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I am relatively new here and this is my first post, but I have been reading the message boards here for some time and find the info here to be invaluable. There are just so many smart people here! Anyway, here is my question/problem:

I am trying to help my mom out with her finances/investments. She is 75 and retired and my dad is in a nursing home. My dad qualified for Medicaid through the state of Illinois, so they are paying for his nursing home care. My mom gets a fixed income (consisting of her SS and my dad's SS and pension) of around $2100/month, which is plenty for her to survive on with some left over, so she doesn't need to touch her investments just yet. My dad will be going to a Veterans home when they have space available (sometime in the next 6-12 months) and he will no longer have nursing home coverage by Medicaid. It will cost $900 a month. Also, if my dad should pass, my mom will be living on $900 less a month (the amount of reduced pension & SS benefits). So either way, she will have to do with $900 less a month. I have suggested to her to take $900/month out of her budget NOW & fund an emergency fund first (up to around $6000 which is about 6 months worth of expenses for her--and she's almost there--for any house repairs, etc) and after that is funded, take the extra money & invest it.

Her investments are:
She has around $10,000 in her IRA, invested in a Lord Abbett mutual stock fund (LAFFX), from which she is taking the minimum distributions of around $800-1000 yearly.

She also has a bond fund through American Express (INEAX) with around $10,000 in it and she owns individual stocks with Walgreens and Walmart, in the amount of about $36,000. I realize she is over weighted in stocks for her age & circumstances, and that is why I am writing today--I would like some advice about how to reallocate to a more conservative approach for her, in case she needs to start drawing from these in the future. I realize the final decision with what to do will be hers, but I was looking for any suggestions, insights, and things I/we hadn't thought about for what would be the best thing to do.

My initial suggestions to her would be to get out of that bond fund (it is a high-yield bond!! with a front load--grrrrr, I would like to know who even let her invest in that at American Express!) and put it in, say, Vanguard's Total Bond Market Index (VBMFX). I would also like to see her roll over her IRA to an IRA with say, Vanguard, and put it in one of their stock index funds, such as Total Stock Market. Is this even possible now that she's taking distributions?

My last concerns are her individual stocks in Walgreen's & Walmart. I think these are pretty good stocks to be holding (even now) as they have not lost all that much in the past years, but like I said earlier, I would like her to limit her exposure to the stock market because she is in retirement. Should she liquidate some/all of her stocks? What about liquidating all her assets & just putting all of it (except the IRA of course) into a balanced fund such as the Vanguard Balanced fund?
What would be the tax/capital gains implications of selling the stocks?

I suggested an overall asset allocation of about 60-70% bonds and 30-40% stocks. Is this too risky for her? OR, should she put part/most of it into cash investments? I realize she needs some stock exposure to offset inflation, but am worried that this is not conservative enough. But on the other hand, she really doesn't need to draw off any of her investments just yet, but may need to in 3-6 years. I want to give her the best advice I can which is why I am writing today, and would love any inputs, suggestions and insights any of you may have. Is there anything I have missed? Also, are there other boards you would suggest I cross-post this to?

MzAeroLvr
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(consisting of her SS and my dad's SS and pension) Also, if my dad should pass, my mom will be living on $900 less a month (the amount of reduced pension & SS benefits).

Hi MzAeroLvy,

Welcome to the boards! I'm not one of the smart ones on here, but I do have a question about the sentence copied ablove.

If your Dad's SS benefits are higher than hers, she can start receiving his instead of hers after his death. That may be only a small amount of difference, but usually the man's SS benefits are higher than the wife's. I'm assuming she would still receive some of his pension? Usually most people opt for the wife to get half, not knowing they possibly could choose a different option. But it's too late to change anything there now, anyway.

There are a lot more knowledgeable people here who can help you with the allocation questions. Everyone's situation is different. For income, you might want to take a look at REITS (Real Estate Investment Trusts). There is a REIT board here at TMF.

It sounds like your mom is lucky to have you there to get info and advise her.

Carol
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No. of Recommendations: 3
My guess is that your mom is like many others out there. She is not particularly knowledgeable in the investment area, so the advisors she sought out were only too glad to help her. The downside to this is that while they tried to help her, they helped themselves first.

A quick look on Yahoo shows us that LAFFX has a "modest" 5.75% front end load (ouch). The amount your mom invested was not enough for the broker to vacation on, but I am sure your mom was not the only fish they had swimming in the barrel. The fund itself is a large value fund that has been around a long time. In good times it will provide decent returns and in the bad times we have been through it lost less than many others. I am bothered by the 77% annual turnover. The .79% expense ratio and .25% 12b-1 fee are not overly high compared to its peers, but it is much higher than Vanguard. Also, the comparison does not take into account the permanent loss of your front load fees. I am sure the advisor just happened to overlook that point.

My personal opinion is that it was sold to your mom because she did not know enough to ask the right questions. The broker collected their very nice bonus as soon as it was sold. It is not a high tech or internet fund, but I think there were much better alternatives out there. It has gone from over 15 per share down to the current 10.33. Between the high up front fee and the decline in value, your mom has already taken a severe hit. Unfortunately there is always a high price to pay when you place your trust in someone who stands to gain more than you do in the transaction. I guess you can tell that I am not neutral on the subject.

The American Express fund is totally inappropriate for someone like your mom. I guess their selling point is that the front load was "only" 4.75%. When you add the 1.03% annual expense ratio to the .25% 12b-1 fee to a fixed income investment it gets very expensive. The track record of 3 down years in the last 5 is not surprising at all. The 125% turnover ratio makes my stomach turnover. It is no wonder why it ranks very low (68-82 percentile ranking). I am somewhat surprised they didn't try to sell her an annuity too along with the kitchen sink.

I would agree that Walgreens and Walmart are well known names and not likely to fall off the radar screen. Still, I would be cautious about having too large a percentage of only two stocks in your moms net worth. I would agree with the idea of moving things to Vanguard. I would also consider adding REITs as a component of her portfolio. They have a REIT fund VGSIX that can give you some good exposure to the sector. REITs have a very low beta which means a low correlation to the S&P 500 index and by definition they throw off most of their income in dividends. I would take the time to get a good understanding of any investments your mom (or yourself) will make.

If you decide to sell the stocks, you have to know your cost basis. If your holding period is more than a year you can have a LTCG. The taxes would be at the lower rate of 10% or 20% depending on the total income she has for the year. From what you posted, I would expect it would be 10% for her. Any state taxes would be additional. If you decide to only sell part of the stock positions, you will need to do it on a FIFO basis or have the specific lots identified on the sales confirmation. It can get tricky so make sure you understand the tax consequences before you act. If you have some specific tax questions, the Fool has an excellent tax strategies board that I am sure will help you.


BRG
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Carol--
I was unaware that SS was like that and I know my mom wasn't aware of it either. Thank you for bringing up that point! And yes, my mom will still receive some of my dad's pension regardless of what happens.

Gurdison--
You are exactly right about the people wanting to "help" my mom that made sure they got helped first. It's a darn shame that stuff like that happens, and it REALLY burns me up. I wish I was more knowledgable when she needed help with this, but I just only recently started to get Foolish myself. My mom has generously opened up her finances to me to let me help her and I hope I can do her some good, even at this late stage.

Yes, LAFFX is NOT a good fund pick and I really want her to roll it over to a Vanguard IRA. She can do that even though she's already taking minimum distributions, right?

I am also extremely upset that they sold her that American Express bond fund and I AM surprised she doesn't have an annuity too! Thank God for small favors, eh? It's a horrible horrible fund for her to be in & that's the first thing that's getting the axe.

I have discussed with her the selling of some of her stocks and the reasons why, and I have shared your responses with her thus far, and she is really liking all of this. In fact, she is kind of tickled with whole Motley Fool message boards, as am I! She has had no one to help her with her investments until now (and neither did I). This whole web site just rocks! Anyway, I would really like her to sell the stocks gradually to minimize the tax/LTCG issues (BTW she pays no income tax, she is just under the maximum you can make w/o paying) and to dollar-cost-average as much as possible. I will definitely have to visit the tax strategies board for this as I am not well-versed in individual stocks' tax consequences.

I will also have to investigate the REITs you are talking about since you both put that in your response. I am not too familiar with them either, but I am a quick study...just point me in the right direction!
=) Also, what % of REITs should be in a portfolio? I have seen it relatively low (15% or so) in the many posts I have come across. Is this common to have so low or is that about right?

So I am thinking the final assest allocation should be close to 60% bond (index) fund, 25% stock (index) fund and 15% REIT fund.

Thank you so much for your well thought out responses so far. They are MUCH appreciated. Any comments, suggestions and/or questions are most welcome. Thank you again!

MzAeroLvr
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So I am thinking the final assest allocation should be close to 60% bond (index) fund, 25% stock (index) fund and 15% REIT fund.

The only thing you might want to keep in mind with interest rates so low right now is that bond prices will drop if/when interest rates rise - it would be terrible if you sold most of her stock and bought bonds, then stocks went up and bonds tanked. A strategy you might want to consider is to change the allocation over several years.
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I will also have to investigate the REITs you are talking about since you both put that in your response. I am not too familiar with them either, but I am a quick study...just point me in the right direction!

The "Real Estate & REITs" board that Carol mentioned is a great place for REIT questions & info:
http://boards.fool.com/Messages.asp?bid=100061

The board's FAQ (disclosure: I compiled it) has a lot of helpful info in it, though some parts of it are likely incomprehensible to REIT neophytes:
http://boards.fool.com/Message.asp?mid=18601388

It's a friendly place; please stop by and have a look around. Feel free to ask any REIT-related questions you come up with (that aren't answered to your satisfaction by the FAQ, of course :-).

Ken
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You have posted some things that I believe are not possible - I suspect you have some terms wrong, but the implications are HUGE. You said your father was on Medicade. Medicade is for people who have essentially zero assets. To get there you sign away you social security benifits, except for about $35 a month for personal items.

The exact procedures and rules vary from state to state, but medicade is something people should hope they never use. Medicare is another issue. Medicare pays for short stays in a nursing home - the payment rates drop if I recall correctly after 30 days, but continue for another 90 days.

You might want to have a talk with an attorney specializing in Elder Care Law. It is complex, but good advise can be the difference between the government getting all the assets and your mother being able to spend some of her assets on herself. I urge you to get legal advise. If you spend money in the wrong way, you can get broke and still not be able to get medicare until you repay money disposed of in ways that are not acceptable. The look back period I believe is 3 years.

Gordon
Atlanta
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MzAeorLvr,

When my dad died, I took over my 90 year old mother's finances. They had had a broker at PaineWebber who had helped himself first, buying front-load high management fee funds inappropriate to their needs. But the value of my mother's portfolio is more than 20 times what you're dealing with, so even after moving everything away from PW, she's just fine. I sympathize with you and share your anger at brokers who take advantage of folks who lack an interest or knowledge of investing.

From personal experience, I can tell you that you can move funds even though MRDs are being taken. Dad had to do MRDs from his IRA at PW, and I moved that IRA to Vanguard when I inherited it.

As I understand your post, your mother's portfolio has a total value of about $56K. That won't support much of an income supplement at any reasonable withdrawal rate, depending on expected longevity past 75. But if she gets over $900 a month in social security and pension and needs only a little over $1,000 it might be enough. But are you sure? You might want to use Quicken to track her finances and do a pro forma budget. Include everything, because $12,000 a year sounds low for someone who is likely to have sizeable health costs.

I'm skittish about buying bond funds right now, because their prices (NAVs) have been driven so high by low interest rates and the flight from stocks. Vanguard's short-term corporate bond index (VBISX) or CDs might be a safer bet for the fixed income part of her portfolio in the near term.

For my mother, I've settle on 50% domestic stock (Vanguard's total stock market index fund) 20% international stock (Vanguard's total international stock fund), and 30% cash as a short-term solution. The cash provides more than a 10-year income buffer. When bonds stablize, I'll move funds into Vanguard's total bond market index and Vanguard's TIPS fund. Although the details of her situation is quite different from your mother's, they are conceptually similar.

Wish I could provide better advice.

db
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No. of Recommendations: 7
<They had had a broker at PaineWebber who had helped himself first, buying front-load high management fee funds inappropriate to their needs. I sympathize with you and share your anger at brokers who take advantage of folks who lack an interest or knowledge of investing.>


I think that all of these experiences drive home the point that there is a very high price to be paid for what you do not know. It is not that every broker is deliberately screwing their customers, but the playing field is far from level for the uninitiated. Most Americans do not have the interest or the patience to learn about investing, finance and taxes. The financial services community has a vested interest in keeping things that way. In many cases, the very fact that you are walking through their door means that you are easy pickings.

For myself, my real financial education came when I had to manage the affairs for my aunt who had a series of strokes. I had started a new job and was recently married, so I already had a full plate. I was in way over my head. I went to a broker through a referral from my CPA. I never resented the broker earning monies off of his suggested investments. What bothered me in hindsight was how much was left unsaid. That goes to the heart of the matter for many.

My aunt needed current income to cover her nursing home expenses. I was directed into several mutual funds that had a 4.75% front load. In my ignorance, I thought that was the norm. They also had the normal annual expenses, plus 12b-1 fees. Over time, I read enough material in the prospectus to catch on that most of the load fees and a portion of the annual fees went directly to the brokerage firm and the broker. When I griped a bit, I was told about the "B" shares where "every dollar goes to work right away for you". Of course these shares had a back end load that discouraged you from leaving. Their annual expenses were twice that of the A shares and the 12b-1 fee was 4 times higher than the A shares. While it may not look have looked like it on the surface, they made even more money off of the B shares. Plus every time we sold a stock in order to free up cash to buy these funds the broker made a comission that was often 20-30 times higher than my current online trading fee of $30.

We can all rationalize the costs of investing. What bothered me is that we didn't have a Yahoo or other places to go to research the funds. The best of the funds I was put into were average performers. Most were below average to down right horrible. It took me all of 5 minutes to get a good overview of the LAFFX and INEAX that the original poster mentioned. I had none of that at my disposal back then (around 1990-91). I had no idea that some funds I was in were ranked in the 98th percentile over a five year period. It did not necessarily mean that the fund managers were so terrible. It was the onerous fee structure that put them (and me) so far behind the 8 ball. By the same token, when you invest with Vanguard it does not mean that the funds are all run by geniuses. Their low cost structure gives them (and you) a good head start each year. They will do better in an off year than the high fee funds will do in a great year.

I am not sure if the advent of the internet is an evolutionary or revolutionary tool. Sometimes too much information presents its own set of problems. I know for myself that it has been a gradual process of learning. The FOOL has been a tremendous tool in that process. Between the REHP board, the REIT board, the Tax strategies board, and a few others, I am more than confident of getting a good answer to any investment question I may have. If I need some suggestions on reducing my expenses, the LBYM board is another good resource (as long as you learn to duck once in a while). This board has been good too but as you may notice, it does not get the heavy traffic that other boards get. Anyway, for the original poster, do not consider your task as a sprint. Take your time. Learn all that you can. Hang around for awhile.


BRG
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One of the things that's often not recognized is that folks of "means" may know and want to know little about investing. My parents were the classic millionaire next door types. They built up a million dollar portfolio not by clever investing but through frugal behavior and concomitant saving. Had they invested in Vanguard's balanced fund, for example, they would have ended up with a much larger portfolio. But they owned their home, had qualified for CA's protected real estate tax status, so they continued to save on the $25,000 a year income from social security and pension. Except for the RMDs from dad's IRA (which he reinvested in their taxable account), they never withdrew from their portfolio.

Another point to recognize is that a parent, especially a father, may be less willing to receive advice from an adult child than from a stock broker, who, after all, is the pro when it comes to investments. It's frustrating. When my dad retired in 1975, he did see a highly recommended financial planner, but he didn't like the advice he got: To buy a bunch of houses in various new developments in the San Diego area, then selling for under $20,000 each!

db
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"When my dad died, I took over my 90 year old mother's finances. They had had a broker at PaineWebber who had helped himself first, buying front-load high management fee funds inappropriate to their needs."


Why does everyone seem surprised by this. If you let a full service broker or a bank manage your finances, you should expect they're going to sell you something they can make a profit on. They are not charities so why would you expect to get their services for free? Also, how much did your dad know about managing money? If the answer is very little, he might have lost more than the fees he paid while he was learning by trial and error.

I'm not in the money management business except for my own accounts. And I buy only no load or low load mutual funds and trade stocks in an online, low commission, account. But there are many people who don't want to learn to do it themselves and need the hand-holding of a professional. Unless they are dealing with a total crook, they probably are getting the service they pay for in higher fees.

Remember, the financial awareness of people on these boards is much higher than that of the average person.



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I understand your points about Medicaid, but the way my mom explained things is that as long as my dad doesn't have more than $2000 (or so, not sure of exact amount) in cash or investments in his name he is eligible for Medicaid. And as long as your assets are below some dollar amount he is eligible. He can be and is still listed on their home & on my mom's car. She didn't mention anything about only getting $35 from SS and she's gotten a few checks from them since he's been admitted and they were for the full amount. I do hope she's not in for any nasty surprises with that. But I have tried to get as many details as possible about all this, but she gets overwhelmed by all the information overload (like I am sure we all do from time to time!) and she doesn't get all the facts or doesn't understand them all. I live in Florida & she is up here in Illinois, so I am not aware of all the things that have been happening. I am here for a week & am trying my best to get all this straightened out.

She did go see a lawyer once, right when my dad was admitted to the nursing home (about 3 months ago) to get everything straight, but I am trying to talk her into seeing another attorney more specialized in what she needs. But she is having none of it. Doesn't want to mess with all that right now. She really needs to take care of a few more things (in my mind IMPORTANT things), but I am not getting anywhere with her.

As far as living on $1100 or so a month (without touching any investments) I think she may be able to do it. At least for a while. The house is paid for, she has no CC debt (or gambling probs!) lol and my dad's insurance is through Caterpillar and it almost completely covers everything. I think between Medicare & Cat insurance she pays almost nothing, so she's REALLY lucky in those respects.

I realize she doesn't have many assets, and she may live for quite a long time, so I am hopeful we will be able to get some of these investments working for her. I do not want to readjust her allocations in one fell swoop, (that would be foolish!) but would like to tackle this one at a time--and take my time. I do hate to take all $10,000 out of the bond fund at once & put it in a better bond fund, due to the high prices of bond funds these days, but this particular bond fund has LOST money over the past year and I hate for her to keep any money in it. However, I do like the suggestion of moving it to a CD, cash, or something similar until bond prices come down a bit. That seems like a very good idea.

You don't know how much I appreciate all your comments & suggestions, but they are invaluable to me & my mom. Thank you all!

Mz
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billiam,

Of course it's no surprise that a full service broker would sell my dad front-loaded high-management-fee mutual funds. The point is my parents had no business in a full service brokers office to begin with. They had no interest in trading in the stock market. But the full service brokers advertise on TV and in newspapers and magazines, so name like EF Hutton, PainWebber, and so forth, become household words. And they almost always have attractive offices.

I'm not suggesting that most brokers are crooks; I am suggesting that there is a mismatch between the needs of many of their clients and the services they offer. Furthermore, I am suggesting that there is not the business ethic among the full service brokers to tell those clients that their interests might be better served elsewhere. If I walk into a criminal law firm with a civil matter, I might expect them to recommend a civil law firm. I do object to full service brokers passing themselves off as "financial advisors" rather than sales representatives.

Anyway, my dad ignored my suggestions that they might be better served by moving their money to no-load index funds at Vanguard, and I sensed resentment whenever I persevered in that argument so I left it alone. Mom is flexible and trusts my judgement -- I hope her trust is not misplaced. Helping a parent is often not easy for either of you.

db
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