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Dad recently passed, need help advice on Mom's retirement strategy
Old 10-01-2015, 09:42 PM   #1
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Dad recently passed, need help advice on Mom's retirement strategy

It's been a tough year for our family as my dad was recently diagnosed with cancer and passed away in the blink of an eye. He was the breadwinner and my mom really relied on him for everything financially (income, bills, etc) as she worked part-time. She is completely lost and not sure what to do so I've stepped in to help as much as I can to organize everything, work the paperwork to transfer assets, automate her bills etc which has been difficult from 600 miles away.

My wife and I have really "begun" our ER journey a year ago and we have been focused on accumulation within our tax advantaged accounts. I have not read up enough yet on the withdrawal strategies and what to do when you truly are near retirement. With that being said, I am looking to the community for help.

Mom's current info:

Age
58.5 in good health

Income
$12.5k per year (part-time work)

Debts
$0

Expenses
$40k per year

Cash
$330k (recently sold house and life insurance benefit)

IRA's
$400k - invested in VBINX (60/40)

Social Security
In 3.5 years @ 62 = $11,808 / yr
In 7.5 years @ full retirement age for survivors benefit = $30,720 / yr
*there are a handful of social security options but it appeared this scenario was the the most optimum payout assuming mom lives to 90.


She is renting now and would like to potentially purchase a home or a condo for roughly $150k in the next 12 months. She also doesn't really enjoy her job so she would like to stop working if possible or find something else that is more enjoyable.

I've run firecalc assuming retirement begins in one year and lasting for 31 years to age 90. I assume a portfolio of $510k ($150k removed from investment assets for home purchase and $70k removed from investment assets for emergency fund / living expenses for year 1). For social security I only included the survivors benefit that begins in 7.5 years, I've ignored the $11,808 payment for the first 4 years of social security. With those assumptions, we get a 99.1% success rate.

Now I'm struggling how to help her make this happen. My initial thoughts:

*Purchase home with cash - $150k
*Keep $70k in cash for emergency fund / living expenses
*Invest the remaining $110k or cash in taxable account (another 60/40 split fund?)
*Keep the $400k Vanguard IRA where it is (VBINX)
*Take monthly distributions (taxable or IRA?) to cover $40k yearly expenses (account distributions should reduce dramatically once full SS is available)

I feel like I am missing something big but maybe not? The goal would be to keep it as simple or automatic as possible and would prefer to not need to rebalance (hence the 60/40 balanced fund in the taxable account suggestion).

I appreciate any insight. This entire situation has further driven my desire to financial independence and appreciation for the delicacy of life as you never know what tomorrow brings.
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Old 10-01-2015, 10:04 PM   #2
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This post might fit better in the "Hi, I am ... " forum.

If you're worried about missing something, there's a nice checklist here Some Important Questions to Answer Before Asking - Can I Retire?

I'd add that you at least need to discuss long term care plans.

Since your mom is going to be hitting her assets pretty hard for the next 7 years, I'd be more comfortable if the taxable stuff were in pretty stable assets (CDs, I-bonds). Yes, she would give up upside potential, but early on the downside risk is significant.

I'm not sure that I'd care about a $70,000 emergency fund. Opinions on that vary.

I don't know how Vanguard rebalances VBINX or how much you plan to be involved. I might be more comfortable splitting that into a stock and a bond index fund and then controlling my own rebalancing.
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Old 10-01-2015, 10:15 PM   #3
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I'm sure more knowledgeable, posters will give more detailed answers.

My, quick, assessment. 58.5 years. Good Health.

1. keep working as long as you can. (try and increase your income).
2. do not touch your principle, invest conservatively.
3. try and find employment that provides medical insurance, till you reach 65.

Good luck
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Old 10-01-2015, 10:42 PM   #4
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Does the 40K expenses include the taxes? Firecalc expects the expenses to be how much you spend each year plus how much you pay for taxes.


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Old 10-02-2015, 07:40 AM   #5
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Would you mind explaining the huge difference in the SS payout numbers? If your Dad was not yet on SS your Mom should qualify for his full payout number at his FRA, minus any age adjustment on her part. I believe a survivors benefit is not reduced by 50%. A 19000 dollar increase for waiting a mere 4 years seems a little high.
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Old 10-02-2015, 08:02 AM   #6
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First - so sorry for your loss. You are a good son to be helping your mother like this.

- I agree with the other posters that the SS numbers look "off".

- The numbers are a bit tight at first glance... but play around with firecalc to see if she can stop working. Be sure to use the tabs that allow you to fill in SS and still working income.

- She has $770k in assets, but plans to take $150k of that for a house. I would do a rent/own evaluation (including all the homeowner expenses like property taxes, HOAs, maintenance, etc). Renting may be the optimum solution. Owning might be... no way to know without knowing the rental prices, etc.

For now, while the analysis is done, it's probably better she continue to work.
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Old 10-02-2015, 08:46 AM   #7
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Sorry to hear about your Dad ! Your Mom is eligible for SSS survivor benefits at age 60 .

Survivors Planner: Survivors Benefits For Your Widow Or Widower
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Old 10-02-2015, 08:53 AM   #8
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Very sorry for your loss. Thanks for being the type of person to really spend time to help your mom in her time of need.

Couple thoughts:

If all goes well and your numbers are correct, I'd agree retirement and house purchase looks doable but doesn't feel like an enormous amount of "fat" to play with if things go wrong (just playing with FireCalc and I-ORP with your data). I'd be very caution / reluctant to pull the retirement trigger just yet.

If I were in that situation, I would work at least another year and not purchase the house for at least another year. Main concern is the current stock market fluctuations, if we hit a large bear market, her IRA could be subject to large reductions (think possibly 20-30% reduction). If that happened, she'd need a back up plan. If you or siblings are available, willing and able to be backup, concern would be much lower.

The added year would allow her to confirm expense spending rate in her single situation. Couple specific areas of concern to watch for would be (1) health care costs (2) higher tax rate on any earned income as a single person vs married and (3) any change in her spending needs due to being single -- possibly wanting to travel more for example to be around friends or relatives. If her spending is actually higher, again might need a backup plan.

The added year would allow the market direction to possibly be better defined which may help or hurt her situation.

Whatever she chooses to do, would be good to ensure she knows how to monitor her own spending or encourage her to allow someone else to help. Would be very sad if she retired in good shape and then slipped into a problem because she was used to your father doing all the financial work.

One of your questions was how to withdraw funds for living. I personally use the free I-ORP program (Optimal Retirement Planner - Parameter Form) discussed quite a bit on this board to get a feel for which financial resources I should be using first. It's "Withdrawal Report" of the output will suggest whether using taxable accounts or tax deferred accounts (IRA) first will be more beneficial to the user. Would be good to get a good feel for what you think is best and then maybe find a trusted financial planner (on hourly fee basis only) to discuss it with. If her accounts are at Vanguard, they can provide that service.

Take care.
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Old 10-02-2015, 11:07 AM   #9
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Quote:
Originally Posted by Independent View Post
This post might fit better in the "Hi, I am ... " forum.

I'd add that you at least need to discuss long term care plans.

I'm not sure that I'd care about a $70,000 emergency fund. Opinions on that vary.

I don't know how Vanguard rebalances VBINX or how much you plan to be involved. I might be more comfortable splitting that into a stock and a bond index fund and then controlling my own rebalancing.
Thanks for all of your comments. You are right, I really need to look at and understand LTC options. Also will work to clarify the emergency fund amount – it is truly not all an emergency fund as her income does not cover her expenses at this point.


Quote:
Originally Posted by wolf View Post

My, quick, assessment. 58.5 years. Good Health.

1. keep working as long as you can. (try and increase your income).
2. do not touch your principle, invest conservatively.
3. try and find employment that provides medical insurance, till you reach 65.
Thank you for your response. If the current assets and expected social security income won’t allow her to meet her current plans continued employment will be required.

Quote:
Originally Posted by tmm99 View Post
Does the 40K expenses include the taxes? Firecalc expects the expenses to be how much you spend each year plus how much you pay for taxes.
Yes, it includes the taxes.

Quote:
Originally Posted by ivinsfan View Post
Would you mind explaining the huge difference in the SS payout numbers? If your Dad was not yet on SS your Mom should qualify for his full payout number at his FRA, minus any age adjustment on her part. I believe a survivors benefit is not reduced by 50%. A 19000 dollar increase for waiting a mere 4 years seems a little high.
Dad was not yet on SS. Her current options below. From what I understand you cannot take both at the same time so I ran a few scenarios trying to find the largest overall payout assuming she lives to be 90. The largest payout option was to take her benefit at 62 and let the survivors benefit grow until 66.

Her own benefit from employment:
@ 62 = $984/month or $11,808/year
@ 66 (full retirement age) = $1,350/month or $16,200/year

Survivors Benefits
@ 60 = $1,830/month or $21,960/year
@ 62 = $2,066/month or $24,792/year
@ 66 (full retirement age) = $2,559/month or $30,708/year


Quote:
Originally Posted by rodi View Post
First - so sorry for your loss. You are a good son to be helping your mother like this.

- I agree with the other posters that the SS numbers look "off".

- The numbers are a bit tight at first glance... but play around with firecalc to see if she can stop working. Be sure to use the tabs that allow you to fill in SS and still working income.

- She has $770k in assets, but plans to take $150k of that for a house. I would do a rent/own evaluation (including all the homeowner expenses like property taxes, HOAs, maintenance, etc). Renting may be the optimum solution. Owning might be... no way to know without knowing the rental prices, etc.

For now, while the analysis is done, it's probably better she continue to work.
You are right, we need to do a full rent to own evaluation to make sure it makes the most sense to actually purchase.


Quote:
Originally Posted by Moemg View Post
Sorry to hear about your Dad ! Your Mom is eligible for SSS survivor benefits at age 60 .

Survivors Planner: Survivors Benefits For Your Widow Or Widower
Thank you for the condolences. We are trying to decide the most optimal time to take survivor benefits.

Quote:
Originally Posted by Whisper66 View Post
Very sorry for your loss. Thanks for being the type of person to really spend time to help your mom in her time of need.

Couple thoughts:

If all goes well and your numbers are correct, I'd agree retirement and house purchase looks doable but doesn't feel like an enormous amount of "fat" to play with if things go wrong (just playing with FireCalc and I-ORP with your data). I'd be very caution / reluctant to pull the retirement trigger just yet.

If I were in that situation, I would work at least another year and not purchase the house for at least another year. Main concern is the current stock market fluctuations, if we hit a large bear market, her IRA could be subject to large reductions (think possibly 20-30% reduction). If that happened, she'd need a back up plan. If you or siblings are available, willing and able to be backup, concern would be much lower.

The added year would allow her to confirm expense spending rate in her single situation. Couple specific areas of concern to watch for would be (1) health care costs (2) higher tax rate on any earned income as a single person vs married and (3) any change in her spending needs due to being single -- possibly wanting to travel more for example to be around friends or relatives. If her spending is actually higher, again might need a backup plan.

The added year would allow the market direction to possibly be better defined which may help or hurt her situation.

Whatever she chooses to do, would be good to ensure she knows how to monitor her own spending or encourage her to allow someone else to help. Would be very sad if she retired in good shape and then slipped into a problem because she was used to your father doing all the financial work.

One of your questions was how to withdraw funds for living. I personally use the free I-ORP program (Optimal Retirement Planner - Parameter Form) discussed quite a bit on this board to get a feel for which financial resources I should be using first. It's "Withdrawal Report" of the output will suggest whether using taxable accounts or tax deferred accounts (IRA) first will be more beneficial to the user. Would be good to get a good feel for what you think is best and then maybe find a trusted financial planner (on hourly fee basis only) to discuss it with. If her accounts are at Vanguard, they can provide that service.

Take care.
Thank you for the comments and sympathy. You really are spot on with a lot of your assessment and some of the things that came to my mind. I did not however think of back-up plans, I do thankfully have siblings nearby that would be more than willing to step in but it would be best to work through those scenarios.



She has discussed potentially wanting to travel more and her lifestyle will change so we should likely get that under control and understand it prior to making any major changes. I am slowly trying to work with her on the budgeting process and making sure she does have control of her finances.
I did not come across the optimal retirement planner form in the past. This looks like it will be a HUGE help – thank you again for your recommendation and comments!
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Old 10-02-2015, 11:13 AM   #10
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I'm very sorry to hear of your loss, I know your mom appreciates your help right now.
It looks like you've gotten some good advice on the finances, do take a close look at the SS situation. One resource many have talked about here is software written by Laurence Kotlikoff called Maximize My Social Security. It's $40 for a household license, and if I were in your shoes I'd definitely make that investment and run your Mom's numbers through it to see the best way forward. (I'm not connected Kotlikoff or his company in any way).

Money aside, one common bit of advice to recent widows/widowers is to wait a year before making any big changes. Your mom might want to take some time to deal with her emotions and let things settle down a bit before she makes big decisions about whether to quit working, switch jobs, where she lives, etc. She's got a lot to deal with, and the stability of some familiar things and structure might be useful and waiting could save her the money and hassle of making a mistake due to haste. (later addition: I see I cross-posted with the OP on this issue)

One macro question: If your dad has handled all the investments, does mom understand about volatility, etc? Sometimes the spouse who isn't involved in the money management just never sees the account balances and trusts that everything will be okay as time goes on. If she sees you as her financial advisor, it will be important to have a frank talk with her about your inability to protect her from the variabilty of the stock market. Specifically, she needs to know that is some years her balances are going to go down, and that there's nobody who can keep that from happening. If you think it worthwhile, maybe introduce her to a good book on this subject, and to FIRECalc. She doesn't need to be able to do everything herself, but if she understands (and buys into) your investing philosophy, it will head off any misunderstandings/emotions when things take a dive and will also help prevent her from being victimized by the many "helpful sharks" out there.

Not now, but as she gets older and as interest rates go up, she could be a candidate for an immediate annuity, especially if you can get a low cost one that covers her spending and is indexed for inflation. Obviously, that might reduce any inheritance to you and your siblings, but might also reduce the chances that she'd need financial assistance from you guys, too (say, if stocks and bonds did poorly for a decade). It would have the added benefit of getting you out of the FA role--she'd get a check every month, plus her SS, and would just budget accordingly.

Best wishes.
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Old 10-02-2015, 11:18 AM   #11
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After working through these responses I am thinking we should look deeper at taking survivor benefits at 62. Although this would be a smaller lifetime payout (assuming living to 90) but it could provide the buffer to hitting the portfolio too hard up front.


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Old 10-02-2015, 11:19 AM   #12
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I don't know how much to add to others, but here's my take.
1. Continue to work until she can up to 66 yrs.
2. She needs 27.5K to match the difference. She can withdraw that from the cash position for quite a few years.
3. Let the mutual fund stay as is.
4. Take social security benefit at about 65. Earlier if it need be.
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Old 10-02-2015, 11:26 AM   #13
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So so sorry about your loss .

There is a valid "rule" that one shouldn't make any major decisions within a year of a spouse's death.

At 58 your mother likely has many years ahead of her to enjoy. My opinion is that she absolutely should keep working for many reasons (If she doesn't like her job, she can look for another one). I think it is really nice that you want to help her through this--she should make the decisions after coming to terms with your father's passing, but it will be helpful for her to have the information and some options pulled together for her.

ETA Samclem's post above says what I wanted to say but better.
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Old 10-02-2015, 11:28 AM   #14
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After working through these responses I am thinking we should look deeper at taking survivor benefits at 62. Although this would be a smaller lifetime payout (assuming living to 90) but it could provide the buffer to hitting the portfolio too hard up front.
The least expensive lifetime COLA'd annuity that we can get is through SS. For that reason, I'd recommend that your Mom strongly consider holding off on claiming SS as long as possible to maximize the size of that monthly payment. That check is going to be the main source of her spending money, will probably cover all of her essentials, will largely keep pace with inflation, won't vary according to the stock market, and will come every month as long as she lives. As a technique, some people plan to wait until FRA and will only claim SS earlier if their investments take a significant unexpected turn for the worse (thus reducing the sale of stock shares at low prices) or if their health suddenly declines (making the "take it now" option a better one due to the lower life expectancy).
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Old 10-02-2015, 12:30 PM   #15
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Now I understand, on the SS front you were talking about 2 different benefits, her and his. Just because I get confused sometimes, it's my understanding that taking a early retirement at less then FRA means the age discount will be applied to your personal benefit forever. The 31K number you are using is at about the max annual payment for someone at FRA...in 2015. Are you certain there will not be age reduction in her survivors benefit?

I am sorry for your loss at well and hope things work out for your Mom. However a lot of the things she is saying are probably not going to happen. It sounds from the SS history as if they had some good income years. Basically your Mom had a paid off house, some 401 money and no debts. A good outcome and better then a lot of couples. Sounds like apart from 401 savings they lived paycheck to paycheck and this is without a house payment. I don't believe leaving work, buying a new home and spending money traveling is in the cards for now. That money is going to have to last her a long time. Give her some time to figure out her budget and where she wants to go from here. I know because everyone is dealing with your loss, you want to make her happy and cheer her up, but that nest egg is the best thing she had going for now. A thousand a month from wages isn't going to go very far, but it's better then zero.
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Old 10-02-2015, 12:50 PM   #16
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Sorry for your loss. I agree with the comments and advice but strongly advise that your mother wait at least a year or two before making any major decisions (quit/change jobs and purchasing a home). A lot will change in her life with the loss of her spouse and she may see things differently later. No reason to be tied down with a home if she decides she wants to travel or relocate.
Wishing you all the best in helping her through the loss.


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Old 10-02-2015, 12:59 PM   #17
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Another thought: If she does want to buy a house now (not recommended), consider getting a mortgage rather than paying cash for it. I know that many will hoot this down ("Why go into retirement with a mortgage!?"), but it will allow her to have a larger pot of liquid assets right now--a valuable buffer to avoid selling equities. She can spend that buffer down over the next few years (probably while she works) to delay taking SS (thus increasing the size of that monthly guaranteed check). Mortgage rates remain near historic lows, a good time to borrow, and that won't last forever. She could still pay off the mortgage whenever she wants, but right now the utility of having more money at hand might trump the slight advantages of paying off the house immediately. Just the $150K not spent on the house + her earnings from he PT work would cover 4-5 years of her living expenses before she needs to dip into anything else--enough to get her halfway to her SS FRA and giving those other assets a chance to grow. Also, at her new (reduced) standard deduction as a single filer, she might even get some tax benefits from having a mortgage (depending on her other deductions). If inflation (the scourge of retirees) takes off, she might feel really smart about having a 30 year fixed mortgage at 4%, paying it off with dollars worth less and less every year.
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Old 10-02-2015, 01:07 PM   #18
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Another thought: If she does want to buy a house now, consider getting a mortgage rather than paying cash for it. I know that many will hoot this down ("Why go into retirement with a mortgage!?"), but it will allow her to have a larger pot of liquid assets right now--a valuable buffer to avoid selling equities if stocks go down. She can spend that buffer down over the next few years (probably while she works) to delay taking SS (thus increasing the size of that monthly guaranteed check). Mortgage rates remain near historic lows, a good time to borrow, and that won't last forever. She could still pay off the mortgage whenever she wants, but right now the utility of having more money at hand might trump the slight advantages of paying off the house immediately. And at her new (reduced) standard deduction as a single filer, she might even get some tax benefits from having a mortgage (depending on her other deductions).
That's a good point but how do you get a mortgage with a W-2 income of 12K and what type of interest rate are you going to get? Honestly with that low income she might qualify for some type of senior housing assistance building while she tries to decide what will be in her best interest. Or perhaps find a fellow widow for a roomate to help replenish her savings from the house purchase.
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Old 10-02-2015, 01:35 PM   #19
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I am so very sorry for you and your Mom. She is so young to lose her husband, but lucky to have a smart kid like you. I don't have any advice to add to the excellent advice already given (especially Dog's), just wanted to express condolences. I hope the pain will lessen with time.

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Old 10-02-2015, 01:52 PM   #20
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After working through these responses I am thinking we should look deeper at taking survivor benefits at 62. Although this would be a smaller lifetime payout (assuming living to 90) but it could provide the buffer to hitting the portfolio too hard up front.


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Nothing wrong with hitting the portfolio early, we're doing it also. You can look at it when she is close to 62. If the portfolio is holding up fine, I'd continue optimizing SS. If the portfolio is getting low then SS early might be a good idea. No need to lock it in now.

I don't see anything about health insurance. Is that in the budget? It's a major expense if she is moving from employer sponsored plan to having to pay for it all.

With IRA and taxable funds you will want to consider Roth conversions. Specifically, living off of the taxable funds now and Roth converting whatever fits easily into the 10% or 15% tax bracket. Strictly a tax move to smooth her income and avoid any bumps into a higher tax bracket earlier or later.

In the same vein, I wouldn't take all $40k from the IRA (after 59.5 right?). Take out whatever keeps you under at least the 15% and maybe the 10% tax bracket (and maybe $40k still fits?), and fill in the rest with taxable funds. You're just trying to make sure you fill up the 10% bracket and stay out of the 25% bracket each year in order to minimize taxes on the IRA.

She doesn't really need an emergency fund. The taxable accounts can handle that fairly well. However, it would probably be easier to have the yearly expenses covered by cash at the start of the year, with a buffer to keep the end of the year from cutting it close. It might help with budgeting to keep the cash in an online savings account where it earns a little more, and create automatic transfers into her checking account each month. Then she can spend whatever is in her checking account. Be sure to save for those "unexpected" expenses like house painting, a new roof, a new car, etc., so not all of the $40k goes to the checking account.
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