Investment advice for recent widow

[ecmcn]

I was wondering if I could get some advice for my mom. My dad passed away in December and his pension and the bulk of their Social Security ended, so she needs to transition to living off of their investments. She has more than enough to get by - I'd just like a sanity check on next steps for investing it and tapping it going forward.

Current assets:
- Retirement accounts: $360k (mix of index funds and bonds)
- Stocks: $450k (mostly IBM - Dad was a 30+ year IBMer and participated in their employee stock program from the start)
- Cash: $875k (life insurance and another recent inheritance)
- House: ~$500k (paid off)

Income:
- Social Security: $8400
- MRDs from retirement accounts: $33k
- Dividends from stock: $12k

Her expenses are under $50k/year, so the income she's forced to take through the SS, MRDs and dividends covers it.

I think reasonable next steps would be:
1. Decide on an asset allocation that makes sense for her, e.g. 60% stocks, 30% bonds, 10% cash
2. Invest the bulk of the cash in VTSAX and VTBLX to achieve the overall above mix

Does this make sense? Going forward, if she needs additional funds would it then make sense to draw on the VTSAX/VTBLX first because they'd have the highest cost basis? She gets a half-step in basis for the IBM stock, but much of it would still realize significant gains. As much as I'd like to convert it to VTSAX I don't think it makes sense to sell at this point; plus it generates good dividends.

Anything obvious (or not so) I'm overlooking?

[VanTran]

That's a lot of IBM, but the dividends make it worth holding vs. selling and paying taxes. IBM still has its share repurchase program and Buffett keeps buying, so there's still a large pool of capital that will support the stock. I'm confident the dividend will keep growing.

As for the cash, your plan is good especially if your mom just wants to live off dividends. Perhaps someone else will suggest how to dollar cost average into these funds. My parents prefer to be invested with asset managers. They've been Berkshire hourders for over 30 years. My dad's Roth IRA is managed by a small investment firm - no one will suggest this based on the stats, but it's always an option.

[Sid Hoffman]

- Retirement accounts: $360k (mix of index funds and bonds)
- Stocks: $450k (mostly IBM - Dad was a 30+ year IBMer and participated in their employee stock program from the start)
- Cash: $875k (life insurance and another recent inheritance)
- House: ~$500k (paid off)

- Social Security: $8400

Her expenses are under $50k/year, so the income she's forced to take through the SS, MRDs and dividends covers it.

I think reasonable next steps would be:
1. Decide on an asset allocation that makes sense for her, e.g. 60% stocks, 30% bonds, 10% cash
2. Invest the bulk of the cash in VTSAX and VTBLX to achieve the overall above mix

Personally I'd sell all the IBM.  If you want a safe portfolio, you can't be all tied up in one single company like that.  It looks like the IBM stock might make up a third of the investable assets, which is way heavy for a single company, no matter how big and seemingly stable that company is.  While they have a long history, no company is perfect.  Look at how Lehman Brothers went from being a strong, seemingly stable financial company founded in 1850 to suddenly bankrupt in September 2008 and liquidated 1 month later due to a bad management team.  While I hope it isn't, IBM could easily be the next Lehman Brothers with just a couple missteps from a bad CEO and complacent board of directors.

The suggestion of 60/30/10 seems good to me, and VTSAX, VTBLX, and a savings account would be the easy way to achieve that.

[Indexer]

You are looking at investing over 500k(maybe over 1m) with Vanguard.  Based on that dollar amount you can talk to a Financial Planner and they can create a financial plan.... for free. 

Call them.

I have no problem giving people ideas about their investments, but this is a large amount of money for a third party(your mom) and taxes are going to play a huge part.  You don't just have the capital gains on the stock.  You also have tax deferred and taxable accounts so you need to take tax efficiency into account when building the portfolio, and since the taxable accounts are bigger than the tax deferred account you are probably going to have bonds bleeding over into the taxable account.  At which point you need to look at your mom's tax bracket and start comparing bonds based on their tax efficient yield because muni bonds might make more sense.  VTSAX+VBTLX also lacks international exposure, and as noted you probably don't want VBTLX in a taxable account if you can avoid it.  You also need to get the right asset allocation and what you think is the right allocation might not be what actually makes the most sense for her.

Yes, this one is more complicated.  Let a professional look at it... especially since it is free. ;) 

[Financial.Velociraptor]

Too much exposure to IBM; rebalance!

How scared is she of investing, the markets, and "running out of money before I die?"   My father insisted on ZERO market risk and was terrified of running out of money.  We eventually put his IRA funds in an insurance annuity.  It pays a fixed amount for life that is a hair over his required minimum distribution.  He can never run out of money and his balance is immune to the market.  Between that and social security he gets by.  He also found a cute little part time job as a member of the local Water Board.  He makes 150 a meeting (two meetings a month) and has made friends.  Water Board is a perfect retiree "job" so long as you aren't terrified of confrontation by citizens who are irate they actually have to pay taxes to get municipal water and sewer (they exist.) 

If a tiny amount of market risk is allowable, NIO and NEA are municipal bond funds that pay almost 6% tax free.  That's 7.5% equivalent yield assuming 25% marginal tax rate; comparable to the very long term US stock market return and must safer and much lower volatility.  (I hold NIO in personal account).

You've already gotten good advice here if she is comfortable with 60/40...

[Wolf359]

You are looking at investing over 500k(maybe over 1m) with Vanguard.  Based on that dollar amount you can talk to a Financial Planner and they can create a financial plan.... for free. 

Call them.

I have no problem giving people ideas about their investments, but this is a large amount of money for a third party(your mom) and taxes are going to play a huge part.  You don't just have the capital gains on the stock.  You also have tax deferred and taxable accounts so you need to take tax efficiency into account when building the portfolio, and since the taxable accounts are bigger than the tax deferred account you are probably going to have bonds bleeding over into the taxable account.  At which point you need to look at your mom's tax bracket and start comparing bonds based on their tax efficient yield because muni bonds might make more sense.  VTSAX+VBTLX also lacks international exposure, and as noted you probably don't want VBTLX in a taxable account if you can avoid it.  You also need to get the right asset allocation and what you think is the right allocation might not be what actually makes the most sense for her.

Yes, this one is more complicated.  Let a professional look at it... especially since it is free. ;)

+1
I think this is a great approach.  Seek some professional advice from Vanguard.

If I understand the cost basis step up, then half the IBM stock was stepped up to current fair market value.  It is therefore possible to reduce the IBM exposure by half without tax consequences.  After that, only $225K would remain in a single stock, or 13% of the overall portfolio.  While still a risk, it's not THAT big a risk (generally it's recommended not to take risks with more than 5% of a portfolio, but the risk you're taking is a diversification risk, and IBM is very big and stable.)  VTSAX gets 1.8-2% dividends as well, so her overall dividend income should increase even if her IBM dividend drops by half.

[ecmcn]

Thanks everyone for the advice. I've been talking to her about seeing an independent professional adviser. I didn't think about the Vanguard option - great idea. If nothing else it'd give her piece of mind. I get the sense that she's somewhat scared of putting too much into the market, but Dad wasn't and she trusted his approach. Plus she's very practical and math-savvy, so she'd understand the advantages of not sitting on all of your cash.

You all are probably right that reducing the IBM exposure would be worth taking some gains. The half step in basis doesn't bring half the stock up to current value, it brings all of the stock halfway up to current value, so there'd still be some gains from selling any of it.

[DrF]

She should be able to sell a decent amount of IBM each year and stay in a low enough tax bracket so that she won't pay much in taxes. I personally wouldn't sell all the IBM in 1 go. Try to have her sell the max amount every year without incurring too much tax burden. Whatever she doesn't use she can invest in her taxable account.

[Doulos]

Step 1.  If funeral is still happening, take charge, pay for it, etc.
Step 2.  Get permission to take care of all of this.  And do all the work for her.
Step 3.  Send her off to Church to mourn properly without worrying about money.  This can take a long long time. 
Step 4.  Make sure she knows you are just going to take care of everything until she is ready again.

Invest in your mom.  That is what she really needs.  You seem to already be on that path.

[seattlecyclone]

I would get out of IBM over the next few years. Even if your parents paid $0 for their IBM stock, the step-up in basis means that the cost basis is no lower than 50% of the current value. At 15% capital gains tax, that means you'll pay no more than 7.5% of the stock's value in tax when diversifying. The real amount will be lower because they originally had a non-zero basis and because your mom will probably have some of this income fall in the 0% capital gains bracket.

I know from experience how hard it can be to convince a scared parent to invest in the market. I had a long talk with my parents about investing around the holidays. My dad is on board, but my mom is just so afraid of doomsday scenarios and for some reason seems to prefer the certainty of losing purchasing power to inflation over the slim possibility of losing money due to market movements. You might see how obvious it is that your mom should invest most of her money in stocks, with some bonds and a little cash, but if she won't sleep at night with that allocation try to meet her halfway. See if she would be comfortable with a mostly-bond allocation with a few years' worth of expenses in cash and a sizable but not "scary" amount of money in stocks.

[James]

I think you have a solid plan. Talk to Vanguard, and then get a separate professional if Vanguard doesn't answer all of your questions. Just make sure you pay cash for any professional advice.


But overall your plan seems solid, just need to decide on details like how much IBM to keep and how to slowly balance that if needed. She won't need to remove money from the market during down times, only replenishing her cash account when the market is up, so her overall risk to having a substantial amount in the market is very low.

[skyrefuge]

As much as I'd like to convert it to VTSAX I don't think it makes sense to sell at this point; plus it generates good dividends.

I don't have a strong opinion on how aggressively the IBM stock should be converted, but just wanted to point out that "good dividends" are not a logical reason to be in favor of keeping it. The dividend payments really are just IBM selling off a portion of your mother's investment in them on their own schedule (which she is then taxed on). So no different than if she sold off a portion on her own. In fact, it's an internal contradiction to see the dividends as a desirable thing, while selling shares are seen as something to be avoided. Particularly since 100% of a cash amount is subject to tax if it comes as a dividend, while less than 100% is subject to tax if it comes from shares sold.

[LordSquidworth]

A lot of you saying to sell the IBM are failing to take into account taxation.

[VanTran]

Personally I'd sell all the IBM.  If you want a safe portfolio, you can't be all tied up in one single company like that.  It looks like the IBM stock might make up a third of the investable assets, which is way heavy for a single company, no matter how big and seemingly stable that company is.  While they have a long history, no company is perfect.  Look at how Lehman Brothers went from being a strong, seemingly stable financial company founded in 1850 to suddenly bankrupt in September 2008 and liquidated 1 month later due to a bad management team.  While I hope it isn't, IBM could easily be the next Lehman Brothers with just a couple missteps from a bad CEO and complacent board of directors.

The suggestion of 60/30/10 seems good to me, and VTSAX, VTBLX, and a savings account would be the easy way to achieve that.

Not even comparable. Lehman's cat. risk was that it was exposed to a crapload of risky financial instruments that could destroy the business in recession. IBM's main risk is some kind of disruptor that renders their tech and services obsolete. On the fundamental end- IBM is a cash generative business with sticky revenues (tech and services deeply integrated in businesses worldwide; would be expensive to make changes). IBM is also well capitalized with a solid footprint in next gen IT infrastructure.

On the capital side of things- IBM has been buying back 5% of its stock consistently each year and still pays dividends. They are shareholder friendly. Also worth mentioning Buffett, Watsa, and a bunch of other investors with deep pockets keep buying the stock. This is one of Buffett's largest investments at cost. Not necessarily a great thing, but when one of the greatest investors around has high conviction in something, I'm going to pay attention. It won't take much to do well over time, but the business must be closely monitored.

I guess it's worth selling half or more and suffering the taxes. The stock may end up going nowhere, but if his mother's goal is to live off dividends, IBM is a good vehicle. An index is just a mix of good and bad. I'd rather bet big on a solid, shareholder friendly business that trades at a fairly low valuation.

[seattlecyclone]

A lot of you saying to sell the IBM are failing to take into account taxation.

I addressed this. The OP's mother has a high enough existing income from social security, RMDs, and dividends to just push her out of the 0% capital gains bracket. Therefore she'll be paying 15% tax on any gains. Since the basis was stepped up in these stocks, the amount of gain when selling will be somewhere between 0% of the sale price (if the stocks were originally purchased for their current price) or 50% of the sale price (if the stocks were originally purchased for $0). Therefore the federal tax she would pay to diversify her holdings would be somewhere between 0%-7.5% of the sale price, depending on exactly how high the basis is.

The real number is probably on the higher end of that range, since IBM stock has gone up about 10x since the 1980s. Regardless, that seems like a small price to pay to stop having a quarter of your liquid net worth invested in a single stock. I'm currently paying a higher rate than that to diversify out of my own previous employer's stock and I have no regrets whatsoever about that decision.