UnThreaded | Threaded | Whole Thread (2) | Ignore Thread Prev Thread | Next Thread
Author: worrywart12 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75830  
Subject: Mother's retirement money Date: 11/3/1999 3:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Hello All!

I have checked the retirement section and a lot of the message board but couldn't find help for my problem

My mother lives on income from my late father's pension lump sum distribution and Social Security. She does not own a home or further assets and lives rather frugally.

Her broker has put her in bond funds and Treasuries, most recently a high yield bond fund. The fund has lost 30% of its value in the last year. Overall the value of her assets over the past ten years has dropped from $130,000 to $83,000.

She needs the remainder to produce about $900 a month in income. I know low-risk high return is usually a contradiction in terms but I need to stop the bleeding and don't think a high-risk bond fund is the way to go.

Thanks in advance for whatever help you can provide.

I am trying to work out a low risk - relatively high return (w
Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15076 of 75830
Subject: Re: Mother's retirement money Date: 11/3/1999 3:36 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Most of the decline in value you have seen has probably come from the fact that interest rates have been rising. Just this week people are beginning to feel interest rates may have peaked and will soon start down. If that is the case, now is not a good time to move out of bonds (you could be selling at the low of the market).

No one knows for sure and it could get worse before it gets better, but at this point I would be inclined to wait it out. In a month or two you will know if the trend is reversed, and then you will start seeing the value of your holdings increase again. (There's no telling if they will get back to where they were, but at least they will bounce back some.)

I would take a look at those bond funds your broker has you in. Are they load funds? They could be costly. No loads will be better.

The bad news is I don't think you can expect to make the kind of return you have in mind with reasonable safety. It depends on your mothers age and life expectancy, but $900/mo on $83K gives 13.01% withdrawal rate. On $130K gives 8.31%. Fools usually would suggest a 4-5% withdrawal rate is sustainable long term. At current interest rates, the $130K could be invested in investment grade corporate bonds paying about $8%. But at $83K, this would fall short. (Neither of these would give inflation protection, but the first case would come close to meeting your income needs.)

You may want to look into an annuity contract. They sometimes will give you greater payout than you would get otherwise. The price is you get no inflation protection. So slowly the guaranteed income will not meet her needs. Secondly, there will be no residual estate after her death. (Fools usually do not recommend annuities, but yours could be one case where they could help.)

I think you face some difficult choices. If your mother spends down her funds over the next say 15 years and must live on social security alone, will this be a hardship? Are there family or others who may be able to help out in the distant future? Future inheritance? etc etc. What is possible? What is workable in her situation?

You will find more discussion of bonds, bond funds, retirement, and yields on the Bond board. (Enter Bond in the board box below and press find.) We usually don't recommend bond funds because they tend to decrease in value when interest rates rise. Bonds themselves are a better investment.

In putting your mother into a junk bond fund, your broker is probably trying to increase her income to meet her needs. I think this is risky, but it could be necessary if you have no other options. The treasuries you have are probably paying lower interest than would a corporate bond. You might look at switching the treasuries to something paying higher return.

Fools would suggest you consider putting as much as you can into an S&P Index mutual fund. These average 12% return over time--but not every year. And Fools would want part of the money in bonds to provide income if the market goes through a downstage. In your mother's case this can be risky, but may come closest to providing your income needs long term.

I would suggest you sit down with a list of these various options, think them out and see which makes most sense. A financial planner may be able to help you make better choices. Hopefully you will get a few more suggestions from others on this board.

Otherwise, feel free to ask for more details on any aspect. We'll try to answer.

Best of luck to you.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (2) | Ignore Thread Prev Thread | Next Thread
Advertisement