An investment question...

[frenchieinme]

Neighbors came over the house this week and as we were chatting they told us they were getting a $100,000 settlement from a pending lawsuit. This was clear $$$ to them. They asked us what we would do if in their shoes.

I said WOW, I would need to think about this. Because they are both 67 years old, I said one would need to play statistics with this one. I said I believed someone their age had so many years to live and of that amount lesser what one would call GOOD QUALITY YEARS.

These neighbors both have pensions and are debt free. They are looking for return on capital and not interested in the stock market.

I suggested they look into an annuity of sorts where they would be guaranteed a certain amount of money over their remaining GOOD QUALITY YEARS.

I also told them I would put it out to the Tuggers and see what suggestions would come from you guys. Any suggestions and rationale for same?

I told them this was a problem my wife and I would love to have.

frenchieinme

 

[ricoba]

Rather than looking at insurance product such as an annuity, I would look at good quality municipal tax free bonds or high quality dividend paying investments.

Much of their decision needs to based upon, need, tax situation, family concerns and personal comfort levels.

They should talk to a licensed Certified Financial Planner who charges a fee verses a commission.

 

[Steamboat Bill]

For their age a simple CD will bring in about $5,000 per year in income.

$100k is not what it used to be!

 

[dioxide45]

Yes, they definitely need to avoid annuities or insurance products where the sales rep only has their interest in mind (their BIG commission). They need to be careful; they could be seen as an easy target. The municipal bond is a good idea. At their age, even though they may have many years left, they should keep it in a safe investment where the returns might be lower, but they will have their principal protected.

 

[johnmfaeth]

I agree totally with each of the above postings. I spent many years on wall street in my past career and was both a NASD licensed representative and supervising principal (Series 7 and 24 exams).

The advice given was great IMHO. At that age, they should avoid risk, a treasury bond or muni bond fund gives diversity of maturity dates and issuers (for muni bonds) thus further minimizing risk.

Annuities charge a high overhead of upfront and ongoing fees which eat away returns.

A finincial planner who is FEE-BASED ONLY (doesn't sell anything) is the ONLY one you can trust.

They shoudl pick a fund which has low expenses (under 1% per year).

 

[geekette]

Late sixties and reasonably good health? In that case, I'd put at least a quarter of it into stocks as they could live another 30 years. Pick a few good no-load mutual funds to diversify. It's not quite playing the stock market.

Definitely they need a professional so that they also understand tax implications.

 

[Steamboat Bill]

Late sixties and reasonably good health? In that case, I'd put at least a quarter of it into stocks as they could live another 30 years. Pick a few good no-load mutual funds to diversify. It's not quite playing the stock market.

Yes, it is playing the stock market....very dangerous for someone in late 60s at the current high values and potential crash of the mortgage business.

 

[elaine]

annuities are usually only decent for tax shelters

I believe that for certain high net-worth people, annuities can serve as a way to shelter $ form taxes. I would not recommend to anyone with $100K.
They should consult a fee-for service financial planner---one whom they pay and he does not sell anything or get commissions on anything.
They can surf the web for certified financial planners and ask up-front if they get any commissions.
They can also just buy T-bills for now---many places sell them for little to no extra fee (Fidelity, etc.). I would buy some T-bill, some "vanilla" mutual funds, some money market funds, and maybe some tax-free muni funds.
OR just find a bank with a good CD rate and pluck it in there for now.

 

[frenchieinme]

OR just find a bank with a good CD rate and pluck it in there for now.

Just think of it, $100,000 CD paying 5.5% (not hard to find these days) would give them $600 a month for the next 26.3 years providing they only take out $600 every month. This of course does not take into consideration future uncertainties of inflation, health, emergencies, taxes, etc...

They are not poor now and this settlement will make them even less poor. Darn I wish I had that problem regardless of what less it is buying in relation to 5 years ago or 5 years from now.

Keep it coming as I have been printing out your responses.

frenchieinme

 

[ricoba]

To shop CD's go to Bankrate.com

But if they are financially comfortable now, so taxation may be an issue. So they need to weigh the taxes on a CD vs a tax free muni etc.

 

[KenK]

What rates do a safe quality Muni bond pay? Will it pay near the same as a CD?

What is the possible highest amount the interest on the CD would need to pay in Fed taxes? Also need to consider state taxes.

When the CD interest rates rise, will that affect the bond value to an extent that it makes a difference? Will they need to pay taxes on the bond if sold or called at a higher PRICE than they bought? (Is it a tax loss if sold or called before maturity?)

CDs & Muni Bonds payments seem so close....I think knowing the approx tax bracket might be helpful.

I also read that stocks are now important even for retired....( or mutual funds) But I also think bill is right..careful tread in this market.

www.morningstar.com seems pretty unbiased and gives ratings. They indicate funds preformance and if loaded or not.

Also, indicate kinds of stocks in each MF that might be helpful.....





Also,

 

[Conan]

I agree they don't need an annuity or other high-cost investment.

But age 67 is not that old! Chances are one or both of them will be alive 20 years from now. Over that time, you can't earn much beyond inflation if you avoid stocks, and you can spread out the risk by buying index funds.

They should talk to a reputable low-cost advisor - - if nothing else, just stop by the nearest Fidelity office [neither I nor anybody I know has any connection to Fidelity] and talk about allocating into a few low-cost funds.

Something like 50% bond funds, 40% domestic stock funds, 10% international stock funds will almost surely give them a better long term return.

 

[owen1521]

dog track or cockfights. triple that money in 10 minutes

 

[dioxide45]

dog track or cockfights. triple that money in 10 minutes

Or loose it in 10 minutes too.

 

[Kal]

Yes, they definitely need to avoid annuities or insurance products where the sales rep only has their interest in mind (their BIG commission)...

Never say "never". In this case some annuties make perfect sense. Don't get fooled by the name. You can have an instrument that will provide a guaranteed ROI. Concurrently, you can take advantage of the tax shelter and all the diversified investment opportunities (e.g. stocks, bonds, MF, etc.) without ever annuitizing the investment.

 

[pwrshift]

You didn't say whether they had heirs. In such cases, a well researched annuity for some of their retirement estate could have advantages of income stability for the life of both partners while the insurance company bets they both won't live more than 20 years. Genetics plays a role.

In Canada, there are tax advantages to rolling registered retirement funds into annuities so that you won't become a ward of the state, while income from bonds, etc. is fully taxed. This may be consistent with the USA.

Manulife in Canada has a new annuity called Income Plus other insurance companies are rushing to match - I would thiink there are similar offerings in the US. Think of Income Plus as a hybrid of annuities and segregated mutual funds. Annuities are a form of longevity insurance that provide income for life, albeit at the expense of one's heirs...but in a market collapse they also protect those heirs from having to cover for mom & dad. Segregated funds are exposed to equity markets but provide a cushion against market losses. The plan also includes the standard segregated fund benefits, including creditor protection, estate benefits and a death benefit guarantee equal to 100% of the deposit value.

You're not talking a lot of money here, or a high return, but many financial experts in Canada feel the income stability is not something you should easily dismiss.

Brian

 

[John Cummings]

CDs are OK for the short haul 1-5 years. They are paying 5%+ now but could be down to 3-4% in a year or two. It wasn't very long ago when CDs were paying less than 2%.