A person I know, who is retired, has most of the money they live on in a trust. The trust has $800,000. They also have $100,000 of their own money outside the trust, in a savings account. Would it be a good idea to invest some of that money, since it earns very little interest in a savings account? If so, what should they put the money into? Would short term bonds, or bond funds be a good choice? I think that they might want to keep at least enough money for one year’s worth of expenses (minus social security) in cash for an emergency fund though. Very little of the trust money is in cash.
It might depend on the conditions of the trust. Is the total trust available or only the income? Are there limits to the withdrawals from the trust? Are there restrictions imposed by the trust? How is the trust invested? Are there other investments available or is this all of it?I am hesitant to respond without more information.Bob
The trust is spread into three accounts. I'm not 100% positive about how it works. The beneficiary has limited control over the trust. There is a withdrawal rate of 8% from the trust. I think that just comes from just one of the accounts. I believe a second account is used just for housing expenses. Finally, there is the third account. I think the beneficiary can do whatever they want with the money from that account. The trust is made up of about 67% in stock funds, 30% in bond funds and about 3% cash. The $100,000 I mentioned is separate from the trust. It's in a savings account.
"If so, what should they put the money into? Would short term bonds, or bond funds be a good choice?I think that they might want to keep at least enough money for one year’s worth of expenses (minus social security) in cash for an emergency fund"You can get better yields these days in bonds and in dividend paying and preferred stocks. Now that people are starting to talk about inflation and rising interest rates again, one must be careful about buying bonds. Their value will fall if interest rates rise. In this situation diversification may be your best approach. By selecting several choices, hopefully you will have more options if needs for funds arise and some will be more attractive than others.Short term bonds avoid the interest rate risk, but usually the price is low interest rates. A laddered maturity bond portfolio constructed of 5 years living expenses (net of Social Security or other sources of income like pensions, annuities, etc) is the classical Foolish way to live off of investment income while having the income from the bond portfolio and the maturing bond each year as a buffer against market declines (forcing you to sell in a down market). (Interest rate risk is reduced by holding the bonds to maturity.)The emergency fund aspect depends on size needed. Given time with assets as you describe most people can work out the best method to pay the extra expenses. But short term you can need cash. A credit card with adequate borrowing limits should cover you for at least 30 days. After that a bond fund can be used. Many allow check writing. So the funds continue to earn interest until the check clears. But you do take interest rate risk on the bond fund. Hence, it becomes important to size it appropriately for the emergencies you may need to cover.
If they (retired person I'm writing about) don't buy individual bonds, the second best choice would be short-term bond funds? The retiree doesn't know much about investing. I don't know if they would attempt to learn about buying individual bonds. I don't know much about it, I've never done it myself.
Not nearly enough info at this point. Retired Person (RP) can pull 8% per year ($64k and decreasing with withdrawals) but how much do they need to pull (assuming SS and other income)?SWR of 4% on 800k is $32,000. Is that enough to meet annual expenses? I think you might be a bit too conservative by keeping a year's worth in cash depending on the income needs. 3-6 months might be better.How old is RP? A RP at 60 has different liquidity needs than an RP at 80. Does RP have a spouse or other dependants? Are they likely to pay medical expenses out of pocket or do they have sufficient insurance? Do they expect their expenses to remain fixed (minus infation) or go up or down in the future?
Well, first, if a person does not know much about investing, and intends to invest, then that person should learn about investing.Second, no investment should be viewed as a permanent thing. Investments should be re-evaluated regularly to see if it is time to sell, and invest in something else.With interest rates so low at this time, the bond market, except for very short term bonds, is not the place to be long term. Eventually the Fed will raise interest rates, and the price of the longer term bonds will go down. One would then be faced with the choice of holding to maturity and then possibly missing some better investments, or selling at a loss (most likely). So at this time, if you want bonds, buy short term bonds, hold to maturity, and then buy more if the situation looks right.So far as stocks are concerned, the major domestic averages have bounced off the April 10 low, but sold off on Friday. I think that we are at a turning point of this market, and it is likely to go lower. Seasonality is likely to kick in, so the "Sell in May and go away" is probably a good thing. In any case, I would be very careful at this time, and might hedge with options (e. g. covered calls).
If they (retired person I'm writing about) don't buy individual bonds, the second best choice would be short-term bond funds?In addition to not understanding the details about the trust, which, as already suggested, is required in order to provide good advice on what the 'best' investment would be, we are also missing a huge detail on what the retiree's objective is for the $100k outside of the trust.The retiree doesn't know much about investing. I don't know if they would attempt to learn about buying individual bonds. I don't know much about it, I've never done it myself.I would suggest that the retiree probably needs a level of advice above that which is provided by a discussion board, from someone who understands the details of the trust, but probably isn't a trustee. The retiree might try looking for an elder-care service that can provide legal and investment advice.AJ
The retired person recently said they think they can live on their social security income. I was surprised because in the past I think they were spending a lot more than that. This person is in their late 70's. No spouse or dependents. I think they have good insurance. I never asked about whether they expect their expenses to change.
The retiree wants to earn more on the $100,000 than the low savings account interest these days. I question whether investing it in stock is a good idea. The trust has lots of money in stocks. I think short-term investing instruments are likely a good idea.I think finding a place for financial advice would be good. I didn't know where someone could go for free or low-cost advice. I don't know if bank managing the trust would be a good place to go. I'll look into elder-care services.
To put this in perspective, Bankrate.com gives the national average yield of a 1 yr CD as 0.33%; of a 5 yr CD, 1.14%Treasury yield curve Friday: 2 yr 0.27%; 5 yr 0.86%Dividend stocks:AT&T 5.70%; Ameren 5.10%; Reynolds Tobacco (RAI) 5.40.Bond fund: Fidelity Capital and Income (FAGIX) 6.13%Closed end leveraged muni fund (Nuveen Muni Select, NQS) 6.80% (mostly fed tax free).You can clearly get better returns in the short term with alternatives to CDs, but in the longer term at somewhat increased risk. Is the added income worth the risk?
"The retiree doesn't know much about investing. I don't know if they would attempt to learn about buying individual bonds."If you decided you wanted to set up a laddered maturity bond portfolio, any stock broker will be able to bid for your business. You tell them the amount, the maturity, and the bond rating, and they will show you a list of bonds they propose to buy. You get to review them to see if you are comfortable with them, and pick the best offer.Most individuals should buy investment grade bonds, rated probably A or better. Longer maturity gives higher yield, but in the example I mentioned before, you would want 5 bonds, each maturing at 1 yr intervals for 5 yrs. The minimum total investment is usually $25K, but more is better.
I don't think the retiree would want the risk of stocks. They just want to do better than the interest in a savings account. This is money for the short-term. They already have a lot of money in stock funds in their trust.Thanks for the info on bonds. I may research them further.
This is money for the short-term.Then I would stay in cash or cds. Nothing else is likely worth the risk of principle.
Maybe the point has been covered before, but it seems to me $100K is a very large emergency fund. Needs vary, but I would think that $100K could be split into a tiered investment system--covering emergency needs but providing better returns with the rest of the money.Yes, your short term emergency fund needs to be appropriately sized and available. But what expenses are anticipated? 1. A hospital stay usually gets sent to insurance company and Medicare first. You can have a month or so before the cash is needed.2. Nursing home. Usually you need an initial deposit and perhaps a few months of charges. But often these are planned after some event giving time to arrange finances if you have the assets.3. Funeral expenses. Situations can differ depending on if you have prepaid arrangements and level of service desired.What else is there?I think most would need no more than $25K in their shortest term emergency fund. Much of that can be covered by a credit card. A bond fund with check writing privileges should cover it. You take the risk that if the event comes up you might take a bit of a loss on the money needed, but that is balanced by the certainty of better return on the other funds.
OK. Here goes. I have been requested to give advice to my more wealthy friends, due to the fact that my investments have turned out to increase my portfolios quite well. HOWEVER, that is a GREAT way to lose a friend.My advice? I give them the names of 3 fee-only financial planners. Many of them have interviewed all three. Many of them interviewed only one. However, they wound up using one of them. Donna - for what it's worth
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