Help Planning Mom's Finances after Dad Passed

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humbucker87
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Joined: Fri Feb 20, 2009 3:54 pm

Help Planning Mom's Finances after Dad Passed

Post by humbucker87 » Sun Oct 29, 2017 6:30 am

Hi SatuMedia,

Unfortunately two weeks ago my father passed away at the far too young age of 61 after a long battle with cancer. Knowing that I have enjoyed learning about investing and personal finance my mother has asked me to sit down and help her plan several aspects of her remaining finances. I wanted to get a sanity check on several pieces to make sure there isn’t anything I’m missing. Thanks in advance for any and all help.

Overall goal - My father was a very hard worker and also blessed to be a fairly high earner as well and so this won’t be a question of ‘how can we make ends meet’, but very fortunately ‘how to maximize what is there’. My mother is 60 and does not currently work. She’s not opposed to going back to work somewhere more as a way to keep busy than for the income.


1. 401k - Approximately 1.6 million in an absolutely awful small business 401k. I took one look over the options (all with ER’s above 0.9%, many 1.3-1.5%, including the ‘index’ options) and knew we had to get out of there ASAP.

I plan to have her roll it over into a Vanguard IRA and invest maybe 60% bonds, 40% stocks (maybe 30% us, 10% international). That would likely be total bond fund, total us stock market, total international. Any holes to poke here?


2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother. One of the battles I know we have coming is to convince the selling agent that we do not want to reinvest it with him (he already tried to sell my parents an annuity a few years ago).

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?


3. Social Security - My mother did work some early on in her career and also late in her career so her Social Security will likely be small, but not non-existent. I think my plan is to have her collect her social security at 62 until age 70 when she will collect my fathers from thereon. Is there any better way to maximize drawing from both?


4. Budget and Drawdown - Budgeting is something we haven’t had the chance to talk about just yet. Their house is paid off and so I think their only debt is one car lease currently. I’m hoping I can fit everything my mom wants to do budget wise into a 3% drawdown rate. Especially considering the insurance money isn’t taxed I think this will be very possible. There are several other accounts but they are smaller and I just want to focus on these 2 for right now. At 3% I calculate it to be 401k = 48,000 taxed + brokerage = 60,000 after tax (which I view as approximately $100k pretax equivalent). In two years we’ll add her social security (maybe 800/month), then at 70 we’ll add dad’s social.

I should also mention that I’m the executor on the estate. This is obviously my first time dealing with many of these issues (life insurance, estate planning, etc). If there’s anything I appear to be missing please don’t hesitate to point it out.

cas
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Joined: Wed Apr 26, 2017 8:41 am

Re: Help Planning Mom's Finances after Dad Passed

Post by cas » Sun Oct 29, 2017 7:01 am

humbucker87 wrote:
Sun Oct 29, 2017 6:30 am
My mother is 60 and does not currently work.

. . .

4. Budget and Drawdown - Budgeting is something we haven’t had the chance to talk about just yet.
I'm sorry to hear about your father's passing. You (and your mother) certainly have a lot on your plate right now, so I hate to risk being off-topic when your post was very clear that you were trying to limit to certain topics.

But, since there is potentially an upcoming deadline on this ... and since it is potentially a big component of a budget for a 60 year old ... do you and your mother know what she is going to be doing for health insurance?

If she is going to need to buy individual health insurance on the ACA exchanges, open enrollment for 2018 is imminent: November 1 - December 15. Your father's passing would be a qualifying event that would allow her to enroll outside of open enrollment, but I really don't know how that fits into 2017 insurance vs 2018 insurance. And I'm not sure how any COBRA that might potentially be available might interact with the passing of a spouse. (Since you mention a small business 401k, I'm guessing there isn't any retiree-surviving-spouse corporate or government health insurance in the picture.)

But - just in case she does need to think about buying individual health insurance - I wanted to alert on the imminent open enrollment period so that it doesn't inadvertently slip by in the crush of everything else that needs done.

Carl53
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Re: Help Planning Mom's Finances after Dad Passed

Post by Carl53 » Sun Oct 29, 2017 7:10 am

You might consider a high yield savings account for one year of expenses and some CDs for a few years of expenses.

Regarding SS, your mom probably can take survivor benefits now at age 60 if she wants. Her FRA, as a survivor is different than it is for her own benefits, likely 66 years 2 months. If so she would get his PIA less 28.5%. Others more knowledgeable may chime in but I don't believe that her survivor benefits will grow any larger past that age (66+2) by delaying their onset outside of COLA adjustments. I'm not saying to do it this way but it is something to consider.

cas
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Re: Help Planning Mom's Finances after Dad Passed

Post by cas » Sun Oct 29, 2017 7:13 am

humbucker87 wrote:
Sun Oct 29, 2017 6:30 am
2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother.

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?
Not to jump too far ahead, since ACA exchanges may not even be in the picture ... but if your mother is going to need to control her MAGI with an eye towards ACA subsidy thresholds, that will probably affect how much of the taxable you want to have easily accessible in a relatively tax-free (or MAGI-free, more precisely) sort of way.

mouses
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Re: Help Planning Mom's Finances after Dad Passed

Post by mouses » Sun Oct 29, 2017 7:20 am

humbucker87 wrote:
Sun Oct 29, 2017 6:30 am

2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother. One of the battles I know we have coming is to convince the selling agent that we do not want to reinvest it with him (he already tried to sell my parents an annuity a few years ago).

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?
I'm sorry about your Dad.

I'm not sure what you're asking in #2. Are you asking should you keep a chunk, say a year's estimated spending in cash? I do about that just for convenience. Well, it's more like 6-9 months. You don't want to be selling stuff every month, that would be a nuisance.

You probably know this from your own finances, but when budgeting, don't forget big ticket items like property tax, house, liability, flood/earthquake, auto insurance. Also some provision for larger house maintenance items like a new roof, or dental bills which can be very large.

It is early for your Mom to be making decisions, but work, maybe part-time, eventually just to keep busy sounds like a good idea. Or she may prefer volunteer work. A number of my friends find that doing Meals on Wheels is rewarding. Or volunteering in a no-kill animal shelter.

humbucker87
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Re: Help Planning Mom's Finances after Dad Passed

Post by humbucker87 » Sun Oct 29, 2017 7:54 am

Thanks for all the kind words and advice. I'm running out the door so I'll read through everything more carefully later but in short Healthcare is definitely a topic. My dad was already on his old practice's cobra and so my mom can continue that for a few months but we will definitely be looking at the exchange to hold over until Medicare eligibility.

Thanks to those who have responded so far. Good stuff.

donall
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Re: Help Planning Mom's Finances after Dad Passed

Post by donall » Sun Oct 29, 2017 8:25 am

I'm sorry about the passing of your dad. It is good that you are looking into helping your mom. Health insurance is important to plan for and is the most pressing need. Your plan for the IRA is sound to reduce costs.

Sometimes insurance companies have an option to leave the insurance money at the company and pay interest. An acquaintance of mine took this option. The interest rate was 2.75%. This allowed her to simplify her life for the first 6 months after her husband's passing and lessen the stress of making decisions.

You will need to do more research on Social security, as already mentioned by Carl53. Your mom does not need to wait until 70 to get the maximum survivor benefits. There are some excellent posters who can guide you with social security.

pennywise
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Re: Help Planning Mom's Finances after Dad Passed

Post by pennywise » Sun Oct 29, 2017 8:45 am

I'm sorry for your loss--as you say, 61 YO is far too young to lose your father and for your mom, her husband.

Perhaps you don't yet know this since you mentioned budget isn't clear but as with many/most of posts of this nature there is a huge omission: how much annual income have your parents been earning/spending? And what will your mother's expectations be for annual income going forward? If your mom is accustomed to having $200K income and spending it every year, that is a whole lot different planning process than if they earned and spent 100K, or 75K or 50K. Or earned $200K and spent $50K. And so on.

$3.6 million for many people is a fortune that once invested will never need to have the principal tapped. But at 60 YO if your mother has been living an upscale and pricey lifestyle that was based on having a very high income to support a very high spending lifestyle, not that there's anything wrong with that, and as a longtime non working 60 YO woman with limited career options-that amount is going to need to be handled very differently to avoid running out of money.

Perhaps your parents are frugal savers and three million+ dollars is more than she will ever need to support her lifestyle. Whatever the case, you have to know that side of the balance sheet to plan for investing and spending that is real and practical for her future.

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BL
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Re: Help Planning Mom's Finances after Dad Passed

Post by BL » Sun Oct 29, 2017 11:56 am

:|
humbucker87 wrote:
Sun Oct 29, 2017 6:30 am
Hi SatuMedia,

Unfortunately two weeks ago my father passed away at the far too young age of 61 after a long battle with cancer. Knowing that I have enjoyed learning about investing and personal finance my mother has asked me to sit down and help her plan several aspects of her remaining finances. I wanted to get a sanity check on several pieces to make sure there isn’t anything I’m missing. Thanks in advance for any and all help.

Overall goal - My father was a very hard worker and also blessed to be a fairly high earner as well and so this won’t be a question of ‘how can we make ends meet’, but very fortunately ‘how to maximize what is there’. My mother is 60 and does not currently work. She’s not opposed to going back to work somewhere more as a way to keep busy than for the income.


1. 401k - Approximately 1.6 million in an absolutely awful small business 401k. I took one look over the options (all with ER’s above 0.9%, many 1.3-1.5%, including the ‘index’ options) and knew we had to get out of there ASAP.

I plan to have her roll it over into a Vanguard IRA and invest maybe 60% bonds, 40% stocks (maybe 30% us, 10% international). That would likely be total bond fund, total us stock market, total international. Any holes to poke here?


2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother. One of the battles I know we have coming is to convince the selling agent that we do not want to reinvest it with him (he already tried to sell my parents an annuity a few years ago).

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?


3. Social Security - My mother did work some early on in her career and also late in her career so her Social Security will likely be small, but not non-existent. I think my plan is to have her collect her social security at 62 until age 70 when she will collect my fathers from thereon. Is there any better way to maximize drawing from both?


4. Budget and Drawdown - Budgeting is something we haven’t had the chance to talk about just yet. Their house is paid off and so I think their only debt is one car lease currently. I’m hoping I can fit everything my mom wants to do budget wise into a 3% drawdown rate. Especially considering the insurance money isn’t taxed I think this will be very possible. There are several other accounts but they are smaller and I just want to focus on these 2 for right now. At 3% I calculate it to be 401k = 48,000 taxed + brokerage = 60,000 after tax (which I view as approximately $100k pretax equivalent). In two years we’ll add her social security (maybe 800/month), then at 70 we’ll add dad’s social.

I should also mention that I’m the executor on the estate. This is obviously my first time dealing with many of these issues (life insurance, estate planning, etc). If there’s anything I appear to be missing please don’t hesitate to point it out.
Since the death just happened, don't expect to make many decisions for up to a year, to allow her (and you) to cope with this loss. The general advice is to leave all decision-making except the critical stuff, for a while. She doesn't need the stress of unnecessary decision-making now, and it is not reasonable to expect a lot of permanent decision-making at this early stage. Be kind to yourself and her. There is more than enough with required actions.

1. Agree that moving 401k is probably good but not urgent; even a year at extra 1% is not terrible (longer definitely is not good!)

2.Life ins: agree that you don't want to be talked into an annuity. Leaving it there for a while might be a reasonable decision. Having ~250k available in a bank or Vanguard mm could be good. Don't want to have more than 250k/bank unless they do CDRS for higher amounts. Waiting a year to invest is fine (see windfall in Wiki).

3. My first thought was 62 for her SS, FRA (66??) for Survivor's Benefit from then on.

4. Having a generous amount transferred to her checking account monthly might be a relief. This could be insurance money or whatever. Time enough to work on budgets later, unless there is an urgent need.
Keep in mind that a market crash could be devastating for her right now, both financially and emotionally. She no longer has the human capital that you have and when the crash comes, she doesn't have as much time to recover. Having a 30% or even lower equity AA for now is fine, even if she decides to increase it in the future when her life is more settled.

Also keep simplicity in mind. What if something happened to you? Would she have to turn to an "advisor" or would she be fine just leaving things almost automatic? Perhaps a SPIA (single premium immediate annuity, some say the only "good" annuity) might be good for regular "income" in the future, but those things are often best left for the '70's age.

You might want to check out her taxable income for this year. Next year the top of the bracket for Single is about 1/2 the MFJ this year.

At least if you are not in a community property state, any joint taxable accounts should have a step-up in cost basis on his half. This does not apply to tax-advantaged accounts.

NotWhoYouThink
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Re: Help Planning Mom's Finances after Dad Passed

Post by NotWhoYouThink » Sun Oct 29, 2017 12:51 pm

1. 401k - Approximately 1.6 million in an absolutely awful small business 401k. I took one look over the options (all with ER’s above 0.9%, many 1.3-1.5%, including the ‘index’ options) and knew we had to get out of there ASAP.

I plan to have her roll it over into a Vanguard IRA and invest maybe 60% bonds, 40% stocks (maybe 30% us, 10% international). That would likely be total bond fund, total us stock market, total international. Any holes to poke here?


2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother. One of the battles I know we have coming is to convince the selling agent that we do not want to reinvest it with him (he already tried to sell my parents an annuity a few years ago).

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?
A 40/60 AA sounds fine, but it doesn't need to be balanced in each account. You can load up the IRA with bonds and keep the after-tax account mostly stocks to be more tax efficient.

humbucker87
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Joined: Fri Feb 20, 2009 3:54 pm

Re: Help Planning Mom's Finances after Dad Passed

Post by humbucker87 » Sun Oct 29, 2017 1:31 pm

cas wrote:
Sun Oct 29, 2017 7:13 am
humbucker87 wrote:
Sun Oct 29, 2017 6:30 am
2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother.

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?
Not to jump too far ahead, since ACA exchanges may not even be in the picture ... but if your mother is going to need to control her MAGI with an eye towards ACA subsidy thresholds, that will probably affect how much of the taxable you want to have easily accessible in a relatively tax-free (or MAGI-free, more precisely) sort of way.
Thanks! This is great advice. I was playing around with one of the calculators and it looks like the difference between $45k reported income and $50k income could mean a $800 subsidy per months vs $0. I'll have to crunch some actual numbers in a spreadsheet, but to me this implies that it might make sense to withdraw less from the retirement accounts (using taxable to make up the difference) until she reaches 65 and can take medicare.

humbucker87
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Re: Help Planning Mom's Finances after Dad Passed

Post by humbucker87 » Sun Oct 29, 2017 1:35 pm

pennywise wrote:
Sun Oct 29, 2017 8:45 am
Perhaps you don't yet know this since you mentioned budget isn't clear but as with many/most of posts of this nature there is a huge omission: how much annual income have your parents been earning/spending? And what will your mother's expectations be for annual income going forward? If your mom is accustomed to having $200K income and spending it every year, that is a whole lot different planning process than if they earned and spent 100K, or 75K or 50K. Or earned $200K and spent $50K. And so on.
Thank you! This is a very good point and will be something to consider. I would have considered them UAW's but only by a little. However, if anything my Mom is the frugal one, and then combined with the fact that most of the retirement savings were planned for two are now needed only for one will help. But yes, I think there is an aspect that hit my mom that the money no longer comes in. I'm sure for many who retire it is a bit of a shock to start drawing down on assets.

humbucker87
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Re: Help Planning Mom's Finances after Dad Passed

Post by humbucker87 » Sun Oct 29, 2017 1:37 pm

Thanks too for all the reminders to save any big decisions that are not needed for a later date. Many of the things I mentioned are not an immediate need. In fact, it seems that the transfer of assets into her name and healthcare are probably the two most immediate.

MJS
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Re: Help Planning Mom's Finances after Dad Passed

Post by MJS » Sun Oct 29, 2017 1:43 pm

Social Security can have some unfortunate gotcha's. Run some of the calculators - https://thebalance.com/social-secur ... rs-2388936 . If the answers vary, then consult an expert.

basspond
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Re: Help Planning Mom's Finances after Dad Passed

Post by basspond » Sun Oct 29, 2017 1:55 pm

Another item to do is fill out IRS form 706 for spousal estate exemption transfer. Even though the estate is under the exemption now, if your mom hopefully lives a long time her estate or new laws might exceed the exemption. I think it has to be filed within 180 days of death.

mouses
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Re: Help Planning Mom's Finances after Dad Passed

Post by mouses » Sun Oct 29, 2017 4:03 pm

humbucker87 wrote:
Sun Oct 29, 2017 1:31 pm
cas wrote:
Sun Oct 29, 2017 7:13 am
humbucker87 wrote:
Sun Oct 29, 2017 6:30 am
2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother.

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?
Not to jump too far ahead, since ACA exchanges may not even be in the picture ... but if your mother is going to need to control her MAGI with an eye towards ACA subsidy thresholds, that will probably affect how much of the taxable you want to have easily accessible in a relatively tax-free (or MAGI-free, more precisely) sort of way.
Thanks! This is great advice. I was playing around with one of the calculators and it looks like the difference between $45k reported income and $50k income could mean a $800 subsidy per months vs $0. I'll have to crunch some actual numbers in a spreadsheet, but to me this implies that it might make sense to withdraw less from the retirement accounts (using taxable to make up the difference) until she reaches 65 and can take medicare.
I'm taking money first from my taxable accounts (except the IRA RMDs), then I'll use the Traditional IRAs, then the Roths, my theory being this is the way to do it so the IRAs can grow more tax-protected.

Lynette
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Re: Help Planning Mom's Finances after Dad Passed

Post by Lynette » Sun Oct 29, 2017 4:17 pm

Sorry for your loss and also think it is a good idea to delay major decisions. You may also want to consult an accountant to determine what happens when your mother reaches 70. She may minimize here MAGI at the moment but most people do Roth conversions in the 60 - 70 age time frame. You mother will have SS and a large RMD when she turns 70. Look into Medicare B and D IRMAA premiums.

Finridge
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Re: Help Planning Mom's Finances after Dad Passed

Post by Finridge » Sun Oct 29, 2017 5:50 pm

I went through this kind of thing before. My advice is not to let things sit or "give it time". It's easy to procrastinate, but this does not avoid the stress. It just prolongs it. Until you do what you know needs to be done, it will be nagging you in the back of your mind every day. Trust me on this. So do what you know needs to be done, as soon a reasonably possible. For example, there's probably no good reason not to contact Vanguard and the current 401(k) custodian in the next couple of days to start the process of moving the 401(k) over and then keep things moving along so it's completed within about a week. (It looks like you can reduce the expense ratio by about a full 1%, at least. All other things being equal, a reduction by 1% in expenses on a $1,600,000 portfolio is $16,000 over a year.)

Likewise, your should get the life insurance funds paid out and put into a Vanguard money market fund as soon as possible. Once it's in a Vanguard money market, you can start deploying it into the desired allocation. Remember, this does not have to be an "all or nothing" thing. If you are still deciding on the exact allocation, you can keep enough in the money market fund in reserve so that (when you decide) you can tilt the final allocation either way.

Also, remember that you can change the allocation at any time by transferring from bond funds to equity funds (or vice versa) in the IRA without any tax consequences. In the taxable accounts in a rising market, you probably wont' be able to transfer funds without taking a tax hit. But remember the allocation does not (and usually should not) be the same between taxable accounts and tax-advantaged accounts (like the IRA). Also, pay attention to tax-efficiency and place the least tax efficient investments in the IRA.

dandinsac
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Re: Help Planning Mom's Finances after Dad Passed

Post by dandinsac » Sun Oct 29, 2017 6:34 pm

When my FIL passed away, we took care of the finances, investments, etc. That worked fine. The things that caused my MIL the most worry was home and car maintenance. She had no background in these areas. This was all new to her and in hindsight, the hardest for us to help her with as we live 800 miles away. There may be non-investment areas like these where your mother could use your help as well.

billfromct
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Re: Help Planning Mom's Finances after Dad Passed

Post by billfromct » Sun Oct 29, 2017 8:38 pm

I think if you start to collect SS before your full retirement age (FRA) & work, SS will reduce benefits if you earn over $16,920 (for 2017) per year. SS will reduce your benefits $1 for every $2 earned over the $16,920 base.

I believe your future benefits are adjusted once you hit FRA based on how much is held back. If she anticipates to make over $17k, it may not make sense to collect SS before FRA. At FRA, you can earn any amount & that earned income will not affect your SS benefits.

bill

Katietsu
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Re: Help Planning Mom's Finances after Dad Passed

Post by Katietsu » Sun Oct 29, 2017 11:08 pm

Finridge wrote:
Sun Oct 29, 2017 5:50 pm
I went through this kind of thing before. My advice is not to let things sit or "give it time". It's easy to procrastinate, but this does not avoid the stress. It just prolongs it. Until you do what you know needs to be done, it will be nagging you in the back of your mind every day. Trust me on this. So do what you know needs to be done, as soon a reasonably possible. For example, there's probably no good reason not to contact Vanguard and the current 401(k) custodian in the next couple of days to start the process of moving the 401(k) over and then keep things moving along so it's completed within about a week.
BL wrote:
Since the death just happened, don't expect to make many decisions for up to a year, to allow her (and you) to cope with this loss. The general advice is to leave all decision-making except the critical stuff, for a while. She doesn't need the stress of unnecessary decision-making now, and it is not reasonable to expect a lot of permanent decision-making at this early stage. Be kind to yourself and her. There is more than enough with required actions.
If you and your mother are truly in the former category, then you should certainly proceed. However, based on the advice of experts, I would assume that most people fall in the latter category. Not only are you more likely to make mistakes during those first few months but you are also more likely not to realize that your judgement, memory and/or cognitive skills are off. Everyone is different but grief is hard.

Also factor in cost sharing subsidies for the ACA. Please learn about how keeping her income below 250% of the poverty level will lower her co pays and deductibles. I am not saying she wants to do this but it is a factor.

Before you do anything with the 401k, make sure you know your options. It seems that your mother will probably want to assume ownership of the retirement funds so that they are in an IRA in her name alone, not in an inherited IRA. Just be careful with this as some decisions are irreversible.

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celia
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Re: Help Planning Mom's Finances after Dad Passed

Post by celia » Mon Oct 30, 2017 4:46 am

humbucker87 wrote:
Sun Oct 29, 2017 6:30 am
1. 401k - Approximately 1.6 million in an absolutely awful small business 401k. I took one look over the options (all with ER’s above 0.9%, many 1.3-1.5%, including the ‘index’ options) and knew we had to get out of there ASAP.

I plan to have her roll it over into a Vanguard IRA and invest maybe 60% bonds, 40% stocks (maybe 30% us, 10% international). That would likely be total bond fund, total us stock market, total international. Any holes to poke here?
I wouldn't say the ERs were "absolutely aawful". They just aren't what a Boglehead would pay if (s)he had other choices.

However, I am concerned with rolling the 401K over and just letting it grow until RMDs are required at 70.5. I estimate that if it had an average 5% growth rate between now and then, the balance at age 70.5 would be $3M and the RMDs would start at $108,000 a year. With just that income alone, her federal tax rate will be 28% because she will be filing as Single (which has half the space in each tax bracket compared to MFJ). It would be better to start doing Roth conversions and pay taxes out of the other $2M. I would convert starting now or next year up to the top of the 25% tax bracket (which is $91,900 currently for Singles). Of course, that amount takes standard deductions and exemptions into account before you hit that number. And once she hits Medicare age and is single, if her MAGI is over $85,000, she will be subject to monthly Medicare surcharges:
https://ssa.gov/pubs/EN-05-10536.pdf

The Asset Allocation you are considering is reasonable, but you need to know about Asset Location as well (even for your own portfolio):
/wiki/Tax-eff ... _placement
Basically, you want to put stocks or any asset that will grow the most into Roth or taxable accounts and put bonds in tax-deferred.
2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother. One of the battles I know we have coming is to convince the selling agent that we do not want to reinvest it with him (he already tried to sell my parents an annuity a few years ago).

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?
You don't need to talk to the selling agent or any other salesman to file a claim. Just call up the company and ask for the procedure to file a claim for someone who has died. If you should have to talk to a salesman, you or she can simply say she no longer has need for any life insurance (ie, if doesn't have any dependents that depend on her income). You should also find out if she is paying for a policy for herself.

If you or she is thinking about putting part of the proceeds into a back CD, you need to know that the maximum account balance that can be held at each bank (chain) is $250,000 in order to be fully covered by FDIC insurance.
http://bankrate.com/finance/savings ... 000-1.aspx
3. Social Security - My mother did work some early on in her career and also late in her career so her Social Security will likely be small, but not non-existent. I think my plan is to have her collect her social security at 62 until age 70 when she will collect my fathers from thereon. Is there any better way to maximize drawing from both?
The Social Security rules were changed a year or two ago and for new filers born after a certain date, there is only one filing. Once they file, they are automatically given the higher of their own or half of their spouse's SS. Given that your dad recently died, the survivor's amount is a third option. I'm not sure if waiting will get her anything more unless her own work history earned her more than your dad's. It will be up to you/her to ask all the relevant questions as to which would be higher and if there be an increase to any of the options if she waited until 70 to file. (There probably won't be since your dad's benefits became fixed when he died. Probably only her own work history claim will be able to increase.)
4. Budget and Drawdown - Budgeting is something we haven’t had the chance to talk about just yet. Their house is paid off and so I think their only debt is one car lease currently. I’m hoping I can fit everything my mom wants to do budget wise into a 3% drawdown rate. Especially considering the insurance money isn’t taxed I think this will be very possible. There are several other accounts but they are smaller and I just want to focus on these 2 for right now. At 3% I calculate it to be 401k = 48,000 taxed + brokerage = 60,000 after tax (which I view as approximately $100k pretax equivalent). In two years we’ll add her social security (maybe 800/month), then at 70 we’ll add dad’s social.
A car lease is not really a debt. It is a rental. If she needs a car, why didn't she buy one and avoid the payments? That is something I would look into.

The insurance money isn't taxed as income for this year, but after it is received and invested, the dividends and distribution on it will be taxed each year, the same as if she/your dad had had that much in a taxable account when he died.

If your parents had a trust, it would be best if you and she visit the estate planning lawyer before making any changes, as other things we don't know about the situation could also have an impact. She will also want to avoid estate taxes if she has estate over $5.5M (or whatever the exclusion is) when she dies.

cas
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Re: Help Planning Mom's Finances after Dad Passed

Post by cas » Mon Oct 30, 2017 6:21 am

humbucker87 wrote:
Sun Oct 29, 2017 1:31 pm
cas wrote:
Sun Oct 29, 2017 7:13 am
Not to jump too far ahead, since ACA exchanges may not even be in the picture ... but if your mother is going to need to control her MAGI with an eye towards ACA subsidy thresholds, that will probably affect how much of the taxable you want to have easily accessible in a relatively tax-free (or MAGI-free, more precisely) sort of way.
Thanks! This is great advice. I was playing around with one of the calculators and it looks like the difference between $45k reported income and $50k income could mean a $800 subsidy per months vs $0. I'll have to crunch some actual numbers in a spreadsheet, but to me this implies that it might make sense to withdraw less from the retirement accounts (using taxable to make up the difference) until she reaches 65 and can take medicare.
Well, as other people (lynette, celia) have pointed out, it might not be all that great of advice. At the least, it is only one side of the coin.

On one side, you have considerations about pre-Medicare health insurance and ACA subsidies. The $2 million in taxable will be generating some level of annual MAGI-contributing dividends and interest. (Very, very rough guesstimate ... tax-efficient combination of total stock, total international stock, total bond (or possibly municipal bond) probably has a very approximate (round-number) 2% yield right now in dividends/interest. 2% x $2 million = $40,000. Google tells me that (2017) 400% FPL cut-off for ACA subsidies was just over $48,000 for a single person. So ... probably do-able, but tight, especially if SS income or part time job enters the picture.) All in the midst of a lot of uncertainty about the individual health insurance market. But an $800/month subsidy isn't chump change.

On the other side, you have considerations about the RMDs that the tax-deferred 401k will start generating at age 70. Those RMDs could easily lead to a higher income bracket and IRMAA (Income Related Medicare Adjustment Amount) surcharges (https://ssa.gov/pubs/EN-05-10536.pdf especially p. 5). Those RMD effects could likely be lessened by using money from the 401k/IRA before age 70 for living expenses and/or Roth conversions. But if your mother went that route, she'd almost certainly have MAGI above 400% FPL and wouldn't qualify for ACA subsidies.

There are people on this forum (probably early-retiree types) who are much more knowledgeable than I on figuring out the sweet spot in the trade-off between the 2 approaches I gave above. (You should take everything I said with a large grain of salt.) Hopefully one of the more knowledgeable people will be able to offer advice.

(If your father was 61, I'm guessing you are probably in your 30s, and having this financial planning conundrum tossed in your lap all of a sudden is probably an awful lot of new stuff. I'm sorry.)

The really important thing is that your father planned ahead well and left your mother in excellent financial shape. Optimizing it all is icing on that cake. And most of those decisions can be put off while you learn.

One other thing: I'm no expert, so don't trust me, but I'm pretty sure I've read on these forums that the end of COBRA is a qualifying event that would let your mother sign up for ACA coverage outside of the open enrollment period. Since you said your mother can be on your father's COBRA for another few months, that probably takes off the pressure to have to make a health insurance decision in time for the 11/1 - 12/15 open enrollment. But don't take my word on that.

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celia
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Re: Help Planning Mom's Finances after Dad Passed

Post by celia » Mon Oct 30, 2017 4:47 pm

cas wrote:
Mon Oct 30, 2017 6:21 am
On one side, you have considerations about pre-Medicare health insurance and ACA subsidies. The $2 million in taxable will be generating some level of annual MAGI-contributing dividends and interest. (Very, very rough guesstimate ... tax-efficient combination of total stock, total international stock, total bond (or possibly municipal bond) probably has a very approximate (round-number) 2% yield right now in dividends/interest. 2% x $2 million = $40,000. Google tells me that (2017) 400% FPL cut-off for ACA subsidies was just over $48,000 for a single person. So ... probably do-able, but tight, especially if SS income or part time job enters the picture.) All in the midst of a lot of uncertainty about the individual health insurance market. But an $800/month subsidy isn't chump change.

On the other side, you have considerations about the RMDs that the tax-deferred 401k will start generating at age 70. Those RMDs could easily lead to a higher income bracket and IRMAA (Income Related Medicare Adjustment Amount) surcharges (https://ssa.gov/pubs/EN-05-10536.pdf especially p. 5). Those RMD effects could likely be lessened by using money from the 401k/IRA before age 70 for living expenses and/or Roth conversions. But if your mother went that route, she'd almost certainly have MAGI above 400% FPL and wouldn't qualify for ACA subsidies.

There are people on this forum (probably early-retiree types) who are much more knowledgeable than I on figuring out the sweet spot in the trade-off between the 2 approaches I gave above. (You should take everything I said with a large grain of salt.) Hopefully one of the more knowledgeable people will be able to offer advice.
I'm glad Cas put things this way. And it may not even be an either-or choice. You have to look at what other assets your parents also have. (I assume you only listed things where you had a specific question.) If you have not yet done so, start by making a list of all the assets, where each is located, the listed beneficiaries, and the value. Group these things by taxable, tax-deferred, and Roth. In other words, get a good handle on the entire picture first. I suggest you add a column for the end of each year, starting this year, or even end of 2016, and keep the spreadsheet up to date each year. It will come in very handy for whomever becomes the executor or trustee when your mom dies. Besides a year-end account value, you may want a second column for each year that shows how much money was added to or withdrawn from each account each year. In ten years when you look back, it will be easier to see where a withdrawal went--to checking for spending, to another account, to a relative. It will also help you see if an account increased by x% due to growth of the assets themselves or because you added money to an account.

As far as medical expenses, I would start with her current and future medical needs. Does some illness/cognitive decline run in her family? Will she have a pre-existing serious condition at the time she starts Medicare? Does she need to see specialists? Does she take any brand name drugs which tend to be expensive? [rhetorical questions--no need to answer here] I don't know enough about the ACA plan choices to know if they have HMO vs PPO plans. I suspect the "silver" plan (for which the subsidy applies) can still leave the patient with substantial out-of-pocket costs. So getting her own private insurance directly from an insurance company until she turns 65 is also a choice.

cherijoh
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Re: Help Planning Mom's Finances after Dad Passed

Post by cherijoh » Mon Oct 30, 2017 5:52 pm

humbucker87 wrote:
Sun Oct 29, 2017 6:30 am
Hi SatuMedia,

Unfortunately two weeks ago my father passed away at the far too young age of 61 after a long battle with cancer. Knowing that I have enjoyed learning about investing and personal finance my mother has asked me to sit down and help her plan several aspects of her remaining finances. I wanted to get a sanity check on several pieces to make sure there isn’t anything I’m missing. Thanks in advance for any and all help.

Overall goal - My father was a very hard worker and also blessed to be a fairly high earner as well and so this won’t be a question of ‘how can we make ends meet’, but very fortunately ‘how to maximize what is there’. My mother is 60 and does not currently work. She’s not opposed to going back to work somewhere more as a way to keep busy than for the income.


1. 401k - Approximately 1.6 million in an absolutely awful small business 401k. I took one look over the options (all with ER’s above 0.9%, many 1.3-1.5%, including the ‘index’ options) and knew we had to get out of there ASAP.

I plan to have her roll it over into a Vanguard IRA and invest maybe 60% bonds, 40% stocks (maybe 30% us, 10% international). That would likely be total bond fund, total us stock market, total international. Any holes to poke here?


2. Life Insurance - My father had a 2 million dollar term policy that will be paid to my mother. One of the battles I know we have coming is to convince the selling agent that we do not want to reinvest it with him (he already tried to sell my parents an annuity a few years ago).

I plan to transfer it to a vanguard taxable account and invest it approximately the same as I have for the 401k. Clearly a large part of my mom's income will be drawn from this. Because of this is there any worth in putting some just in cash/money market so we don’t pay short term capital gains, or do I just invest it all with my desired AA and pay whatever taxes are due on the gains (they would be gains after all)?


3. Social Security - My mother did work some early on in her career and also late in her career so her Social Security will likely be small, but not non-existent. I think my plan is to have her collect her social security at 62 until age 70 when she will collect my fathers from thereon. Is there any better way to maximize drawing from both?


4. Budget and Drawdown - Budgeting is something we haven’t had the chance to talk about just yet. Their house is paid off and so I think their only debt is one car lease currently. I’m hoping I can fit everything my mom wants to do budget wise into a 3% drawdown rate. Especially considering the insurance money isn’t taxed I think this will be very possible. There are several other accounts but they are smaller and I just want to focus on these 2 for right now. At 3% I calculate it to be 401k = 48,000 taxed + brokerage = 60,000 after tax (which I view as approximately $100k pretax equivalent). In two years we’ll add her social security (maybe 800/month), then at 70 we’ll add dad’s social.

I should also mention that I’m the executor on the estate. This is obviously my first time dealing with many of these issues (life insurance, estate planning, etc). If there’s anything I appear to be missing please don’t hesitate to point it out.
I'm sorry for your loss.

I think you have a good plan for the 401k money. However, I think you should seriously consider having your mom do Roth conversions in the period before she has to start RMDs and also starts drawing you father's larger SS benefit. I would recommend James Lange's Roth Revolution - it gives a good explanation on the concept of "purchasing power" and why it often makes sense to pay taxes now rather than later.

I would keep at least a year's worth of expenses in a High Yield savings account or MM so that you avoid buying and selling soon after investing (and therefore paying ST cap gains). It would act as a bit of a shock absorber if the market does something crazy in the short term. It would also allow you to be more "hands off" with your mom's day-to-day finances. I'm sure she would feel more comfortable transferring money from a savings account vs. "selling" investments.

If you decide to pursue Roth conversions it would make more sense to spend down the taxable account (i.e., life insurance) rather than splitting withdrawals between the taxable account and the rollover IRA.

Good luck helping your mom.

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BL
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Re: Help Planning Mom's Finances after Dad Passed

Post by BL » Mon Oct 30, 2017 8:17 pm

Perhaps a book would also be useful for reference. Seems I have read that this one is recommended (haven't read it): Executor's Guide, The: Settling a Loved ... . (Author)

There may be an older version available at the library; not sure how useful that might be.

humbucker87
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Re: Help Planning Mom's Finances after Dad Passed

Post by humbucker87 » Tue Oct 31, 2017 7:35 am

Thank you all. You've given me some great avenues to research and things to consider which I hadn't before. I do really appreciate it.

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Peter Foley
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Re: Help Planning Mom's Finances after Dad Passed

Post by Peter Foley » Tue Oct 31, 2017 7:51 pm

Again, sorry for your loss. Nowadays 61 is still pretty young.

BL and Celia made a couple points that should not be overlooked. Your mother will file married filing jointly this year. It may be to her advantage to take advantage of that by either doing a Roth conversion or by tax gain harvesting. Try to make a good estimate of her marginal tax rate this year versus next year. $75,900 in taxable income is the top of the 15% bracket this year for MFJ. $38,700 is the top of the 15% bracket for a single person in 2018.

I personally opted for two years of cash when my wife and I retired. That is considered a bit conservative by some, but I have no regrets. I include short term CD's as part of my cash allocation.

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