that theoretically she's shifting her overall AA by moving what used to be home equity into stocks, but it won't be an enormous shift, and there's no immediate need for this money). I helped her open a Vanguard taxable brokerage account, and I have transact rights to handle the actual purchase of funds for her.

I feel confident about the stock mutual funds to use, but after the last few months, I'm much less confident about making her bond component be 100% total bond market. Personally I'd prefer to have her start accumulating a position in I bonds at Treasury Direct, but she wants to minimize the number of accounts she has.

I have been thinking about making her bond component be 50% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX), and 50% Vanguard Inflation-Protected Securities Fund (VIPSX / VAIPX). Anything else I should consider?
"Simplicity is the master key to financial success." - John Bogle | "If I am what I have and if what I have is lost, who then am I?" - Erich Fromm
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JoeRetire
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Re: Planning for 64 year-old mom's investment future

Post by JoeRetire »

langelgjm wrote: Wed Jan 19, 2022 9:33 am Any feedback for me, either on the plan in general or specifically on how to handle bonds? On the one hand she doesn’t currently need to make any changes, but on the other hand she pays a lot in fees and it’s hard for me to swallow that, especially given that she could live for another 30 years and have larger end-of-life expenses.
Tread carefully when weaning her away from a trusted advisor.
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delamer
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Re: Planning for 64 year-old mom's investment future

Post by delamer »

langelgjm wrote: Mon May 16, 2022 8:05 am Updating this thread with some more info and questions.

Mom's house is under contract and settlement is this week. She's going to invest the proceeds of the house sale at roughly 2/3 stocks, 1/3 bonds. This is in line with the asset allocation in her other accounts. (I realize that theoretically she's shifting her overall AA by moving what used to be home equity into stocks, but it won't be an enormous shift, and there's no immediate need for this money). I helped her open a Vanguard taxable brokerage account, and I have transact rights to handle the actual purchase of funds for her.

I feel confident about the stock mutual funds to use, but after the last few months, I'm much less confident about making her bond component be 100% total bond market. Personally I'd prefer to have her start accumulating a position in I bonds at Treasury Direct, but she wants to minimize the number of accounts she has.

I have been thinking about making her bond component be 50% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX), and 50% Vanguard Inflation-Protected Securities Fund (VIPSX / VAIPX). Anything else I should consider?
You could stick with only government bond funds. There’s an argument to take your risk solely with stocks and just use government bonds in your portfolio: https://www.mymoneyblog.com/william-ber ... bonds.html
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Stinky
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Re: Planning for 64 year-old mom's investment future

Post by Stinky »

langelgjm wrote: Wed Jan 19, 2022 11:49 am She also has a 4X variable annuity (I know :oops: ) …..
Do you want any input on the variable annuity?

If so, post some details. Is it in the taxable account, or is it IRA?
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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