My mother is in her early 90s. She is fairly healthy, with some chronic health issues but nothing particularly alarming or severe. She lives in an assisted living facility and her expenses are tax-deductible. She receives social security, an inflation-adjusted pension, rental income from her former home, and a long-term care insurance policy benefit. The shortfall between her income and expenses is expected to be about $70k this year, $75k in 2026, and $120k in 2027 and thereafter (not inflation-adjusted). The increasing shortfalls are due to the LTC insurance benefit maxing out sometime next year.
We have decided to break with her financial advisor, who has her IRAs invested in high-fee funds, so that I can manage her investments at much lower cost. The primary goal is to continue to cover the shortfall between income and expenses for as long as necessary. (For all I know, this could be 10 years or more.) The secondary goal is to leave something for her heirs, preferably while minimizing tax consequences. I would like some feedback on the next steps I’m thinking of (see below).
Her assets are as follows:
Cash, CDs, high-yield savings, and money market accounts: $646k
Traditional IRA: $306k
Roth IRA: $66k
Variable annuity: $455k (basis $65k)
Total: $1.473m
The IRAs are invested mostly in high-fee income funds and some individual bonds. The variable annuity has a choice of funds ranging from money market to stock. The annual annuity fees are 1.4% plus fund fees, which are roughly 1.25% depending on the fund.
The strategy:
1. We want to cash out the annuity as fast as possible while still maintaining my mother in the 12% tax bracket (15% next year if current law doesn’t change). We have already cashed out an annuity this year that will push her a bit into the 22% bracket for 2025, so the next withdrawal will be in 2026. Because of the medical expense deduction, we can withdraw a little more than her expenditure-income shortfall each year ($80k in 2026 and about $130k in 2027) and not go too far into the 22% (25% next year) bracket. State taxes are not a concern; they only kick in when her federal taxable income pushes well into the 22% bracket. The annuity withdrawals will bump her into a high IRMAA bracket, but this really can’t be helped if the annuity is to be drawn down. With that in mind, I am thinking of:
(a) Doing a 1035 exchange of around $100k into a 3-year MYGA this year and another $100k exchange next year. These will mature in 2028 and 2029, and cover most of her expenses for those years while keeping her in a low tax bracket. (Only a 3 year MYGA is available to someone her age; the rate is not great at 4.1%; and the only company offering it is rated B+ - but the alternative is to keep throwing away thousands of dollars in fees.)
(b) Allocating the funds in the variable annuity to the money market fund (60-80%) and a bond fund (20-40%). With the high fees, this will barely keep up with inflation, but the funds are to be used in the next 3 years, so they should be invested conservatively. Because there will be $250k left next year after the 1035 exchanges, withdrawals in 2026 and 2027 would finally liquidate this variable annuity (including the portion of the basis not transferred to the MYGAs).
2. Maintaining an overall asset allocation of 20% stock/80% bonds.
3. Buying individual treasury bonds and/or CDs in the traditional IRA, including about half short term (<1 year) and half 2-3 year. ($306k)
4. Buying a stock index ETF such as VTI in the Roth IRA and taxable for the 20% stock allocation. ($66k in Roth IRA and $234k in taxable)
5. Buying individual treasury bonds in the remainder of taxable ($412k). Taxable income will be roughly $16k/year at current rates; it will help that this is not taxable at the state level.
Questions:
1. Are the MYGA 1035 exchanges this year and next year a good idea? Or are they not worth the hassle or the risk of a B+ rated insurance company?
2. What is an appropriate asset allocation given the goals outlined above? Does 20/80 make sense? I want to make sure my mother can easily cover her expenses for the next 10 years if necessary, without having to sell the rental house (which would involve a large capital gain). As long as her investments keep up with inflation, this is very doable. But I don’t want to be too conservative because over a longer time horizon (if she lives that long, and for her heirs), it makes sense to take a little risk.
3. Is there anything else we should consider?
We have decided to break with her financial advisor, who has her IRAs invested in high-fee funds, so that I can manage her investments at much lower cost. The primary goal is to continue to cover the shortfall between income and expenses for as long as necessary. (For all I know, this could be 10 years or more.) The secondary goal is to leave something for her heirs, preferably while minimizing tax consequences. I would like some feedback on the next steps I’m thinking of (see below).
Her assets are as follows:
Cash, CDs, high-yield savings, and money market accounts: $646k
Traditional IRA: $306k
Roth IRA: $66k
Variable annuity: $455k (basis $65k)
Total: $1.473m
The IRAs are invested mostly in high-fee income funds and some individual bonds. The variable annuity has a choice of funds ranging from money market to stock. The annual annuity fees are 1.4% plus fund fees, which are roughly 1.25% depending on the fund.
The strategy:
1. We want to cash out the annuity as fast as possible while still maintaining my mother in the 12% tax bracket (15% next year if current law doesn’t change). We have already cashed out an annuity this year that will push her a bit into the 22% bracket for 2025, so the next withdrawal will be in 2026. Because of the medical expense deduction, we can withdraw a little more than her expenditure-income shortfall each year ($80k in 2026 and about $130k in 2027) and not go too far into the 22% (25% next year) bracket. State taxes are not a concern; they only kick in when her federal taxable income pushes well into the 22% bracket. The annuity withdrawals will bump her into a high IRMAA bracket, but this really can’t be helped if the annuity is to be drawn down. With that in mind, I am thinking of:
(a) Doing a 1035 exchange of around $100k into a 3-year MYGA this year and another $100k exchange next year. These will mature in 2028 and 2029, and cover most of her expenses for those years while keeping her in a low tax bracket. (Only a 3 year MYGA is available to someone her age; the rate is not great at 4.1%; and the only company offering it is rated B+ - but the alternative is to keep throwing away thousands of dollars in fees.)
(b) Allocating the funds in the variable annuity to the money market fund (60-80%) and a bond fund (20-40%). With the high fees, this will barely keep up with inflation, but the funds are to be used in the next 3 years, so they should be invested conservatively. Because there will be $250k left next year after the 1035 exchanges, withdrawals in 2026 and 2027 would finally liquidate this variable annuity (including the portion of the basis not transferred to the MYGAs).
2. Maintaining an overall asset allocation of 20% stock/80% bonds.
3. Buying individual treasury bonds and/or CDs in the traditional IRA, including about half short term (<1 year) and half 2-3 year. ($306k)
4. Buying a stock index ETF such as VTI in the Roth IRA and taxable for the 20% stock allocation. ($66k in Roth IRA and $234k in taxable)
5. Buying individual treasury bonds in the remainder of taxable ($412k). Taxable income will be roughly $16k/year at current rates; it will help that this is not taxable at the state level.
Questions:
1. Are the MYGA 1035 exchanges this year and next year a good idea? Or are they not worth the hassle or the risk of a B+ rated insurance company?
2. What is an appropriate asset allocation given the goals outlined above? Does 20/80 make sense? I want to make sure my mother can easily cover her expenses for the next 10 years if necessary, without having to sell the rental house (which would involve a large capital gain). As long as her investments keep up with inflation, this is very doable. But I don’t want to be too conservative because over a longer time horizon (if she lives that long, and for her heirs), it makes sense to take a little risk.
3. Is there anything else we should consider?
Statistics: Posted by snic — Thu Jan 30, 2025 9:57 pm — Replies 0 — Views 32