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.