2 financial advisors' plans for my MIL - need some better advice

[WM]

Many of you are aware that my FIL passed away a few months ago, leaving a bit of a financial mess (still working on that), but also some positives - life insurance and pension. In working through options for my MIL, I came up with a plan, and my brother-in-law consulted his financial advisor. Another person MIL works with also recommended a financial advisor.

She will have 22K rollover from the pension, plus 40-50K of life insurance $ to invest. She has not invested before and wants everything to be as simple as possible. She won't need the $ for at least 10 years, that we can tell, if then.

The two advisors both recommended variable annuities :. I think we all know where we each stand on FA's and variable annuities, so no need to start that up.

My plan - put the partial lump sum into an IRA in Vanguard's total bond index. After a few months (to make sure we have a handle on her finances) put the 40-50K into Vanguard total market and international indexes. Split everything so it's something like 40% bonds, 45% total market, and 15% international. She will work for a few more years, so we can keep putting 5K annually into the IRA, which will help the AA (she will likely save additional money in the taxable accounts as well). If she gets too stock-heavy, I'd look at a tax-exempt bond fund.

I know, I know, no variable annuities. My question is, how does my plan sound? I am 99% confident that I can explain to MIL and BIL why this will be better. But first I want to make sure I'm not forgetting something! (She will also have a separate emergency fund, which we all agree should go into a money market).

 

[haha]

I am not expert in this area, but to me your plan sounds sound, simple and to the point.

Ha

 

[MasterBlaster]

Perhaps you might look at life-cycle type funds that mix equities, bonds, and cash equivalents in an age-appropriate manner.

Take a look at Vanguard Target Retirement 2010, 2020,2030 etc. where the number given is the intended retirement date at which the funds would start producing income.

Or another example would be Fidelity Freedom funds - eg Fidelity Freedom 2020.

 

[WM]

Take a look at Vanguard Target Retirement 2010, 2020,2030 etc. where the number given is the intended retirement date at which the funds would start producing income.

Or another example would be Fidelity Freedom funds - eg Fidelity Freedom 2020.

This was my initial plan, but then I saw the good advice of someone here (forget who, sorry, maybe LOL?) that splitting things up and putting the bonds in the IRA would be even better. That's assuming MIL is ok with the slight complexity of the additional funds.

 

[cute fuzzy bunny]

Dumping your bonds into the IRA makes sense from a tax efficiency perspective, providing you've already determined that you want to hold bonds, wont need the income, and wont be tapping into the IRA to avoid selling depreciated equities in your taxable account during a downturn, invoking some early withdrawal penalties.

Otherwise, it may make sense to put longer term holdings intended for later withdrawal into the IRA and income producing items of lower volatility into the nearer "bucket" for earlier withdrawal.

So its not quite as simple as picking the most tax efficient strategy that might be more suitable to a 30-40 year old with a 20-25 year horizon to retire.

Variable Annuities suck. Suck, suck, suck. We finally got rid of my wifes VA 403b this year, and I am SO looking forward to not having to read the 500 page revised contract paperwork next year, filled with magical legal mumbo jumbo, just to find out how much and how many different fees and charges they're going to use to suck out most of my investments blood.

Even though they whacked us with a little surrender fee, it'll only take 3 years of reduced fund fees to recollect that investing in better funds with vanguard.

 

[LOL!]

From the original thread on the subject, MIL is 62 years old, so putting the bond funds in an IRA would not create any early withdrawal penalties.

 

[Brat]

Variable Annuities are not in her best interest...

Now, make sure that she doesn't go near the 'advisers' who recommended them.

 

[kcowan]

The way I would approach it is to work an example of how a Variable Annuity will produce less after-tax retirement income than your approach. I am sure CFB can serve as a reference here. Then use that to show that the advisors are not considering what is best for her. Finally mention how much you are charging!

Maybe use the last ten years for the proforma rather than trying to forecast returns. YMMV

 

[boutros]

Do you plan on funding the IRA contributions with money from the taxable account or from additional contributions? If you plan on from the taxable account you may want to put some bonds in the taxable so that you won't have to realize gains to make contributions.

 

[WM]

Thanks for the replies.

Dumping your bonds into the IRA makes sense from a tax efficiency perspective, providing you've already determined that you want to hold bonds, wont need the income, and wont be tapping into the IRA to avoid selling depreciated equities in your taxable account during a downturn, invoking some early withdrawal penalties.

Yes, these conditions are all met. I don't know if she'll ever need any of the money in the IRA, as a matter of fact. Between pension income and SS, she will likely not even withdraw much from the taxable accounts, actually.

Do you plan on funding the IRA contributions with money from the taxable account or from additional contributions? If you plan on from the taxable account you may want to put some bonds in the taxable so that you won't have to realize gains to make contributions.

Thanks for thinking of this. She will have enough leftover from her income to fund the IRA, rather than having to transfer.

Variable Annuities are not in her best interest...

Now, make sure that she doesn't go near the 'advisers' who recommended them.

I was laughing last night on the phone with her, listening to her take on the second advisor, who she talked with in person. She was unimpressed with him, since she easily grasps the idea that any investment fees are coming straight out of her pocket, and is not about to be convinced that 2.5% of her money (annual annuity fees) is negligible. She was mystified as to why she should pay that when she can invest with Vanguard and pay one-tenth that much. I'm very proud of her