Annuities in a S/B/C ratio?

[Texas Proud]

It might be just me.... but I tend to put things that have zero (or very little) chance of principal risk in the cash category.... oh, and also is easy to get money out of with no fee, or very little fee.... (lost of interest might be considered a fee)....

So, that would be the CD, and actual cash...

The annuities I would put into bonds since they are more of a long term investment.... you can buy one and do nothing with it the rest of your life... yes, it has some cash component to it, but it looks more like a bond to me...

Gold does not go there... the principal is very much at risk....

Of course stocks are in stocks....

[RetireAge50]

Once you decide how to label it, what then?

[Griffers]

Quote:

Originally Posted by MRG The 50k in gold. Is that bullion price or collectors price? Big difference between the liquidity of the two.

Located the spreadsheet where deceased FIL kept records on the gold. Here's what he had as of September 2014: Gold coins = 35.92 oz; Cost = $51,895; Market = $43,833; Mkt/Oz = $1,214

So it looks like he was using bullion price. More like 40K today. DW and MIL have said that he said that "some of the coins are worth more than their weight." At some point in the future I'm sure we'll have pull them out of the vault and try to determine collectors value.

Quote:

Originally Posted by MRG I'm assume MIL isn't planning a bug out.

While I'd pay to see my MIL sling a backpack and an AR , I think her idea of a bug out would include cruise ship!

[Griffers]

Quote:

Originally Posted by Independent This brings up my first thought on reading the thread (which I didn't post) - "Why do you want to apply one of these three labels to every one of her assets?"

Partly trying to understand things myself, partly trying to help my MIL understand how an investment strategy addresses risk. She vividly remembers her DH talking about how much of their retirement they lost in 2008. When I first started helping her, she wanted no money in stocks (and that's pretty much where they were/are). I'm trying to use s/b ratio language to explain to her that (for example) 80/20 is indeed risky, but 30/70 is much less so and has more potential for beating inflation than 0/100. I'm including the /c category to help her understand the importance of having emergency funds available, but also to explain to her about inflation risk.

If this isn't the best way to think about these issues, let me know. As I said, I'm in the learning phase myself.

Quote:

Originally Posted by RetireAge50 Once you decide how to label it, what then?

The plan was to determine what's appropriate for someone of her age and income needs, and to also compare to others. fwiw, I don't have a set ratio that I'm looking to put her in. I may someday but admit that I don't know enough yet to determine it. I do feel like her current ratio, which is somewhere near 0/60/40, is costing her.

Ya'll are asking me good questions and making me think. Thanks, it is very helpful! For example, I was thinking of the gold as cash because it cold be sold easily. I didn't factor in that it is currently losing value faster than actual cash dollars. In trying to label it I got information here that will help me explain to MIL that she shouldn't think about the gold as "money in the bank" but rather as an investment, like stocks, that is currently losing value.

[haha]

You may not mind, but you are sticking your neck out to be teaching your MIL while you are trying to learn yourself.
While she may not lose as much with a S:B of 30:70, she may still lose enough to make her afraid.

Ha

[Independent]

Quote:

Originally Posted by Griffers Partly trying to understand things myself, partly trying to help my MIL understand how an investment strategy addresses risk. She vividly remembers her DH talking about how much of their retirement they lost in 2008. When I first started helping her, she wanted no money in stocks (and that's pretty much where they were/are). I'm trying to use s/b ratio language to explain to her that (for example) 80/20 is indeed risky, but 30/70 is much less so and has more potential for beating inflation than 0/100. I'm including the /c category to help her understand the importance of having emergency funds available, but also to explain to her about inflation risk.

Thanks.
So I'm back to my earlier post. pb4uski had a good point. "Cash" could mean just the balance in a checking account and currency in the dresser. Or, it could mean those things plus an emergency fund that might be in the checking account, a money market mutual fund, a bank savings account, shorter term CDs, or even an annuity with very little remaining surrender charge.

I'd guess the target allocation to "C" is smaller for someone using the first definition than for someone using the second definition.

You, of course, should use the definition that works for you. It's just a matter of being consistent between the definition you're using, the type of assets you include, and your target allocation.

[Texas Proud]

Quote:

Originally Posted by Independent Thanks. So I'm back to my earlier post. pb4uski had a good point. "Cash" could mean just the balance in a checking account and currency in the dresser. Or, it could mean those things plus an emergency fund that might be in the checking account, a money market mutual fund, a bank savings account, shorter term CDs, or even an annuity with very little remaining surrender charge. I'd guess the target allocation to "C" is smaller for someone using the first definition than for someone using the second definition. You, of course, should use the definition that works for you. It's just a matter of being consistent between the definition you're using, the type of assets you include, and your target allocation.

I agree with this.... in my definition I have very little 'cash' even though I have a years worth of money in a ST bond fund and another year in a HY bond fund.... I really only concentrate on S/B ratio.... and these are included in my B holdings.... even though they are close to cash and I use them like cash....


I am actually more concerned with the makeup of my 'S' allocation.... I go more towards mid cap.... more toward growth, have a little bit of international (should have more)... but when first starting out you probably do not need to get into the weeds on the various options... and your MIL can go the easy way and do the balanced fund.... set it and forget it....

[pb4uski]

FWIW, the definition of cash and cash equivalents in audited financial statements is:

Quote:

.....cash equivalents are short-term, highly liquid investmentsthat are both: a. Readily convertible to known amounts of cash b. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition. Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds.....

[REWahoo]

For added repetition research...

http://www.early-retirement.org/foru...ash-71276.html
http://www.early-retirement.org/foru...nds-70279.html

[Griffers]

Quote:

Originally Posted by haha You may not mind, but you are sticking your neck out to be teaching your MIL while you are trying to learn yourself. While she may not lose as much with a S:B of 30:70, she may still lose enough to make her afraid. Ha

Good point. That is why we are seeking a fee-only, fiduciary, CFP to help her come up with a plan for investing her assets. While I can come up with a plan (I did so in a different thread), I don't have enough confidence in it to say to her and her family "Go with my plan. It's just as good as what you'd pay a CFP for!". At the same time, if the CFP recommends 70/20/10, I want her to be knowledgeable enough to tell them that's too risky.

Your point is well taken though. I shouldn't try to teach what I don't know myself!

[ETFs_Rule]

Quote:

Originally Posted by Griffers That is why we are seeking a fee-only, fiduciary, CFP to help her come up with a plan for investing her assets.

Watch out for dually licensed advisers (fiduciary and non-fiduciary). You hear horror stories about advisers verbally saying "Yes. I am a fiduciary" then they turn around and give commission-based advice. Be sure to get it in writing. The adviser should provide both parts of a "Form ADV" and provide a written disclosure of exactly how he will / may be compensated for his services and list any potential conflicts of interest.

[mpeirce]

Even with $25K in CDs, you might want to consider a ladder.

When her current CD comes up either:

1) Buy three equal value CDs: a 3 year, a 2 year, and a 1 year. Then each year, buy a replacement 3 year CD.

2) With ⅓ buy a 3 year CD. Roll the rest into another 1 year CD. Next year, with ½ buy a 3 year CD. The next year, buy a 3 year CD. Rinse and repeat.

You get a modest, but noticeably better interest rate.

And in an emergency, most CDs have a reasonable interest penalty if you need to get at the money.

[haha]

Quote:

Originally Posted by Griffers Good point. That is why we are seeking a fee-only, fiduciary, CFP to help her come up with a plan for investing her assets. While I can come up with a plan (I did so in a different thread), I don't have enough confidence in it to say to her and her family "Go with my plan. It's just as good as what you'd pay a CFP for!". At the same time, if the CFP recommends 70/20/10, I want her to be knowledgeable enough to tell them that's too risky. Your point is well taken though. I shouldn't try to teach what I don't know myself!

I think I forgot about your plan to do that. Very good plan, IMO.

Ha

[target2019]

Some of this might be restating what others have mentioned. We have experience in a similar situation. How to describe annuities in an allocation, and in your case the gold, is not familiar territory for most. Eventually what we settled on was keeping the annuities as a class of its own. That is what the attached graphic is all about.

Previous to this picture we had been tracking the value of in-laws home for a few years. As might happen in your situation, the home is sold and then you need to decide on how to invest. So, in the graphic you see REIT broken out, as I wanted all to understand that some of the home proceeds was invested in a similar asset class. I think the home was 12-15% of all wealth.

Savings annuities (all in the graphic) are interesting. In my example, the annuities are actually liquid, since way past the penalty period. Watching these instruments gain in value by 3% or more every year has been educational. At one time the interest was 5%+. Soon, though, the contract expires, and it will be decision time.

Your annuity products are different, so all the more reason to break them out separately.

Gold, I'm going to pass on that, except to say I would not sell anything until I had a good idea of what the father paid for the gold coins. If he paid $80,000, and now they can be sold for $50,000, selling all requires more thought.

[mrfeh]

Quote:

Originally Posted by pb4uski +1 on ditching the gold.

+2

[alaska55]

If the annuity was bought in 2008 you might want check them out before selling, you can get the best advise from Vanguard they have low cost income annuities.

[rayvt]

In general, an annuity is not an asset, it's an income stream.

One of the ideas behind a 60/40 (or whatever) asset allocation is rebalancing. When stocks go up, you sell some stocks dearly and move that money into cheap bonds. When stocks go down, you sell some bonds dearly and move that money into cheap stocks.
You can't do this with an annuity. Even if you can cash in the annuity, you can't rebalance.
For this reason, you can't meaningfully consider an annuity an asset -- it's an income stream.

Quote:

Gold, I'm going to pass on that, except to say I would not sell anything until I had a good idea of what the father paid for the gold coins. If he paid $80,000, and now they can be sold for $50,000, selling all requires more thought.

A clear example of the sunk cost fallacy. What he paid for the coins years ago has no bearing on what to do with them today.

--------
To the OP: If you are in the early learning stages -- as I gather is the case, from yor comments & question(s) -- then you probably don't really have the knowledge and background for helping your MIL invest. It's one thing to make beginners errors with your own money; it's more tragic to make beginners errors with someone else's money.

Not to mention that it's a thankless task, as many of us have found out, when we tried to help friends and relatives invest. Especially if there are other more-closely-related familiy memebers who may have an opinion, whether it's an informed opinion or not. And most likely it would be a completely uninformed opinion, otherwise they'd be the ones helping your MIL and not you.

I still remember the time I told my MIL & FIL that if they didn't need the dividends from their mutual funds for income, that they'd be better off to reinvest the dividends. That was 30 years ago, and I still have the scars from where MIL attacked me.

When something goes wrong -- and something ALWAYS goes wrong -- you will be the one who gets the blame.


Best thing for you to do would be to set up an appointment with a fee-only professional Financial Advisor, and attend that meeting with her. Just make sure that the FA knows ahead of time that you are looking only for advice on what Fidelity & Vanguard funds to use, and that you (she) won't be buying anything from him.

[pb4uski]

Quote:

Originally Posted by rayvt In general, an annuity is not an asset, it's an income stream......

In this case, it is a deferred annuity, not an immediate or payout annuity. It is substantively similar to a CD (in that it grows at a stated interest rate) with an annuitization option but no FDIC insurance protection.

These can be converted to an income stream by annuitizing or converted to cash by surrendering.

[target2019]

When the annuity is NOT annuitized, it is sometimes referred to as a savings annuity. There is no income stream, but there could be one in the future. What occurs is the surrender value increases by, in my example, 3%. If you cash out early (the period varies), you pay a penalty. In that respect it is similar to a CD, as pb4uski points out.

As for gold, prescription without diagnosis is malpractice. To give anonymous blanket advice, I feel, is wrong. The OP's F-I-L may have had a purpose for the gold. I do not know, so I just point out what is likely. Over some period of time the investor bought quite a bit of gold. To just dump it without diagnosis is not prudent, I feel.

Sunk cost means different things. If the F-I-L has been accumulating gold coins so that he can bequest to the children, sunk cost fallacy means nothing. However, his intentions have real meaning. So it is a good idea to find out why before taking action. Ready-Aim-Fire. Not Ready-Fire-Aim.

From the other thread I believe there are 3 or 4 other siblings. It is not right to sell an asset without understanding something of the past and creating a complete plan that helps the widow. It sound like the OP is doing all the right things, getting advice, and so on.