I've managed the finances for my MIL for the last 6 years, and have just used a conservative AA mix, given her an increasing amount of the year end amount, and rebalanced. She's 80 YO now. She gets a SS check, and (for discussion) let's say this approx $400K portfolio provides for withdrawals of about $20K each year.
I'm rethinking this approach. It has two problems:
1) It's subject to market declines, which means she could see a cut in her annual "allowance." Since I still have to plan for a possible 25 year withdrawal window, I can't totally disregard the need to keep pace with inflation, with some moderate growth. So, I've still got approx 30% of her portfolio in equities. This ain't much, but given the low returns of everything else right now, if stocks take a tumble she'd get less to spend for awhile. I can accept that for my
own plan, but it would be uncomfortable to ask this of her.
2) If I keep with this plan, I'll have to keep a lot of her money tied up for a long time to cover the potential that she lives a long time (she's a wonderful lady, I sure hope she does!). I'd rather her be able to spend this money while she can appreciate it.
I'm thinking that, by buying an annuity (
), I can cover the longevity issue, and because she's already up in years, the mortality credits are substantial.
So, here's my plan, for comments/ridicule, etc.
- Divide her money into three parts:
1) A CD ladder to cover the next 5 years. (Or, I could use TIPS, but CD's are easier). My assumption is that CDs will track general interest rates and not lag substantially
behind inflation. (Rather than buy 1,2,3,4,and 5 year CDs now, I'd probably go for shorter term CDs, take the annual spending out and roll them over to get to 5 years or so). Total cost:$100K
2) Buy an annuity which starts paying at age 85 to cover her baseline annual spending for life. The perfect product would be from a top-tier company with full inflation indexing, but I haven't found this to be available. If I assume that matching her present $20K/yr withdrawal, after inflation, will take $23K/yr in 5 years, I can choose from products like these deferred annuities:
Pay $162K for a full CPI -linked annuity from Principal Financial
Pay $173K for a 3% annual increase annuity from NY Life.
I'd be happier with NY Life, but would sure like to be covered for any inflation rate, especially as we are buying this to cover possible expenses many years from now. I suppose I could split the purchase between the two.
TBD/question: Better to buy this as a deferred annuity now, or get an immediate annuity for an 85YO in 5 years? It is about 10% more expensive to buy the same coverage as an immediate annuity (mortality credits . . .), but we may know more about her health 5 years that allows us to make a better informed decision. If she needs LTC starting in 4 years, I'll might be really sorry we spent $170K already for a deferred annuity that won't even start for another year.
3) With the remaining approx $130K of her money, keep it invested in a conservative mix of equities, bonds, etc. This provides some spending flexibility for her, I hope she'll use it to buy whatever she wants. She's very careful with her spending, I'm guessing she'll probably take it on an increasing age-based withdrawal schedule. It might also be needed to cover some LTC costs or other assistance, though obviously it won't cover a long stay.
Sorry for the long note. Observations, comments, better ideas solicited!