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Help for mom…

Background:

My mother, who is mentally ill, recently received a $89,000 settlement from a work-related accident. Right now, at age 56, it looks like she will not be able to work again & that this money will have to last her until age 62 when she can receive Social Security. She is applying for Social Security Disability Insurance, but has been rejected twice. She will have an SSDI trial hopefully within a month. However, she is upset since the trial has been postponed twice over four months.

Question:

She wants to invest 78,000 in something that will give her a relatively stable income. I just starting to learn about investing & do not want to make a mistake with my mom's money. I only know one person who is knowledgeable about investing, but I do not want to rely only on him for information & opinions.

We have visited three financial planners. One, who works for Prudential , suggested we invest in an annuity. We have already rejected this idea because it seems expensive & does not keep up with inflation. However, it would pay $525/month. The second planner, who works for American Express, suggested bond funds that have bonds ranging from AAA to BBB. He estimates that his recommendation would pay 6.5 to 7% return. I estimate that this would provide about $420/ month. However, each fund is a front load fund of 4.75%. The last planner, who works for our local bank, suggests that he invest in bonds directly for us. He estimates that he could get about a 6% return. I think it would provide about $400/ month. He charges .005% or 50 cents per 100. My friend suggests that we invest the money into a bond fund ourselves. Specifically, Vanguard bond funds such as the Total Bond fund, GNMA, & Short-term Corporate. There are many different returns listed on the Vanguard web site & Morningstar, so I am not sure what kind return to expect. However, I think that it would be about the same as the others. However, their main benefit is the low charge.

Which option do you think would be the best for someone like my mom? Personally, I like the Vanguard fund idea, but as I said I am new to this & nervous about making a mistake. What should we consider before making this kind of investment? I would appreciate this forum's ideas on my dilemma. Thank you very much for your help.

Regards,
Chris
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I like the Vanguard idea best also, due to low fees, but keep in mind that none of the bond funds that anybody recommended are guaranteed to keep up with inflation.

Vanguard has an investment planner service that costs $500.

Re: the bank planner -- is he buying the bonds himself and then reselling them to you at a higher price? That would make his fee more expensive than the 50 basis points he's telling you about. (1 basis point = 1 cent per $100 or .01%)
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She wants to invest 78,000 in something that will give her a relatively stable income. I just starting to learn about
investing & do not want to make a mistake with my mom's money. I only know one person who is knowledgeable
about investing, but I do not want to rely only on him for information & opinions.


From what you said I would go with Vanguard.

One problem with bond funds is that the value goes down as interest rates go up and vice versa.

If you are trying to cover 6 years (56 to 62) remember that 78,000 will give you about 1,100 per month with no funds left over. How does this compare to the annuity?
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<<<She wants to invest 78,000 in something that will give her a relatively stable income. I just starting to learn about investing & do not want to make a mistake with my mom's money. I only know one person who is knowledgeable about investing, but I do not want to rely only on him for information & opinions.>>>

Here would be my take on the situation, and it's alot different than investing in bonds/bond funds. It carries some risk but would allow for inflation in the long run, a very real risk in your mom's situation.

I would take 5 years worth of expenses or $31,500 (525/month x 12 months x 5 years) and place them in CDs. Or for simplicity's sake a money market fund. If you want to give yourself some more breathing room, take half, $36,000, and this would give you $600/month. Currently they return about 5%. Lower than the bonds quoted but can get the cash by writing a check and NO threat of potential loss as with bonds. If interest rates go down, bonds will loose value if you try to sell them before maturity.

The rest of the money I'd simply by SPY, the stock symbol for the S&P 500, or a S&P 500 index fund, say Vanguard 500. This will historically outpace inflation. Each year, take another years worth of money from the index fund and place it into the money market fund. While in any given year or two or three years, and S&P fund can loose money, it's rare over 5 years or longer, so this strategy is for the long haul. And in the future, when $525 or $600 doesn't buy as much as it used to, the S&P should've grown enough to be able to give yourself a payraise.

JLC
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Here is how I look at it:

Option # Vangaurd GNMAs are a very safe place to put money and recieve a monthly income. The daily price of your asset will fluctuate daily as intrest rates change etc, but by no means as much as a stock.

2nd option : Buy government issued securities directly from the Federal Reserve. they have 13 26 52 week 2 5 and 10 year notes, they will pay a little less but they are govt backed securities. you can buy them without a commission by going to www.treasurydirect.com

with the GNMA you have the benefit of dividend reinvestment if you wanted to or have the money fromt the dividends go into a Vangaurd Money Market fund where you can write checks off of it.

good luck
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Another wholehearted vote for Vanguard.

Whatever you do, I wouldn't take the advice of any financial consultant that works on commission. Believe me, most of them don't have your mother's best interest at heart. Most are more concerned with how much they can make if they can talk you into their "sale of the day."

Another option is to open your Vanguard account (after considering the advise you have gotten from the other Fools regarding your post...and...after reading books like "Mutual Funds for Dummies" and "Investing For Dummies" by Tyson) and then consider opening an account at someplace like Schwab. At Schwab you have access to non-commissioned brokers who can give you advice as well. (You do need to have a $20,000 balance there, however, to avoid quarterly fees. Check the website or call them and have them explain the fee information to you.)

Meanwhile, while you are deciding, put your money in a money market account (which you can also get through Schwab if you decide you're going to open that anyway...or...through a Vanguard Money Market) rather than a savings account. The interest will be much higher.

Good Luck,
bc

(btw...I have no affiliation with either Vanguard or Schwab other than that is how I chose to invest my money.
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