Retirement Strategy Needed - Interest on Principal Strategies

[fsutaylor31]

Earning Interest - Not Spending Principal

My father is going to be retiring in the near future with about 1 million dollars from company profit sharing. He mentioned rolling it into an investment firm for investing. He wants to try and obtain a guaranteed interest rate to have an income stream through retirement. I dont like the idea of going into an investment firm without some ideas already planned out.

I know he would like to get 5% a year on his money without touching the principal.

1. What kind of strategies should be employed here?
2. Is there any kind of vehicle that provides a guaranteed 5% a year on your money without touching the principal?
3. There is not much room for a lot of risk here, this is his only nest-egg. He needs an income stream off of it without losing principal.

Any suggestions would be greatly appreciated!

[brewer12345]

I can see where this is going, but I'll try anyway.

Principal vs. income is not important. What really matters is total return being less than you need to spend. There are plenty of vehicles that would throw off a fixed 5% or close to it. The problem is that inflation eats you alive over time, ravaging both your income and your principal. I'd suggest you start by reading the safe withdrawal rate study at www.retireearlyhomepage.com

[uncledrz]

Sure, I'll throw some ideas out (I've got some time this afternoon).

One the actual investment side, consider two main concerns. First, you need a secure income off the principal, so take a look at income producing assets, say bonds. Second, your dad's probably going to live for a while, so think inflation, shinking purchasing power, purchaseing power protection, say stocks.

That gets you to a basic stock/bond mix. Take a look at something like the Wellsley fund at Vanguard and you'll get an idea of income stream off of a stock/bond mix.

The other side, since I'll assume neither you nor your dad are very experienced investors, is the investment firm and person you'll be dealing with, and investment advisor/stockbroker/etc. Some firms are great, others great at going through your money. Places to do some checking are the NASD site, the SEC site and the state regulatory agency. Play around with these sites for the investor information/education and for the specific history on both the firm and the licensed rep.

Take you time before giving anyone the funds, or control of the funds. Make the give you specifics in writing.

Uncledrz

[MooreBonds]

Originally Posted by fsutaylor31

Earning Interest - Not Spending Principal

He wants to try and obtain a guaranteed interest rate to have an income stream through retirement. I dont like the idea of going into an investment firm without some ideas already planned out.

I know he would like to get 5% a year on his money without touching the principal.

1. What kind of strategies should be employed here?
2. Is there any kind of vehicle that provides a guaranteed 5% a year on your money without touching the principal?
3. There is not much room for a lot of risk here, this is his only nest-egg. He needs an income stream off of it without losing principal.

Any suggestions would be greatly appreciated!

Welcome fsutaylor31.


Regardless of what your father hears from the 'pro', it will likely be no better than what you can gleam from this board for free. My suggestions:

1. 30-year Treasury Bond currently yields 4.71% - almost the 5% your father is looking for. So, if your father wanted just 5% interest-only, there's almost enough right then and there. However, as other posters have pointed out, your father's purchasing power will erode over time from inflation, so his $50,000 won't seem so large in just 20 years.

2. There are several Exchange Traded Funds (ETFs) in Real Estate Investment Trusts (REITs) out there that offer juicy yields. The catch is that they use leverage to pump up their yield, which makes them vulnerable to short-term interest rate increases, since they borrow short-term money and use it to buy shares of REITs. Three ETF REITs that I own and like are:

JRS 8.78%
SRO 7.90%
IGR 8.67%

The above yield between
I don't yet own but may pick up some shares of IIA (another ETF REIT).

As Brewer has mentioned in other posts, I used to own (rode it from 20 to 22.50) and am planning on buying back into STON - it's a limited partnership cemetary operator that offers a juicy dividend yield of around 8%-9%, and may be increasing it as it digests recent acquisitions. The caveat with STON is that as a limited partnership, it requires several extra tax forms to fill out....since I just owned it this year, I haven't seen what they send out to shareholders, but other limited partnerships I've owned in the past sometimes (depending on how good they are) actually send you a very detailed, step-by-step instruction booklet with all of the forms required.

There are also several financial stocks that offer tax-advantaged dividend yields (only taxed at 15% max, versus regular income tax rates for bond interest)....my current financial holdings include:

C
BAC
WM
NYB
FCF

The above yield between 3.7% and 5%.

I also own another Brewer recommendation (remind me to buy you dinner the next time I see you Brewer ): EGLE It's a dry goods shipper operating in the Pacific Ocean. They just came public recently, and only paid one dividend so far, but they have indicated that they intend on yielding something like 13%, based on operating cash flows, etc. They also have a goal of being the lowest cost shipper, and to maximize distributions to shareholders.

Also, I intend on starting some deposits in the much-loved Wellington and Wellesley funds at Vanguard. They have historically offered yields of around 3% to 4%, in addition to growing the fund price at an additional 6% or so (one of them has averaged 10% since 1929..the other about 10% since 1971)..but, of course, past performance is no guarantee of future results.

As with everything, diversification is the key. That way, you can successfully handle an individual stock or two getting wiped out by some scandal/disaster and not be hit too hard.

I wouldn't suggest he invest all of his money in my recommendations above, but I'd suggest a good smattering of it, depending on his overall risk profile and his ultimate goals (leaving something for his estate, just having money for him, etc).

There are a few other options like investing in a charitable annuity (where you give money to a charity and they pay you a lifetime annuity) that could be beneficial due to some tax deductions you get, since part of your investment is considered a 'charitable contribution', but we'd need more particulars to know what other courses of action to suggest.

[MooreBonds]

One other suggestion:

FISN.com

They're a CD broker. They offer a variety of FDIC-insured CDs from a vareity of banks. Everything from standard CDs to callable CDs to inflation-linked CDs....Plus, the rates they offer are fairly competitive.

[brewer12345]

Just a thought on NYB: they can afford to pay the dividend, but not by a lot. If they decide that they need to boost their capital levels in order to fix the balance sheet (needed, IMO), they might choose to chop the div.

Two other quickies: I think MMA and CHC are attractive, especially if you aren't subject to AMT. Nice, fat 7+% yield that is tax free.