As idyllic as this sounds, the pair isn't completely worry-free. They've recently been repositioning some of their assets, having lost a sizable amount in a brokerage account, and they haven't yet invested a $250,000 inheritance that Alan received when his father passed away. Given the market downturn and its recently sharp snapback, they're unsure what their next steps should be. The bulk of their investment assets are sitting in cash, and Ginnie and Alan would like guidance on an appropriate asset mix for people in their situation. They'd also like advice on when to begin taking Social Security.
More important, they'd like to make sure they leave a legacy for their two daughters. While both are single and living and working on their own, their oldest daughter has special needs. She receives Social Security to supplement the income she earns, but a key priority for Ginnie and Alan is making sure that their daughter's financial future is as secure as it can possibly be. They've set up a special-needs trust for their daughter and would like advice on investing the assets in the trust.
| Ginnie and Alan's Portfolio--Before|
| ||Star Rating||Category||Holding|
|Fidelity Export & Multinational ||Large Growth||13,000|
|Fidelity Capital Appreciation ||Large Growth||6,000|
|Fidelity International Discovery ||Foreign Large Blend||18,700|
|Fidelity Ginnie Mae ||Intermediate Gov||22,400|
|Fidelity Mortgage Securities ||Intermed-Term Bond||28,000|
|Fidelity Short-Term Bond ||Short-Term Bond||11,800|
|Transamerica Premier Equity ||Large Growth||10,500|
|Gabelli Equity Income ||Large Value||4,800|
Ginnie and Alan's assets are in a few different silos. They both have IRAs, consisting mainly of cash currently and totaling roughly $200,000. Additionally, Ginnie has a small amount in a 403(b), also in cash.
The rest of the Davidsons' assets are in their taxable accounts. They hold a smattering of stock and bond funds, including some solid funds from Fidelity. In aggregate, their equity holdings skew toward the growth column of the Morningstar Style Box, while their bond funds are generally high-quality offerings. The bulk of their taxable portfolio consists of the inheritance, which is idling in a money market fund. Their daughter's special-needs trust is also in cash.
| Ginnie and Alan's Portfolio--After|
| ||Star Rating||Category||Holding|
|Vanguard Selected Value ||Mid Value||50,000|
|Vanguard Interm-Term Invest-Grade ||Intermed-Term Bond||50,000|
|Vanguard Total Bond Market Index ||Intermed-Term Bond||25,000|
|Vanguard International Explorer ||Foreign Small/Mid Gr||25,000|
|Vanguard Inflation-Protected Sec ||Inflation-Protected Bd||25,000|
|Vanguard Tax-Managed Cap App ||Large Blend||150,000|
|Vanguard Tax-Managed Intl ||Foreign Large Blend||50,000|
|Vanguard Total Stock Market Index ||Large Blend||75,000|
|Vanguard High-Yield Corporate ||High-Yield Bond||22,500|
|Vanguard Wellington ||Moderate Allocation||75,000|
The couple's pensions currently cover their living expenses. For that reason, I would recommend they defer receipt of Social Security for as long as possible, presuming that living on the pension income alone doesn't seriously cramp their ability to pursue the activities they'd like early in their retirement years. True, they could take Social Security sooner and invest the proceeds, but Social Security benefits increase at a guaranteed rate of return. Just as important, deferring Social Security will ensure that they'll receive full pension payments for the next several years. (Their pension income will be reduced by 10% once they begin taking Social Security.)
Given that generating current income and preserving capital are lesser concerns than growing their assets for their daughters, the Davidsons can hold more equities in their investment portfolio than would be typical for other retirees of the same age. Still, I would recommend holding some bonds for ballast as well as some cash in the portfolio to cover emergencies, and also keeping the bulk of their equity assets in more-conservatively positioned stock funds. Fidelity, where the Davidsons currently have most of their equity assets, fields some of the lowest-cost index funds in the business, but I would favor Vanguard for their assets because I prefer the latter's taxable-bond funds.
I would also urge this couple to check with an accountant about converting their traditional IRA assets to a Roth IRA. Because they may not tap their IRA assets during retirement, converting them to a Roth means they wouldn't have to take mandatory distributions at age 70 1/2, unlike with a traditional IRA. In turn, they would be able to stretch out the tax benefits of the IRA and leave some or all of those assets to their daughters. The bear market of the past 18 months has dramatically reduced investment gains in IRA portfolios, thereby making an IRA conversion quite beneficial for many individuals right now. (When you convert, you pay ordinary income taxes on any deductible contributions and investment earnings.)
Additionally, I think long-term care insurance could be a good idea for this couple. Some financial planners argue that long-term care insurance is usually "sold, not bought," and there's certainly an element of truth to that. Yet given that leaving an inheritance for their daughters is a key priority for the Davidsons, I would recommend it here. Although Alan has a health condition that could affect the pricing of this insurance, the fact that the pair is still quite young will work in their favor. In addition to improving the likelihood that the couple will be able to leave assets to their daughters, having this insurance could also provide this couple valuable peace of mind.
Finally, setting up a special-needs trust is a great step toward leaving a legacy for their daughter with special needs; Alan and Ginnie could also make the trust a beneficiary of their IRAs, if they so choose. Were they to leave assets outright to her, it could jeopardize her eligibility for government benefits such as Social Security. The assets in the special-needs trust are there to pay for extras such as hobbies, trips, and even caregiving--not for the basic living expenses that are covered by government programs.See More Articles by Christine Benz
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