Author Topic: Retirement portfolio for family member w/ inheritance  (Read 1331 times)

volleyballer

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Retirement portfolio for family member w/ inheritance
« on: March 18, 2021, 06:21:12 AM »
Looking for portfolio building advice for a family member, early 60's, widowed, who will be receiving an inheritance and retiring soon. I consider myself pretty savvy. However, creating a retirement portfolio appropriate for this age bracket, and with mostly a taxable account, is a new game to me. Thank you for your help!

After all is said and done, I expect the portfolio to look something like this:
$300k taxable accounts
$40k 401k pre-tax
$30k inherited pre-tax IRA (non-spouse)
$14k Roth IRA
$384k total

This will be supplemented by social security and a couple small pensions. Family member is risk averse, but would be receptive to having some stocks in the portfolio if I suggest it.

1) Portfolio
- What portfolio to build, and how to distribute the investment choices most efficiently between the various accounts?
- I was considering Vanguard Wellesley VWIAX as an all-in-one fund, but I hear that's not very efficient to hold in a taxable account. Perhaps that doesn't matter much at the ~40 to 50k/ yr income level?
- Create a simple 3-fund portfolio VTSAX / VTIAX / VBTLX in some proportion? (30% / 10% / 60%) ?
- Some other portfolio?
- What's a reasonable target withdrawal rate for a more conservative portfolio? 4% of 400 is $16k/yr.
- How to automate Vanguard for monthly withdrawals? Do we keep a 'cash cushion' in the money market settlement fund and have fund distributions go there and monthly disbursements out to the regular bank account from there?
- Any advice on what order to withdraw from between the various account types?
- Should the inherited IRA fund selections be different than the rest of the portfolio due to the RMD's starting now?

2) Land
- There is a small piece of vacant farmland in the estate (~15 ac). Do we have to do anything with this to account for or document the stepped up cost basis?
« Last Edit: March 18, 2021, 06:24:28 AM by volleyballer »

Rob_bob

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Re: Retirement portfolio for family member w/ inheritance
« Reply #1 on: March 18, 2021, 11:13:41 AM »
As far as the land goes get an assessment of it's value from a real estate agent, maybe check Zilo for the market value and the property tax assessment and file it away.

I don't invest in mutual funds or with Vanguard so I can't comment on their funds or automated distribution features.

It's tough to invest for someone who has a low risk tolerance.  Bonds are closer to a top than they are to a bottom, you could see value erode there.  Stocks are volatile and that can stress people out even if the returns are better.

I think a 4% withdrawal rate would be the max, take out less if it can be a supplement to the pension and SS income.

Is it possible for her to work longer?  If not it might be better to not take SS early and use the inheritance in place of SS to let it grow as long as possible.  She might be able to get a larger pay out from the pensions if she delays them also.

cool7hand

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Re: Retirement portfolio for family member w/ inheritance
« Reply #2 on: March 18, 2021, 11:24:45 AM »
Most folks here just put everything in a broad stock market fund such as SCHB. There are others who use other mixes such as 60/40, All Seasons (that's what we use), and Golden Butterfly. You can look at some data on them here: https://portfoliocharts.com/portfolio/all-seasons-portfolio/. We use All Seasons because its lower volatility fits our situation/goals.

Spaarwalvis

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Re: Retirement portfolio for family member w/ inheritance
« Reply #3 on: March 20, 2021, 07:58:32 AM »
Is rebalancing across accounts too advanced for this individual?

I might allocate 33-33-33 U.S. stocks, int'l stocks, bonds.  If that's too aggressive to avoid heartburn, 25-25-50.

I'd advise paying just a touch of attention to tax treatment of different asset classes.  Stick bonds (maybe a split between Vanguard's intermediate treasuries with interest reinvested and some sort of high interest munis) in the 401k and Roth accounts.  Split between U.S. and foreign stocks, preferentially putting foreign in the taxable account.  Vanguard or no-fee ETFs for the stocks.  That will straighten out what should go where. 

When it comes to withdrawal time, reach your 4% (or whatever) SWR by pulling the max possible from the 401ks, then from the Roths, and only from the taxable if needed to hit the quota.  Rebalance with each withdrawal.  One spreadsheet can track all of this.

If rebalancing is too hard, say so and I can make a simpler plan.

Wintergreen78

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Re: Retirement portfolio for family member w/ inheritance
« Reply #4 on: March 20, 2021, 08:23:21 AM »
Put everything into a low-cost target date fund. 4% withdrawal rate is probably fine. Reinvest dividends and every three months sell $4,000 and transfer it to checking.

Keep the whole thing as simple as possible. Dont complicate it to try and save a few dollars in taxes.

Use whichever withdrawal order you want, but dont forget that the 401k and pre-tax IRA will be treated as taxable income.

Sell the land. Id expect the trustee to help with the cost basis question.

volleyballer

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Re: Retirement portfolio for family member w/ inheritance
« Reply #5 on: March 20, 2021, 09:05:05 AM »
I appreciate all the replies so far.

@Spaarwalvis - I would say, yes, rebalancing is too much for this individual, but not necessarily for me. (ok, it's my mother... I was purposely vague in the op). As a bit of background, this is more money than she has ever had in her life. Her impression is that "Stock Market" = "Bernie Madoff", (one of her pensions got burned by a ponzi) and she saw a number of her friends in S&P500 funds panic when they "lost half" back in 08/09 (but didn't recognize the subsequent recovery and resurgence in the following decade). So I have had to educate her on why including some solid blue chip stocks in the portfolio is a good and necessary thing, why the friends only "lost" if they sold low and stuffed it in a mattress, etc. In time I hope that she can take gain more understanding and take some ownership of the portfolio, but perhaps right now when we are all mourning is not a good time.

The tax treatment of the various accounts is the one thing I do not have a good grasp on yet. I understand that bonds produce taxable income, rather than stocks that produce LTCG and qualified dividends potentially taxed at 0%, so put bonds in tax-advantaged and put stocks in taxable. However, in her case, for such a low income, does it matter at this point? Her income is going to look something like this:

16.5k social security
13k pensions
10k ? income from taxable funds (4% of 250k)
3k - withdrawals on the pre-tax accounts (~ 4% of 73k)
42.5k / yr total

Since social security is not taxed, that leaves ~ 26k of taxable income, some of which will be LTCG / Qualified and some as regular income. Some of the regular income would be offset by the standard deduction, and the LTCG / Qualified div's would be in the 0% bracket anyways.

I should also mention that I am inclined, for the time being, to put 250k of the taxable into VWIAX, at least for the first year, to get us over the hump of losing family members and having to clean up their estate etc, and not let perfect be the enemy of good. Am I missing anything huge here?


jeroly

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Re: Retirement portfolio for family member w/ inheritance
« Reply #6 on: March 20, 2021, 09:23:22 AM »
I appreciate all the replies so far.

@Spaarwalvis - I would say, yes, rebalancing is too much for this individual, but not necessarily for me. (ok, it's my mother... I was purposely vague in the op). As a bit of background, this is more money than she has ever had in her life. Her impression is that "Stock Market" = "Bernie Madoff", (one of her pensions got burned by a ponzi) and she saw a number of her friends in S&P500 funds panic when they "lost half" back in 08/09 (but didn't recognize the subsequent recovery and resurgence in the following decade). So I have had to educate her on why including some solid blue chip stocks in the portfolio is a good and necessary thing, why the friends only "lost" if they sold low and stuffed it in a mattress, etc. In time I hope that she can take gain more understanding and take some ownership of the portfolio, but perhaps right now when we are all mourning is not a good time.

The tax treatment of the various accounts is the one thing I do not have a good grasp on yet. I understand that bonds produce taxable income, rather than stocks that produce LTCG and qualified dividends potentially taxed at 0%, so put bonds in tax-advantaged and put stocks in taxable. However, in her case, for such a low income, does it matter at this point? Her income is going to look something like this:

16.5k social security
13k pensions
10k ? income from taxable funds (4% of 250k)
3k - withdrawals on the pre-tax accounts (~ 4% of 73k)
42.5k / yr total

Since social security is not taxed, that leaves ~ 26k of taxable income, some of which will be LTCG / Qualified and some as regular income. Some of the regular income would be offset by the standard deduction, and the LTCG / Qualified div's would be in the 0% bracket anyways.

I should also mention that I am inclined, for the time being, to put 250k of the taxable into VWIAX, at least for the first year, to get us over the hump of losing family members and having to clean up their estate etc, and not let perfect be the enemy of good. Am I missing anything huge here?

Up to 85% of social security benefits are taxable.

https://www.ssa.gov/benefits/retirement/planner/taxes.html

reeshau

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Re: Retirement portfolio for family member w/ inheritance
« Reply #7 on: March 20, 2021, 10:14:14 AM »

3k - withdrawals on the pre-tax accounts (~ 4% of 73k)


If you left the inherited IRA in cash (which I don't recommend) this would drain it in the required 10 years.  So, however you invest it, this number is going to creep up on you.  If you just follow the RMD requirements, this will grow and you will have an inflated final year withdrawal.  But a level withdrawal rate will be somewhat more than $3k, depending on how you invest it.

And of course, if you (rightly) focus on the inherited account, then her 401k will have grown, and in 10 years you will need to consider her RMD's there.

SwordGuy

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Re: Retirement portfolio for family member w/ inheritance
« Reply #8 on: March 20, 2021, 01:59:26 PM »
Family member is risk averse, but would be receptive to having some stocks in the portfolio if I suggest it.

Are they RISK averse or VOLATILITY averse?    A lot of people confuse the two and think they are the same thing.

A low fee, broad brush index fund isn't RISKY over time, it's VOLATILE.     

A savings account paying interest rates below that of inflation is a GUARANTEED LOSS but it's not VOLATILE at all.

ysette9

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Re: Retirement portfolio for family member w/ inheritance
« Reply #9 on: March 20, 2021, 03:42:07 PM »
Family member is risk averse, but would be receptive to having some stocks in the portfolio if I suggest it.

Are they RISK averse or VOLATILITY averse?    A lot of people confuse the two and think they are the same thing.

A low fee, broad brush index fund isn't RISKY over time, it's VOLATILE.     

A savings account paying interest rates below that of inflation is a GUARANTEED LOSS but it's not VOLATILE at all.
Amen

Wintergreen78

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Re: Retirement portfolio for family member w/ inheritance
« Reply #10 on: March 20, 2021, 07:10:30 PM »
Family member is risk averse, but would be receptive to having some stocks in the portfolio if I suggest it.

Are they RISK averse or VOLATILITY averse?    A lot of people confuse the two and think they are the same thing.

A low fee, broad brush index fund isn't RISKY over time, it's VOLATILE.     

A savings account paying interest rates below that of inflation is a GUARANTEED LOSS but it's not VOLATILE at all.
Amen


You know your mom better than anyone else on this thread. How will she feel if a significant portion of her inheritance drops by 20% in one month? How will it affect your relationship if you are the person who decided how it should be invested?

A lot of people here are comfortable with volatility, but Id guess a lot more people in the real world are not.

Id suggest thinking carefully about how this might affect your relationship with your mother, what decisions best suit her goals and her risk tolerance and attitudes. Trying to change her attitudes to match those of a bunch of strangers on the internet will probably not work.

volleyballer

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Re: Retirement portfolio for family member w/ inheritance
« Reply #11 on: March 21, 2021, 01:20:32 PM »
Wow, lots of great responses! Thanks again!

Up to 85% of social security benefits are taxable.
https://www.ssa.gov/benefits/retirement/planner/taxes.html
I was thinking about the benefits reduction due to earned income but didn't realize that the benefits themselves can also be taxable. I ran a sample 1040 with guesstimated income numbers to see how that shakes out. Sure enough, a portion was taxable.

And of course, if you (rightly) focus on the inherited account, then her 401k will have grown, and in 10 years you will need to consider her RMD's there.
I will probably set it up to let the 401k sit and grow, and drain the inherited IRA in time for the RMD's on the 401k to start at 70.5 to take over for that cash flow.


Family member is risk averse, but would be receptive to having some stocks in the portfolio if I suggest it.

Are they RISK averse or VOLATILITY averse?    A lot of people confuse the two and think they are the same thing.

A low fee, broad brush index fund isn't RISKY over time, it's VOLATILE.     

A savings account paying interest rates below that of inflation is a GUARANTEED LOSS but it's not VOLATILE at all.
Amen


You know your mom better than anyone else on this thread. How will she feel if a significant portion of her inheritance drops by 20% in one month? How will it affect your relationship if you are the person who decided how it should be invested?

A lot of people here are comfortable with volatility, but Id guess a lot more people in the real world are not.

Id suggest thinking carefully about how this might affect your relationship with your mother, what decisions best suit her goals and her risk tolerance and attitudes. Trying to change her attitudes to match those of a bunch of strangers on the internet will probably not work.

Good point, I will make sure to have a frank talk about this to see how she feels.



Another general question - I posted about having 14k in Roth IRA. I put that there assuming some of the cash from the inheritance would fund a Roth IRA for FY 2020 and 2021, as my mom is retiring this year. I could also do pre-tax IRA if that makes more sense, any thoughts on this? Might as well fill a tax advantaged bucket while I can, right?

Rob_bob

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Re: Retirement portfolio for family member w/ inheritance
« Reply #12 on: March 21, 2021, 04:16:14 PM »
RMD's now start at age 72.

Remember, she can only contribute to a Roth if she has earned income.  You said she will retire this year so she must have earned income of at least $7000 to contribute the max for this year.

Financial.Velociraptor

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Re: Retirement portfolio for family member w/ inheritance
« Reply #13 on: March 22, 2021, 02:22:54 PM »
The large amount in taxable accounts means she will probably have bonds in taxable.  You might search here: https://www.cefconnect.com/ for municipal bond funds.  Plenty of good options that pay around 5% fed tax exempt.  Stock/bond allocation really depends on risk tolerance.   I'd put the stock allocation in VOO or VTSAX.