Vanguard Lifetime Income Program - Single Premium

[Craig]

A friend has a relative who can be a bit of a spendthrift, and is not good at managing money. He wants her to be secure, and have a lifetime stream of income, inflation adjusted, so that she will always have a base amount of money to live on. [He may pay off her mortgage as well, but that carries its own risks ... she could mortgage the home again.]

More specifics about her: age 50, two boys (15 and 23), she has zero net worth, working at a $28K annual salary job, high school education only. Toughing life out as best she can. Very honest, very hard working, very caring and decent lady, but no financial prospects, and little likelihood of getting that college education in her current situation.

While lifetime annuities may not make sense for the sophisticated investors on this board, what about a situation like this, where you want it to be on autopilot? An irrevocable trust might make sense as well, but more complicated, and then you have to worry about the future actions of a trustee.

If this doesn't make sense, what would you recommend? [Teaching her to manage money is not an option.] If this does make some sense to you, which company / program for the annuity?

Thanks.

[Independent]

Originally Posted by Craig

A friend has a relative who can be a bit of a spendthrift, and is not good at managing money. He wants her to be secure, and have a lifetime stream of income, inflation adjusted, so that she will always have a base amount of money to live on. [He may pay off her mortgage as well, but that carries its own risks ... she could mortgage the home again.]

While lifetime annuities may not make sense for the sophisticated investors on this board, what about a situation like this, where you want it to be on autopilot? An irrevocable trust might make sense as well, but more complicated, and then you have to worry about the future actions of a trustee.

If this doesn't make sense, what would you recommend? [Teaching her to manage money is not an option.] If this does make some sense to you, which company / program for the annuity?

Thanks.

You didn't mention age, health, or children.

[Craig]

Please see above ... edited to add more specifics about her.

[chinaco]

You did not mention many specifics about the person's financial situation.

I am not opposed to an annuity... but I would not lock up every cent in it.

If the person does not have good investment knowledge, a good all-in-one fund may be the ticket.

Of course, if the hope is that the annuity will cap the person's spending... I would be concerned if that will actually work. People can borrow easily.

[Craig]

Regarding her spending / borrowing, yes, there is some concern there, and your point is well taken. Can't control everything.

[cashflo2u2]

If she has a zero net worth I take the friend is going to purchase the annuity for her. At 50 that is going to be one expensive annuity. I'm like VG but they use AIG and for that amount I think I would go with a highest rated insurer, which I guess would be somebody like NYL or
NW. I don't think NYL has a single life that does not have a refund feature so you would be paying for that and her heirs would get the present value of the remaining policy if she left the building early.

[Independent]

I did a quote on the Vanguard straight-life inflation adjusted annuity for $1,000 per month for a female born in April 1958. The single premium was $278,000. That's a significant sum.

Your friend can probably do better managing it himself. So the annuity is a way to simplify his life - feel that he made his one generous gift and then get on with his own life.

Looks like she doesn't need an estate, so that's consistent with an annuity. There is a small risk that she dies suddenly and the 15 year-old is left out. The friend could put a certain period on the annuity to be sure there's money for him. That might also make the friend feel better since he won't lose the whole $278k if she dies.

I know nothing about the gift tax situation. $12,000 is real close to the limit, $278,000 is way over. But I don't know which counts when it's from an annuity.

He might be able to keep ownership and direct the checks to her, then leave her the annuity in his will. That might also prevent her from borrowing against the future checks.

You didn't mention health. If there's any questions (like diabetes) than you've got to remember that most annuities are priced to cover very healthy people. I see Vanguard has a question about age rating. Presumably you can get a higher payout if you can prove you're in poor health. But I have no idea how that works.

[JPatrick]

Thinking about the youngest boy. there might be a place here for a term life policy, at least for a few years.

[Craig]

Any other suggestions on highly rated insurers to issue the annuity? Thanks.

[ats5g]

Originally Posted by Craig

Any other suggestions on highly rated insurers to issue the annuity? Thanks.

There's the ELM income annuity, backed by Principal Life Insurance Co., and Income Solutions. The second was noted by Zvi Bodie in a recent article. Might have to contact them, but I think they give you access to a number of different life insurers.

- Alec

[FinanceDude]

Originally Posted by Craig

A friend has a relative who can be a bit of a spendthrift, and is not good at managing money. He wants her to be secure, and have a lifetime stream of income, inflation adjusted, so that she will always have a base amount of money to live on. [He may pay off her mortgage as well, but that carries its own risks ... she could mortgage the home again.]

More specifics about her: age 50, two boys (15 and 23), she has zero net worth, working at a $28K annual salary job, high school education only. Toughing life out as best she can. Very honest, very hard working, very caring and decent lady, but no financial prospects, and little likelihood of getting that college education in her current situation.

While lifetime annuities may not make sense for the sophisticated investors on this board, what about a situation like this, where you want it to be on autopilot? An irrevocable trust might make sense as well, but more complicated, and then you have to worry about the future actions of a trustee.

If this doesn't make sense, what would you recommend? [Teaching her to manage money is not an option.] If this does make some sense to you, which company / program for the annuity?

Thanks.

If your friend really wants to help, he will encourage her to have enough life insurance to get the 15 year old through in case she dies. Is he really going to give her a few hundred thousand dollars? That's pretty nice............

[mark500]

Your friend can probably do better managing it himself.

But he said that the friend is a bit of a spendthrift.
I would look at a third party trust if the amount you are going to give is over $75,000. You gift the money to an irrevocable trust (lifetime giftax exclusion is 1 million dollars). Your friend and her children are the beneficiaries. You could be the trustee or have an independent trustee, or both. The funds are protected from your friends creditors. A lawyer will be needed to set it up, but if you want to do it right and for the long term, that is the way to go.

Since she is 50, who knows what the insurance rating of an insurance company will be in 20 years.

[Craig]

Thank you, Mark500 ... you see the dilemma. We need something as autopilot as possible, that she would have a more difficult time hocking, or getting into a position where someone takes advantage of her.

We considered the irrevocable trust, and it is in the running. Question is, will that trustee (would need to be a third party, like a bank, attorney, etc.) be any better over that very long term than an insurance company selected today. Still pondering that one.

For example, if an attorney, what happens if he / she dies, the duties get passed on to "who knows who", or the Firm breaks apart and you're back in an even more precarious position of "who knows who".

We recognize a similar challenge occurs with the insurance company.

Perhaps an irrevocable trust, requiring XX% invested in S&P500 index fund, and XX% invested in ?? bonds, with a very large bank as trustee? Something very hard to screw up. Though ... 20 years from now, will there be an S&P500?

[ziggy29]

I would think that instead of spending hundreds of thousands on an annuity, this friend might be better off managing that money himself and giving her $1,000 a month ($12,000 a year) in tax-free gifts. He could also put something in his will to provide for an annuity if he saw fit.

[2B]

If we are talking about several hundred thousand dollars plus, you've tripped my "talk to a financial advisor" button but only for what are reasonable options for long term cash for her. Try to drag some more info out of Finance Dude.

I wouldn't recommend an annuity. A COLA'd annuity is usually not geared towards fully keeping pace with inflation especially if inflation takes off. That's when you'd really need the inflation adjustment. A non-COLA'd annuity would lose purchasing power significantly over her lifetime.

What's more important than her is getting the two boys set up to live on their own. Ideally, one or both would later have enough financial sense to manage their mother's custodial account or trust.

She does have a COLA'd annuity and it's called social security. Earning $28K/year means she gets a pretty good return on her money compared to the higher contributors. She may do even better if she qualifies for her former spouse's SS (I assume there was one with the two boys but I realize I may be wrong in that assumption). She may find that without having to support her children she'll be able to live pretty well on just the social security.

This situation is similar to what would be needed for a "special needs" child but the duration of money needed is probably less.

[mark500]

The successor trustee of a third party irrevocable trust can be an issue.
One could use a corporate trustee (bank, trust company) along with a "trust protector". A trustee is legally bound to act in accordance with the terms of the trust. The protector could be a person (not a beneficiary) whose sole power is to change trustees.

The terms of the trust could almost certainly be written to alleviate concerns about a bad successor trustee or attempts by the beneficiary to invade the principal and drain the funds.
The trust could also address where the funds go if your friend dies.
I suspect you would have to talk to an experienced lawyer to get a handle on the use of a third party trust. I doubt they would charge a fee for just an initial consult.