Need a plan

[philo]

My Mother has 600K and is 80 years old. She wants to leave the 600k to her children and needs it to supply $2,500/ + inflation per month to live.

What is a safe approach for her?

Thanks for your thoughts

[Niko]

A safe withdrawal rate of 4% would give her $2000/month. If she were 20-30 years younger, it would be very risky for her to withdraw more than that much. Considering her age, she is probably safe taking out $2500/month, which is a 5% withdrawal rate.

You might look into a low cost index fund approach of bonds and stocks. The exact mix should be up to your mom taking into consideration her risk tolerances, but I would think anywhere between 40/60 - 60/40 would be appropriate.

Monitor her spending carefully, and if her principal is going down too fast, you may need to change things. Also, if you think she will live well above 100, the above approach might be a tad risky.

One last thought -- does she receive SS or a pension? If so, some of her needs can be taken care of that way rather than through her savings.

If you withdraw $2500/ month from her savings, she will likely not have $600K to pass on to heirs.

[Niko]

One more thing. That last post was very "off the cuff" and very general i nature. If you want more specific, and better, advice, you should post more details about her situation. Married? Pension? Medical care costs/projections? etc.

[philo]

What exactly would you recommend her money be in ?
Yes she gets S.S. but needs $2,500/ month on top of that.

[Niko]

That is for her and family to decide. BUT if it were me I would look at some combination of Vanguard's Total Stock Market Index (VTSMX) and Vanguard's Short Term Bond Index (VBISX). Alternatively, she might just stick with one of VG's target retirement funds.

Other companies provide similar (but usually more expensive) options, like Fidelity, T.Rowe Price, etc.

Again, your mom needs to make the call. She can certainly get more sophisticated allocations, but if it were me and I wanted to K.I.S.S., the above would work for me.

[clifp]

My mom's situation is very similar to your mom. She is 82 and needs $2,500 month to supplement her SS and my dad's small pension. I've taken over her finances and her liquid assets are ~$900K the bulk at Vanguard, with a decent size chunk at Schwab. (She had a number of individual stocks cause of AT&T spin offs etc.)

Her AA is 50%/50% which is probably too aggressive, but I figured worse case was 5 years at nursing home at $100K/year, so anything over $500-$600K is my and sisters inheritance. Her bonds are primarily Vanguard GNMA which pretty consistently has paid 5-5.5% over long periods of time. A couple of years of expenses in Money Markets and short term bond funds (which sadly have been hammered)and a few CD's (but with CD at 3.75% I've be reluctant to roll them over). Equities: Vanguard S&P 500 and extended market, smattering of Vanguard international funds and the remainder in individual dividend stocks..

[philo]

Does anyone have an opinion on the Janus "smart funds" vs. Vangard "retirement funds"?

Thanks for the input!

[haha]

Quote:

Originally Posted by philo What exactly would you recommend her money be in ? Yes she gets S.S. but needs $2,500/ month on top of that.

If you can give up part of the inheritance, this situation is made to order for one or more single premium immediate annuities, inflation adjusted.

Not for all the money, but for some of it.

Also, since there are couples on this board who say that they live on <= $25,000, it seems that your Mom's $30,000 +SS might have some fat in it?

Though I would not want to be around when that idea was presented to her.

Ha

[MooreBonds]

Quote:

Originally Posted by clifp My mom's situation is very similar to your mom. She is 82 and needs $2,500 month to supplement her SS and my dad's small pension. I've taken over her finances and her liquid assets are ~$900K the bulk at Vanguard, with a decent size chunk at Schwab. (She had a number of individual stocks cause of AT&T spin offs etc.) Her AA is 50%/50% which is probably too aggressive, but I figured worse case was 5 years at nursing home at $100K/year, so anything over $500-$600K is my and sisters inheritance. Her bonds are primarily Vanguard GNMA which pretty consistently has paid 5-5.5% over long periods of time. A couple of years of expenses in Money Markets and short term bond funds (which sadly have been hammered)and a few CD's (but with CD at 3.75% I've be reluctant to roll them over). Equities: Vanguard S&P 500 and extended market, smattering of Vanguard international funds and the remainder in individual dividend stocks..

Clifp, make sure you look into their CD desk. Vanguard was recently offering a 6 1/4% 20 year (callable after 6 months) CD, which I placed a small position in for a relative. And, it has a "death put" feature where the principal can be redeemed without penalty upon her death. The (relatively) higher yielding callable CDs are something to consider for any age's bond allocation (especially for older folks, considering the death put feature and relatively higher interest rate). The CD deals don't always last long, and it's best to check EARLY in the morning to see that day's offerings.

[DblDoc]

Quote:

Originally Posted by philo Does anyone have an opinion on the Janus "smart funds" vs. Vangard "retirement funds"? Thanks for the input!

1) The Janus funds are more expensive and actively managed so may have worse tax implications.

2) The Janus funds appear "static" they target a certain level of stocks to bonds. The Vanguard Target Funds change over time increasing bonds:stocks to reduce volatility as you approach your target retirement date.

DD

[jIMOh]

Quote:

Originally Posted by philo My Mother has 600K and is 80 years old. She wants to leave the 600k to her children and needs it to supply $2,500/ + inflation per month to live. What is a safe approach for her? Thanks for your thoughts

You need to withdraw 5%. Conventional wisdom suggests 4% is the target. What is working in your favor are 3 things

1) mother is older- she may need to only sustain withdraws for 20 more years
2) the goal of 600k as a gift at death is one where if not met, it has little consequence (at the time) to your mother.
3) 5% is achievable with some fixed income products.

You did not mention tax brackets. If mother files taxes as single, the 30k income puts her in 15% tax bracket. SS might shoot her into 25% tax bracket ($32550 is cap).

You did not mention if the 600k is in a taxable account now, or in an IRA type holding.

Here is what I would do-

Look for CDs paying 5%+ in interest. See if interest is paid every year or at maturity.
Look for any bond funds yielding 5%
Look for any moderate investment which appreciates around 3-5% per year (balanced fund or moderate allocation fund).
Look for ways to piece a 3-5 income bucket portfolio together to minimize risk.

Then come up with an asset allocation which maintains the 600k amount, and profides the 30k annual growth/income needed.

Examples
bucket 1. 100k in a CD yielding 4% -provides $4000, taxed at 15%
bucket 2. 100k in a bond fund yielding 3.5% (maybe split between a short term bond fund and an inflation bond fund). provides $3500 taxed at 15%
bucket 3. 100k in a equity income fund yielding 2%. provides $2000 taxed at 5% dividend rate and could appreciate in value.
bucket 4 100k in a moderate allocation fund (one which invests in natural resources, gold, silver type). Appreciates 5% per year, provides $5000, taxed at 5% as a LTCG.
bucket 5 100k in a S&P 500 or similar mutual fund. provides 1.5% in dividends- $1500, plus appreciation.
bucket 6 100k in another investment. Money market, REIT, municipal bond or other. Yield anywhere from 1% to 5%, provides 1-5k of income.

Then add it up

$4000 taxes owed $600
$3500 taxes owed $525
$2000 taxes owed $100
$5000 taxes owed $250
$1500 taxes owed $75
$1000 taxes owed $150

This is $17,000 of the needed $30,000. If the budget includes taxes (in the 30k, I think some tax planning might actually reduce the need to around 25k or 27k)
I would suggest selling bucket 3-4-5, or use cash in bucket 6 to meet the need of the other $13000. Buckets 2 and 3 will be 200k sitting there forever, doing their thing. Bucket 6 could do same thing if desired. Buckets 3-4-5 have the chance to grow much larger than the $13000 needed each year (granted in case of bucket 4 it is anticipated the fund already appreciates 5%).

$19000 is 6.3% of $300k. Meaning if overall gain of buckets 3-4-5 is 6.3% annually or greater, the portfolio grows in value.

If you can find better yields for buckets 1 and 2, the likelihood of this working is much higher, IMO. Like the 6% CD another poster mentioned, or maybe an equity income fund which yields 5% instead of 2% for bucket 3.

This portfolio is either 40-60 or 50-50 depending on allocation of bucket 6.

[philo]

That that is a lot of information.

I'm leaning towards Janus Smart Fund- Conservative.

Check it out. How does it look?

[jIMOh]

Quote:

Originally Posted by philo That that is a lot of information. I'm leaning towards Janus Smart Fund- Conservative. Check it out. How does it look?

What is ticker symbol? If you are looking for a simple solution, also look at RPSIX- T Rowe Price Spectrum Income.

It is very similar to the approach I listed (buckets 1-2-3). It is a fund of funds which holds 20% dividend paying stocks and 80% bonds/money markets. It's current yield is 4.75% and it's 5 year average annual return is 7.5%.

If you go with a simple approach, you might be missing some opportunities. Taxes might be factoring in more than you realize, as income for your mother might jump from 15% to 25% taxes, costing you 10% more than needed.

[clifp]

Quote:

Originally Posted by MooreBonds Clifp, make sure you look into their CD desk. Vanguard was recently offering a 6 1/4% 20 year (callable after 6 months) CD, which I placed a small position in for a relative. And, it has a "death put" feature where the principal can be redeemed without penalty upon her death. The (relatively) higher yielding callable CDs are something to consider for any age's bond allocation (especially for older folks, considering the death put feature and relatively higher interest rate). The CD deals don't always last long, and it's best to check EARLY in the morning to see that day's offerings.

Thanks MooreBonds that is a terrific recommendation. Philo worth considering for your Mom. At my age a callable 20 or 30 year CD isn't very appealing, but for somebody in their 80s it is a much better deal.

[jIMOh]

What does it mean if a CD is callable?

[OAG]

It means the issuer can force you to redeem the CD at the call points, if you do not respond, you generally will not lose principal, but the money will no longer earn interest. I said generally you will not lose interest because I would not put it past some institutions charging some kind of fee if you fail to redeem after being notified of the call. Personally, I would stay away from these types of CD's because calls, when made, may not be at a time that they are of benefit you (earnings wise).

[clifp]

Wood generally I'd agree with you about callable CDs. But when the spread between a year CD and long term callable CD is 250+ basis points. I think the callable ones are worth looking at. You'll get a minumum of 6 months of interest at 6.25% and if it is called it probably mean interest rates are going lower. If they don't get called and interest rates sky rocket you can generally cash them with a interest penalty of several months.

[OAG]

clifp: Depends, I guess, if I can get 5% for 84 months (PENFED's Current Rate))but the 6.25% rate for 6 months but then the call is exercised, due to falling rates, and now 4% is the best one can get (could be that low in the near future considering the rate cuts by the FED) I am sure the 5% for 84 months (uncallable) would be better for OP. Besides at some institutions (PENFED does) allow taking of the interest monthly. $600K with taking of interest at $2.5K (5%) per month for 84 months supplemented by SS is not too bad IMO. It would be, more or less, automatic, and preserves the principal. I know 84 months is a long time but if CD's are laddered properly you would have about 14% being maturing each year.

[MooreBonds]

Quote:

Originally Posted by R Wood It means the issuer can force you to redeem the CD at the call points, if you do not respond, you generally will not lose principal, but the money will no longer earn interest. I said generally you will not lose interest because I would not put it past some institutions charging some kind of fee if you fail to redeem after being notified of the call. Personally, I would stay away from these types of CD's because calls, when made, may not be at a time that they are of benefit you (earnings wise).

Um, I don't know what kind of experience you've had with calls...but if a CD is called by the bank, there is not an obligation on your part to do something in order to redeem it - the bank automatically redeems your CD and sends you the money (or in the case of a brokerage account, the cash is deposited into your account). There aren't any fees or opportunities for the bank to somehow take advantage or screw an unsuspecting CD holder.

Yes, the CDs may be called when it's not at the best time (declining/lower rates) - but that's why they're paying (sometimes substantially) higher-than-market rates for an equivalent product. As I always say when it comes to investing - when you have two options that both look attractive from a risk-reward scenario, why not simply cut it into two (or whatever your divisor is) and diversify some into all of the options?

[OAG]

Quote:

Originally Posted by MooreBonds Um, I don't know what kind of experience you've had with calls...but if a CD is called by the bank, there is not an obligation on your part to do something in order to redeem it - the bank automatically redeems your CD and sends you the money (or in the case of a brokerage account, the cash is deposited into your account). There aren't any fees or opportunities for the bank to somehow take advantage or screw an unsuspecting CD holder. Yes, the CDs may be called when it's not at the best time (declining/lower rates) - but that's why they're paying (sometimes substantially) higher-than-market rates for an equivalent product. As I always say when it comes to investing - when you have two options that both look attractive from a risk-reward scenario, why not simply cut it into two (or whatever your divisor is) and diversify some into all of the options?

Can you tell I do not trust banks? I do have some experience with calls but the experience is kind of dated. I did have a bond called several years ago and I did not get the mailed notification from the issuer. The bond was redeemed and placed into a non-interest "holding account". Fortunately, I did catch it in a short period of time and there was no big loss, just a few days of interest and of course the mail time to get the check and then redeposit the check. That experience soured me on Calls. I generally use Credit Unions now as the ones I have used compound daily, pay a higher rate of interest (5% this morning at PENFED), provide access to the interest on a monthly basis, and do not charge a fee for every little thing they can get away with.