No. of Recommendations: 11
Hello:

My mother asked me for some investment advice and I wanted to tap the well of wisdom here before I passed it on to her.

My mother will be retiring this September at age 62. She will be receiving a lump-sum payout by her employer. It will be roughly $100k.

She will also be receiving approximately $3,800 per month (after-tax/tax free). This is more then she needs to live on and will be saving the remainder every month (or squandering it on a lavish lifestyle so as to deprive her son of any inheritance <g>).

She asked me, being the Foolish son that I am, what I would recommend that she do with the $100k. She had already talked to an “advisor” who recommended stock mutual funds so she could “double her money in 10 years.”

Her number one priority is that the money be maintained and not decrease.

My initial suggestion is this:

10% in a money market account (ING, etc)
10% in I/EE Bonds (so at least that is tax deferred)
40% in a 5 year CD ladder (to protect against rising rates)
40% in short term municipal bonds, 5 yrs. Max. (held to maturity)

The 10% in cash and 10% in savings bonds provides her with emergency cash should she need it. While she has yet to have a $20k emergency in her entire life, I think it is sufficient.

As she builds a surplus from her monthly income, she can add to any of the levels so she can save for later in life when $3,800 may not be enough to live on (not ruling out the option of attaching herself to her sons wallet like some financial leech <g>).

This will ensure that her principal will be safe (with the sole exception of having to liquidate the muni's prior to maturity.

I am at a loss to find a better tax advantaged system without going to more muni's.

I welcome any comments or suggestions.

Luv Ya Mom,
Splotto

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No. of Recommendations: 7
Although I would definitely recommend not having anything to do with a broker or mutual funds he/she/it suggests, you may be being too conservative, especially since her biggest concern would be inflation.

You really don't provide enough information (although a lot more than most people seeking advice). I'm assuming the $3800/month is a pension. Is it a tax-free pension, or is $3800 your estimate of what it is after-tax? Is it a fixed pension for life, or is there an inflation clause? Is it a secure pension that isn't going to go away if the employer goes belly up? Is she also getting social security? Does she have other savings, in additon to having a son who says he loves her? What's her health care coverage? How about long term care insurance?

What I'm doing to estimate how much I'll need (though a little ways further out than your mom) is to start looking at current expenses, not including what comes out of the paycheck, i.e., including property taxes, insurance, vacations, big ticket items (home improvement/repair, new cars/repairs, furniture, eletronics, etc.), in addition to month to month expenses (I lump clothing in with those). Then you have to tag on an estimate for income taxes. This can get you a starting point from which to project how much will be needed down the road to protect against inflation.

Are tax free bonds really right? It doesn't sound like she'll have enough income to warrant them?

Given the huge tax advantage now for stocks, I'd probably be looking at half in Vanguard's Total Stock Market Index Fund (dripped in, starting mid-September, after the self-fulfilling crash). If she did a CD ladder with CDs where you can't lose principle if you break into them, I wouldn't go over 5% in a money market. I'd probably go with 20% EE bonds (with the idea of using those many years from now) and the other 25% in a CD ladder (with the idea of moving some to bonds in a few years). Of course, there's also the Balanced Index Fund: say $150,000 in that, which would get at least an extra $3000 in cash every year, even if she didn't want to use the principle (if the market is down).

Obviously the broker's prediction for the stock market is bogus: it could do twice as well or crash completely. But most conservative advice suggests a need for some money in stocks as a hedge against inflation. Figure at this point she should have 35-40% exposure, but if the $3800 is a pension, which is like bonds, $100,000 in stocks would still bring her below that.
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No. of Recommendations: 7
Not necessarily a recommendation, but for your consideration:
You haven't indicated what kind of money this 100K will be but I am guessing that either taxes will have to be paid on it unless it is rolled over into an IRA. And of course, while the money is in the IRA she will not be taxed on any gains. "Advisors" love to find people who are retiring and receiving lump sum payments from 401k plans or pensions. They are a great source of commissions and fees.
I am not sure a more mature person such as your mother and I, needs an emergency fund like a younger person might.
Have you considered the potential loss of spending power that comes from a 100% fixed income allocation. Some exposure to equities might decrease her overall risk.
Have you looked at balanced funds such as the Vanguard Life Strategy funds. These are funds of funds and there are 4 of them with differing asset allocations. The most conservative is the Life Strategy Income fund which has a 5% exposure to the Total Stock Market and 25% in an Asset Allocation fund. The AA changes its stock/bond allocation depending on market conditions. I believe that currently it has a stock allocation of nearly 100%. So with this fund she would have a stock market exposure which might vary from 5% to 30%. This is still a pretty conservative allocation.
For what it is worth, I retired recently and put a large chunk of my lump payment into one of the LS funds.
This may not be as tax efficient as your suggested portfolio but remember that paying taxes is not all bad. It means that you have received income that require taxes to be paid.
And finally, don't forget to spend some money on herself and have a good time. Her no good son can take care of himself. ;-)

Bob
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Loki and CA:

To clarify:

The $3800 is from 2 pensions and social security. It will be tax free and $3,800 is what she will "bring home." The pension portion is fixed and the SS will move accordingly. SS is about 15% of the total.

Here monthly expenses are about $1000/month, so after all is said and done, she should have a surplus of say $1000/month (after blowing some it on her grandkids).

The lump sum payment is an early retirement incentive payout to her from her government employer's pension plan. It will be tax free and 100k will be what she receives.

Splotto

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You didn't mention health insurance. This is the "Black Hole" of retiree's dollars. It seems that you can't afford to live with it, and you can't live without it.

Is she one of the fortunate ones whose retirement plan covers health insurance too?

PF
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No. of Recommendations: 1
Kind of what I was thinking: government buy-out. I think I misread the lump sum as $200,000, so cut any suggestions I made earlier in half. I'm assuming she does have health insurance covered, although I know my in-laws (retired government pension) pay some kind of supplemental. Don't forget about long-erm care insurance, assuming it's not covered. That costs a bundle.

Do the $1000 monthly expenses include everything? My actual monthly expenses (i.e., what I pay for groceries, utilities, etc.) are only about 1/3 of my annualized expenses (including big ticket items, vacation, insurance, property taxes—mortgage has been paid).

I'm still not clear whether she gets the inflation protection with social security, or if the rest of her pension goes down to compensate for any boost in social security, but with that little s.s. probably doesn't matter.

Anyway, if we assume she's going to start of using about 2/3 of her income, with about 4% inflation rate, she'll be in the red in about 10 years. Of course, she should have saved some of the excess until then.

Her biggest worry, though, is inflation. With real deflation (meaning her expenses not some abstract figure that's mostly about vacations and overpriced homes and unnecessarily big cars and weddings), she doesn't have to worry. Stocks are the traditional hedge against inflation.
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PF:

Her retirement plan will pay her health insurance for 5 years, then she must handle it herself and with medicare.

Splotto
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All:

Thanks for all the great responses. I am looking into the suggestions. I have one question: Given the current level of interest rates and the looming bond bubble (and while I am not trying to get her in the habit of market timing) I am very worried about any bond FUND holdings. I would rather see he hold EE's or I's, cash and a total stock fund.

How does everyone feel about the Vanguard Life Strat. FUnd's exposure to bonds? Do you think the impending rise in rates make it worth holding off? Will the reinvestment of income from the fund counteract the loss in principal?

Splotto
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No. of Recommendations: 2
You may want to look into something like the Dodge&Cox Balanced fund (DODBX) for the extra $100k. Expenses are low and its done a wonderful job of leveling the waves - but not following the crests. Its split something like 60% value stocks and 40% bonds. Oakmark has a similar fund.
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How does everyone feel about the Vanguard Life Strat. FUnd's exposure to bonds? Do you think the impending rise in rates make it worth holding off? Will the reinvestment of income from the fund counteract the loss in principal?

There are different Life Strategies Funds with different bond proportions. In theory, stocks should go up when bond values go down, so the downside of bonds is cushioned (and vice-versa). If you do want to look at balanced funds at Vanguard also consider STAR (which is the one I'm using), Balanced Index, Wellington, or Wellesley. Wellesley is much higher proportion of bonds than the others (except the less stock heavy of the Life Strategies Funds.) I personally don't like the Life Strategies Funds because part of each fund is the Asset Allocation Fund, which market times. For your mother, Wellington might be a good choice, even though it has a slightly higher expense ratio than Balanced Index, because it is Value Stock oriented, which means more emphasis on dividend paying stocks. Of course, when I look at the list of stocks, I see a lot I wouldn't want to own.

The health insurance thing needs pursuing, especially if there isn't a significant drug bill. You need to work through a future budget for her, a pessimistic one, with supplemental health insurance and long term care insurance included. You might want to run some stuff past the Retirement Board folks.

A fixed pension is actually more scary if inflation sets in than living of "fixed income" from bonds and CDs, because laddering (or inflation adjusted bonds) allows you to catch higher interest rates.

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No. of Recommendations: 3
Hey Splotto---I would look at the situation this way---Your Mom has a fixed income investment that yields her $3,800/month for the rest of her life. A small portion of it (the social security) is indexed for inflation, the rest is fixed. Her needs relative to her income are modest, only $1,000/month. She is $2,800 a month ahead at the start of her retirement. In addition, health insurance is provided to her for 5 years, after which she will recieve medicare health insurance. She will have some additional costs then in 5 years for the medicare supplemental and drug benes.

Because she starts out in great financial shape, with the ability to save more than she spends every month, and assuming she is in reasonably good health, her problem is not how to safeguard the 100K lump sum, but how to best protect her against future inflation and medical costs. In fact the bulk of her resources are at the beginning of her retirement in extremely safe bond equivalent types of investments. It seems clear that what she needs is to invest the 100K in stocks for this protection. In an emergency, she either will have accumulated enough from her monthly savings, or she will sell off a portion of her stock holdings.

Good luck. Your mom has a good problem to have.
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NN:

It seems clear that what she needs is to invest the 100K in stocks for this protection. In an emergency, she either will have accumulated enough from her monthly savings, or she will sell off a portion of her stock holdings.


There is also the psychological aspect of her retirement: One of her main concerns when laying out this request was that preservation of the principal was important to her. She hasn't been an investor her whole life. She has worked for over 25 years for the same government employer and has banked on receiving her pension. She has never had to experience the feeling of getting an account statement showing her that she actually LOST money. That is a major fear for her. Therefore, that became a guidepost for me (from her) for this process.

While I am going to suggest a portion go into equities, I don't think I am going to be able to sell her on 100%.

Splotto
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Loki:

OK. I laid out a cashflow spreadsheet with her SS income, pension income, expenses, surplus, and running surplus as invested.

I assumed $2000/month in expenses, doubling the number she gave me as a factor of safty and anticipating the healthcare costs and showering gifts upon her Son.

The SS is actually a bigger portion then I thought. SS is 1030 and the pension is $2750 to start in year one. I carried the sheet out for 40 years.

I am starting with these assumptions:

SS increases 2% per year;
Her expenses increase 4% per year;
Her investment yields 5% per year, reinvested.

With those numbers, if she investes her surplus in the same way as the lump-sum money, she will run a positive balance for more then 40 years. The break even point for the invested money is about $70k. If she invests less then that in the beginning, she will run out of money.

Thoughts on the assumption?

Splotto
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No. of Recommendations: 13
One rule of thumb for how much equities you should own is 100 minus your age in years. But I've heard other financial advisors say that people over 70 shouldn't own any equities at all. My wife and I are both over 70, and we are about at 50% in equities. Because of what has happened to interest rates, I have been having a hard time trying to stay in bonds and CDs that we can hold to maturity (I lost quite a bit of money a number of years ago - 1979 - when I had to cash in some bonds early.). I've diversified into a variety of stocks that have long records of paying and raising dividends. But splendid records can break. BMY (which we haven't owned) stopped raising dividends after 30 years. TE (which we do own) not only stopped raising dividends but cut them 48% and had their stock price smashed as well. And Woolworth's and Corning stopped paying dividends all together (We did own both at one time). So there are definitely risks whatever you do.

Although inflation is said to be only about 1%, services are experiencing rampant inflation. Medicare has been going up 8%/yr the last few years and our back-up health plan has increased at the rate of 12.5%/yr for the last 7 years plus we now have a prescription drug copay that increases more than 10% a year. And the property tax on our home went up 23% last year and our summer cottage property tax is going up 50% this year. Your mother is going to have to take this sort of thing into account. And her annuity plus the $100,000 would maybe last two years in a nursing home.

We seem to be heading for an economic train wreck and I'm not sure what this means if it occurs. I suspect at the very least that cost of living increases will go on government annuities (ours didn't quite cover the increase in Medicare plus back up health plan this year. I full realize that we are better off than most people, but I'm just stating what needs to be taken into account.

brucedoe
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No. of Recommendations: 8
Splotto,

I'm a lot more comfortable with your $2000/month guess than your mother's $1000, which just doesn't sound plausible, taking into account big ticket items, home repair, insurance, vacations, etc., even if the hosue is paid off. It would be better to sit down with her and do a careful budget, with long term care insurance and the added health care costs (see Bruce's message for a realty check) factored in, even if this doesn't necessarily affect decisions about the lump sum investment.

I think your other assumptions sound reasonable. I'd look at 4% return on investment, especially if you're being conservative in investment choices, which is 2% above the official CPI you're assuming (for social security). Also check your own spreadsheet against one of those retirement calculators in case you screwed up (nothing personal).

Given your mother's lack of "risk tolerance," probably a balanced fund is the way to go to get her to accept some stock exposure. They can go into the red, but not to the same extent. You might also print out some stuff from TIAA-Cref or Vanguard about stocks in retirement portfolios. They have credibility (unlike a broker).

By the way, she is an example of why the tax preference for stocks is class warfare. "Risk tolerance" is a stupid term. It implies those who are risk aversive are simply too scared, like not wanting to bungi jump. The reality is, rich people can afford to be heavily into stocks, which gets them the tax advantage, because if stocks do prove a disaster, they still have plenty of other assets to tide them over. For the rest of us, we can't afford to take the risk, not because we are Nervous Nellies, but because we don't have enough other assets to fall back on.
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Loki:

I'm a lot more comfortable with your $2000/month guess than your mother's $1000, which just doesn't sound plausible, taking into account big ticket items, home repair, insurance, vacations, etc., even if the hosue is paid off. It would be better to sit down with her and do a careful budget, with long term care insurance and the added health care costs (see Bruce's message for a realty check) factored in, even if this doesn't necessarily affect decisions about the lump sum investment. I think your other assumptions sound reasonable. I'd look at 4% return on investment, especially if you're being conservative in investment choices, which is 2% above the official CPI you're assuming (for social security). Also check your own spreadsheet against one of those retirement calculators in case you screwed up (nothing personal).


I will be sitting down with her once I get some initial leg-work done. Once I know the real hard numbers, I can tweak it. It seems that the more she heads toward a deficit, the more % she may need to accept in stocks in order for the 4% ROI to move up to 5%, 5.5% or 6%.

Splotto
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No. of Recommendations: 4
Splotto,

My concept of asset allocation is constantly evolving. Is it your age minus 10 in bonds and the rest in stocks? Is it mostly stocks, as many TMF writers show their portfolios as being? Should you switch assets from stocks to bonds at a certain point, say, when interest rates are over 6%? Does SS count as part of your fixed income allocation?

What this means is I have no hard and fast answer. But I'll tell you how I recently invested my Mother's money (she netted $250K from a home sale one month age, and had some other small investments. She's 53, and her plan is to buy a condo with an estimated value of $100K within six months.

In Vanguard:

Individual:
International Value Fund $18K
Total Int'l Stock Index $36K
Mid-Cap Index Fund Inv $58K
Small-Cap Value Index $63K

TIRA:
High-Yield Corp Fund Inv $26K
500 Index Fund Inv $26K
Total Bond Mkt Index $25K

Roth:
REIT Index Fund: $13K


In ING Savings:

$80K- 80% of the money she'll need in the short term for the condo. I'm feeling lucky, so we'll gamble a little with the rest ;).

-Serious consideration was given to investing 30% or so of her stock allocation to TMF's "Stocks for Mom" picks through Scottrade, which came out the week we got the home proceeds.

-We also immediately maxed out her 2003 Roth IRA contribution and converted 8K of her TIRA to a Roth. We'll continue converting a little of the TIRA each year.

Nick (I'm a mamma's boy, too!)
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Nick:

Thanks. The main issue now for me is trying to pin down health care costs. I posted it over on the retirement investing board and am waiting for responses.

I would welcome anyone's opinion of the likely costs of supplimental healthcare coverage for a 65 yr. old Pa. woman.


Splotto
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In Vanguard:
Individual:
International Value Fund $18K
Total Int'l Stock Index $36K
Mid-Cap Index Fund Inv $58K
Small-Cap Value Index $63K
TIRA:
High-Yield Corp Fund Inv $26K
500 Index Fund Inv $26K
Total Bond Mkt Index $25K

Roth:
REIT Index Fund: $13K

Nick,

What's your reason for the heavy weighting of Mid Cap/Small cap Value in a taxable account, and overweighting these in general? Even the small cap value Vanguard Index fund has a much lower yield than the 500 fund or the Total Stock Market Index fund, and even with the new tax laws, the turnover rates on mid cap and small cap indeces will generate more capital gains than the 500 or the Total Market (assuming capital gains happen someday). Of course, you also seem to be assuming mid caps and small cap value will outperform the overall market.
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http://www5.tiaa-cref.org/ltc/LtcCalc

Splotto,

Here's the TIAA-Cref Long-Term Care premium calculator. I'd go for more than 5% inflation/
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Loki:

GREAT. It's actually cheaper then I thought. I put in for the best options I could and it comes to $1365 per quarter. Not bad. I was expecting arouns $1500 a month.

Looks like mom can afford to buy her son that new house and still afford to eat the good alpo. :-)

Splotto
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Splotto - Health care is a tough one...my parents have a small biz and pay over $1K/month combined for health insurance. It's one of the main reasons they're staying employed.

Lokicious - Great point about my overweighting small/mid cap funds. Really just and oversight on my part. I will reweight. On this topic, I recently requested a Statement of Additional Information from Vanguard (provides additional disclosure info) and did a comparison of the 500 vs the Small Cap Value. Here it is for the record:


All data for 2002

Fund: S&P500 / Sm Cap Val

Market Cap: $73,000 / $1,200
Turnover: 7% / 57%
Commissions: $4.39 / $1.19
Div dist: 1.60% / 0.80%
LT Cap Gain Dist: 0 / 2.10%
ST Cap Gain Dist: 0 / 3.0%

Nick
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Splotto,

Glad you're feeling so "happy" about $1365/ quarter. For 2 people, it works out to be about what we pay for property taxes, home, and auto insurance combined.

Let's face it: in 20-30 years, the elderly in this country (i.e., your mom and me) are going to be living like those pensioners in Russia after the collapse of the Soviet pension system.
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Loki:

I know. It's not funny when you actually think about it. I was just glad that my estimate was higher then reality.

Splotto
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"While I am going to suggest a portion go into equities, I don't think I am going to be able to sell her on 100%."

And you shouldn't! But DO give her something to do, and learn, in her well-earned retirement. Show her how to start "dripping" into many different stocks, until and as she learns how to manage her own investments. After all, lacking any medical/health emergencies, she probably has better than 20+ years ahead of her. Buy her any (or all) of Charles B. Carlson's books. I'd be looking to get her ultimately positioned with about 60% equities, 40% bonds.

Investing CAN be fun. At least, I have found it so.

Ray
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I wonder how she would respond to the Vanguard Fund -Balanced Index VBINX.

I think the balance is 60% equities and 40% bonds. Then it is just a matter of thinking of the amount or proportion.

It is also reasonable to dump the "cash" etc into an intermediate term bond fund at Vanguard. This is better than the alternatives, has a short duration, and face it , this can be dumped in seconds. Most "cash"cant compete with this a Vanguard. Second best would be short term Treasury fund. Still beats "cash" by a margin of about 1.5%.

Pretty simple- two funds for any amount of cash. Exposure to equities and plenty of safety.

Binturong
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I wonder how she would respond to the Vanguard Fund -Balanced Index VBINX.
I think the balance is 60% equities and 40% bonds. Then it is just a matter of thinking of the amount or proportion.
It is also reasonable to dump the "cash" etc into an intermediate term bond fund at Vanguard. This is better than the alternatives, has a short duration, and face it , this can be dumped in seconds. Most "cash"cant compete with this a Vanguard. Second best would be short term Treasury fund. Still beats "cash" by a margin of about 1.5%.
Pretty simple- two funds for any amount of cash. Exposure to equities and plenty of safety.

As already suggested, a balanced fund, such as VBINX, is certainly a reasonable way to go. I don't know what you mean by an intermediate bond fund having a short duration—by definition, the duration is intermediate. Sure you can dump a bond fund, the problem is knowing when, and I wouldn't be advising someone with no experience (or even someone with experience) to spend their lives glued to the ticker tape trying to time the market. You can get comparable returns to an intermediate bond fund with 5-year CDs or EE bonds (remember Mother Splotto won't need her lump sum cash for years) without having to worry about interest rate risk on a bond fund.
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"While I am going to suggest a portion go into equities, I don't think I am going to be able to sell her on 100%."
And you shouldn't! But DO give her something to do, and learn, in her well-earned retirement. Show her how to start "dripping" into many different stocks, until and as she learns how to manage her own investments. After all, lacking any medical/health emergencies, she probably has better than 20+ years ahead of her. Buy her any (or all) of Charles B. Carlson's books. I'd be looking to get her ultimately positioned with about 60% equities, 40% bonds.
Investing CAN be fun. At least, I have found it so.

Having fun investing can be a dangerous and expensive hobby for someone who doesn't have spare money to play with. It is a lot cheaper to get diversification with an index fund, with a lot less to worry about.

The suggestion of putting all her lump sum buy-out of $100,000 into stocks isn't a bad one, given her other sources of income and her situation, though it is not a suggestion she would find easy to follow, given her (rational) intolerance for losses. Although Splotto has yet to get an accurate budget projection, it is clear Mother Splotto will be running a surplus from her fixed pension plus social security for some years to come. Her biggest problem will be inflation eating into the fixed pension, so eventually the pension plus social security could be insufficient to live on. Historically stocks are the best hedge against inflation.

Also, if you look in terms of asset allocation: we can gloss the fixed pension as roughly equivalent to about $650,000 in 30 year treasuries at 5% (I haven't rechecked the actual numbers Splotto gave) and social security as about $350,000 in TIPS (except in both cases there is no acess to use the principle). $100000 in stocks would be less than a 10% allocation, thought of in this way.
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Mother Splotto

LOL.

Splotto
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Loki & All:

I completed the spread sheet with her SS income, pension income, expenses and heatlhcare costs. Her expenses surpass her income in years 7-8.

I then added columns for her savings, beginning with her lump sum investment (70,000 now) and adding her surplus income to it until year 7. With the following assumed ROI's (pre-tax) her savings last for the folloing years (age):

4% - 23 years (83)
5% - 24 years (84)
6% - 25 years (85)
7% - 28 years (88)
8% - 31 years (91)
9% - 34 years (94)

Healthcare increased 10% a year and starts in year 5 (65). Other expenses increased 4% a year. SS increased 2% a year.

Clearly she needs to obtain a yeaild near 7-9%. The other alternative is for me to give her additional funds now to put into her savings (around another $50k-$100k) which would carry her nicely past 100 at the higher returns.

Splotto
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I would place at least some of it in a Total Market Index Fund. Low maintenance cost, no "churning". A portfolio of all "fixed" investments is going to get hammered by inflation; 20 years from now you will have preserved your capital, but not made anything with it. You might have $110K, but its buying power has eroded. Taxes shouldn't be you sole consideration.
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Loki & All:

I wondered why I was getting late replies. TMF added this thread to their COMMUNITY CHEST list. :-)

Splotto
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Splotto asks:

"Her number one priority is that the money be maintained and not decrease. I welcome any comments or suggestions."

1) Pay off the mortgage if she has one.

2) Pay off any credit card debt.

3) Buy a 6-month CD @ 2% with the rest.

Your Mom is a wise owl for emphasizing return of capital instead of return on capital. In 6 months you and she can review your strategy and make any necessary adjustments in free cash. In these turbulent times it is prudent to plan in small increments.

If you want to take a small amount of risk you could consider $10,000 of gas and oil futures. In-ground assets are valuable during times like these when the dollar is falling. Plus, the odds on oil and gas rising in price by the end of the year are better than 50/50.

Hope this helps.

Andy

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Andy:

1) Pay off the mortgage if she has one.

None.

2) Pay off any credit card debt.

None.


If you want to take a small amount of risk you could consider $10,000 of gas and oil futures. In-ground assets are valuable during times like these when the dollar is falling. Plus, the odds on oil and gas rising in price by the end of the year are better than 50/50.

I think that the futures pit might a little too hard-core for mom. :-)

Splotto

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I really like the original breakdown that you came up with yourself. I don't think anyone can say "stocks will do well over the next 10-20 years, and bonds will be a poor investment" or vice-versa. Diversity is the way to go with this much money.

Someone made a comment about her income not looking like she would benefit from tax-free funds - I think she would! At $3800 a month take-home, her income is substantial. Unless it is all tax-exempt income.

If her income is taxable (or already taxed?) then any gains she makes in non-IRA investments would also be taxable.

jrsmith13
not an expert - just my $0.02
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Lokicious, you said to Splotto:

Given the huge tax advantage now for stocks, I'd probably be looking at half in Vanguard's Total Stock Market Index Fund (dripped in, starting mid-September, after the self-fulfilling crash). If she did a CD ladder with CDs where you can't lose principle if you break into them, I wouldn't go over 5% in a money market. I'd probably go with 20% EE bonds

What did you mean by "self-fulfilling crash" ?

Thanks,
Scott
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JS:

Someone made a comment about her income not looking like she would benefit from tax-free funds - I think she would! At $3800 a month take-home, her income is substantial. Unless it is all tax-exempt income.


All monthly income she receives from SS and the pension is tax-free.

Splotto
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"I completed the spread sheet with her SS income, pension income, expenses and heatlhcare costs. Her expenses surpass her income in years 7-8. "

Ouch! I thought the original $1000/month expenses sounded unlikely, but this is decidedly unpleasant, even though I assume you are now being extra-conservative in your estimates. Conservative is good, though not if it forces us to make unwise plans to make up for our pessimism about expenses to try for high returns on savings/invesment.

"Clearly she needs to obtain a yield near 7-9%. The other alternative is for me to give her additional funds now to put into her savings (around another $50k-$100k) which would carry her nicely past 100 at the higher returns."

If you actually can afford to help out, here's a thought. You (and your wife) can each give her 11000/year in gift money. Let's say you do that for the next 5 years ($110000 total), with the idea that if she dies before the money runs out, she leaves you what is left. If she doesn't ever have to break into the money, it actually becomes an investment plan for you, probably saving you on taxes. You might run it past the tax people to see if this is legal, but I don't see why not.
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Generally, for someone who is getting more money than they need to survive, the most important part is risk vs. reward. Take a look at the Efficient Frontier charts in http://www.intelligencereport.com/. The best risk/reward points, corrected for inflation, tend to be around 60% bonds/40% equities (slightly better reward than the lowest risk point, which is 75% bonds/25% equities). As far as equities, the best risk/reward point is near 50% stocks/50% REITs. The longer the money can sit, the higher weighting for equities and the higher weighting for stocks. So a good point might be 60% bonds (of which around half can be government bonds), 20% stocks (maybe an index fund), and 20% REIT (another mutual fund).

Risk is defined as the standard deviation of the value of the equity from its trend line. Higher risk generally leads to higher return, but also to more volatility.
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Loki:

If you actually can afford to help out, here's a thought. You (and your wife) can each give her 11000/year in gift money. Let's say you do that for the next 5 years ($110000 total), with the idea that if she dies before the money runs out, she leaves you what is left. If she doesn't ever have to break into the money, it actually becomes an investment plan for you, probably saving you on taxes. You might run it past the tax people to see if this is legal, but I don't see why not.

That's what occurred to me, but I didn't want to sound like I was investing in her death, if you know what I mean.

It's something to consider.

Splotto
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Generally, for someone who is getting more money than they need to survive, the most important part is risk vs. reward. Take a look at the Efficient Frontier charts in http://www.intelligencereport.com/. The best risk/reward points, corrected for inflation, tend to be around 60% bonds/40% equities (slightly better reward than the lowest risk point, which is 75% bonds/25% equities). As far as equities, the best risk/reward point is near 50% stocks/50% REITs. The longer the money can sit, the higher weighting for equities and the higher weighting for stocks. So a good point might be 60% bonds (of which around half can be government bonds), 20% stocks (maybe an index fund), and 20% REIT (another mutual fund).

Risk is defined as the standard deviation of the value of the equity from its trend line. Higher risk generally leads to higher return, but also to more volatility.


Good stuff Russ. Thanks!

Splotto
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One interesting idea would be something called the Permanent Portfolio. While not timing the market, it understands the idea that markets do change. The basic premise is to invest 25% in Treasury Bonds, 25% in Treasury Bills, 25% in leveraged stocks, and 25% in gold. The idea is that no matter which direction the market is trending, one of these investment classes will do well enough to carry the rest of the portfolio.

There's a mutual fund that follows this strategy, although they do vary it a bit. The ticker is PRPFX. It's not a fund for those looking for a tremendous return, but rather is designed for steady growth. It has, however, been known to go up dramatically in certain economic conditions. Most recently it has gone up quite a bit due to the increasing value of gold. It protects itself by rebalancing the portfolio periodically to avoid being overcommitted in any one investment class.

Just a thought. I've not seen much press on this fund, but I put some into it a year ago, and have been pleasantly surprised.
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Hello. You guys all seem right on target with plans for Mom so I thought I would ask a slightly different question within the same topic.

My mom is concerned that one day she might have to go into a nursing home and that the nursing home will take all her savings before she qualifies for medicaid. (This happened to her mother.) She has shifted a small amount of assets to my brother and me or opened joint accounts with us. However, the bulk of her assets remains in her name. Should I direct her to an attorney to figure out a plan? She would like to be able to leave her money to her grandchildren for college, etc. If it helps to know, the savings amount is not particularly large, but she is financially set for life through other means and does not need the savings to live on.

Thanks.

KW
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D:

One interesting idea would be something called the Permanent Portfolio. While not timing the market, it understands the idea that markets do change. The basic premise is to invest 25% in Treasury Bonds, 25% in Treasury Bills, 25% in leveraged stocks, and 25% in gold. The idea is that no matter which direction the market is trending, one of these investment classes will do well enough to carry the rest of the portfolio.

There's a mutual fund that follows this strategy, although they do vary it a bit. The ticker is PRPFX. It's not a fund for those looking for a tremendous return, but rather is designed for steady growth. It has, however, been known to go up dramatically in certain economic conditions. Most recently it has gone up quite a bit due to the increasing value of gold. It protects itself by rebalancing the portfolio periodically to avoid being overcommitted in any one investment class.


Based on my original discussion with her, that may have been a good choice. However, now that I ran the numbers, she needs to do more them maintain her investment. She needs to fight the fact that her expenses rise faster then her income and without a higher growth rate in savings, she will run out of money.

Splotto
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What did you mean by "self-fulfilling crash" ?

Scott,

I think the traders are so convinced that stocks inevitably crash in September, they sell (and short sell) on that assumption, causing it to happen (i.e., a self-fulfilling prophecy). I don't believe in market timing, and there is no certainty this will happen, so I wouldn't act on this prediction (disclaimer, my predictions are always wrong) by pulling money out of stocks. However, I have decided to make the end of August and late October my rebalancing dates, and I see no reason for someone to put a lot of money into the market now (if you're dripping, fine) instead of waiting a few months, given this pattern. Last year, when I had to be out of the market for a time anyway, to get out of my brokerage fund over to Vanguard, I chose to do it over this period, and got back in about 10% lower than where I left, which more than covered my load fee. But I have no intention of doing anything like that this year.
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My mom is concerned that one day she might have to go into a nursing home and that the nursing home will take all her savings before she qualifies for medicaid. (This happened to her mother.) She has shifted a small amount of assets to my brother and me or opened joint accounts with us. However, the bulk of her assets remains in her name. Should I direct her to an attorney to figure out a plan? She would like to be able to leave her money to her grandchildren for college, etc. If it helps to know, the savings amount is not particularly large, but she is financially set for life through other means and does not need the savings to live on.

KW,

Does she know about long-term care insurance? It costs an arm and a leg, but may be the way to go. Earlier in this thread, I posted a link to TIAA-Cref's long-term care insurance calculator.
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How is it that she is getting SS and a government pension tax-free? I don't think that what my spouse is looking at in a government pension.
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Hello
I have a suggestion after reading everyone's ideas. No one suggested putting all $100,000 in a savings/money market fund and wait for opportunities to arrise for what you know as good safe investments at close to the best prices.
I sold my condo and invested everything within a short period of time and didn't understand the importance of price. I bought index funds, a small cap value fund and an international fund. They had good morningstar ratings. I bought GE and PFizer as a possiblity to increase the returns.
I am sure you know what happened. In less than two years, I lost 33% of my money. It was a nightmare. For the last 8 months I have tried to learn on my own and opened a small Scottrade account. I have been able to make profits because I learned about buying at a reasonable price and selling at a reasonable profit.
I think you could wait for the impending pullback in the market and do a lot better for your mom.
I'm just a beginner and am only two years younger than your mom.
Dianne
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You make a good point. I think that a lot of people would suggest dollar cost averaging because it is extremely difficult to recognize a "good" opportunity and even more difficult to actually pull the triger on the investment.
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Splotto,

Living in Florida, I can't give yoou details on PA rates, but I would guess that they might be less than in Florida, since the "elderly" population is so large here. Anyway, I got a policy for my wife (age 66) for Medicare-supplement from Blue Cross @ $109/month. Between Medicare and the supplement, her medical costs are quite well covered. Of course, Medicare has no drup coverage at this time, and from what I've read, the proposed plans being "debated" in Congress are really not going to help that much until you have thousands of dollars spent yourself. I've been going to Canada for my wife's drugs. Basically, you can save 30-60% over best prices in US pharmacies. One more thought...since I was involved in the Long Term Care field for 5 yrs before I retired, I can highly recommend the policies written by G E Capital. The benefits are the best in the industry, and they have managed to stay in the LTC business since 1974 without ever raising rates on a particular policy. Other companies may start out lower, but there have been many huge increases in their rates over the past 3-4 years. Good luck to you and Mom. Curt
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Living in Florida, I can't give yoou details on PA rates, but I would guess that they might be less than in Florida, since the "elderly" population is so large here. Anyway, I got a policy for my wife (age 66) for Medicare-supplement from Blue Cross @ $109/month. Between Medicare and the supplement, her medical costs are quite well covered. Of course, Medicare has no drup coverage at this time, and from what I've read, the proposed plans being "debated" in Congress are really not going to help that much until you have thousands of dollars spent yourself. I've been going to Canada for my wife's drugs. Basically, you can save 30-60% over best prices in US pharmacies. One more thought...since I was involved in the Long Term Care field for 5 yrs before I retired, I can highly recommend the policies written by G E Capital. The benefits are the best in the industry, and they have managed to stay in the LTC business since 1974 without ever raising rates on a particular policy. Other companies may start out lower, but there have been many huge increases in their rates over the past 3-4 years. Good luck to you and Mom. Curt

Curt:

Thanks.

Funny thing is, I saw a stat the other day that there are more seniors in PA then any other state. No proof it was right though. I know we have a huge age-restricted housing boom here.

Local townships love age-restricted housing. No load on the schools, less police calls, and they still pay RE taxes.

Splotto
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Lockious,

<<Let's face it: in 20-30 years, the elderly in this country (i.e., your mom and me) are going to be living like those pensioners in Russia after the collapse of the Soviet pension system.>>

I have a neighbor who is retired (I'd guess his age at around 65-70 yrs. old) and says that they were saying that when he was 30 as well. I'm not saying we don't have issues with the social security system in this country, but thought that was an interesting comment.

JP
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The word "afford" is all over this long (52) thread.
But not a single "Ford" as in Ford Money Market Account.
-
Also not mentioned: Virtual Bank

Latinus, fond of doing "Ctrl + F"
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I have a neighbor who is retired (I'd guess his age at around 65-70 yrs. old) and says that they were saying that when he was 30 as well. I'm not saying we don't have issues with the social security system in this country, but thought that was an interesting comment.

jp,

I always hope that pessimism is just the same old thing: there's a line in the song "Cockeyed Optimist" from South Pacific that says something about all the cynics who've been predicting the worst forever.

Nonetheless, there are real problems that need to be dealt with, and not just the well known one of social security going into deficit. Many fewer people now have traditional pension plans. A lot of folks have not saved as much as they should have, partly because they believed unrealistic hype about returns on investment (most retirement calculators were using default assumptions with returns on investment being 4-5% above inflation); most, of course, have never tried to calculate how much they need or couldn't come close to saving enough, even if they tried. Health and long term care costs are out of control.

We're upper middle class, with no kids, and have always lived a frugal, if not miserly, lifestyle. We save over 60% of our pay after federal and state income taxes (including pre-tax retirement deductions and match(. And it's still a struggle to put away enough to feel comfortable we won't outlive our savings. You can see from Mother Splotto how what looks pretty good may not be.

Most people I know in their 50s have little savings besides their highly mortgaged houses and 401Ks, which they usually have not maxed out. Many of our friends with higher combined incomes than ours are going to have to work till 75. And we're talking folks who are classified as well -off, if not rich. Maybe I'm just a cokceyed pessimsit—hope so—but I'm worried.
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splotto, you might want to consider posting your original question here

http://boards.fool.com/Messages.asp?bid=112992

62 is not really retiring early, but they have some good ideas there. I would also post your analysis

I am starting with these assumptions:

SS increases 2% per year;
Her expenses increase 4% per year;
Her investment yields 5% per year, reinvested.

With those numbers, if she investes her surplus in the same way as the lump-sum money, she will run a positive balance for more then 40 years. The break even point for the invested money is about $70k. If she invests less then that in the beginning, she will run out of money.

The retire early folks have done a lot of analysis on this type of "problem", and I'll bet they will give you new insight.

I wonder how she figures to live on $1000 a month. Sounds low. House expenses, taxes, and so forth. But she should also budget for more entertainment, smelling the roses, as it were. And, as someone already said, let her ne'er-do-well son save his own money.

cliff
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I skipped some of this string, but the first one stated a distribution that worries me. CD yeilds are in the pits. A 5 year ladder is locking in a very low yield.

Second, Is there a paid up house in the background? If so it is a real asset that is a potential reverse mortgage emergency backup.

Are there state income taxes lurking in the background? Why municipals if all money is tax exempt? Check this one carefully. It may not be! As one who retired 7 years ago, we are hit by income tax on 85% of the SS, all pensions and modest exemption in state taxes to keep us from moving to a more tax friendly state.

Your thinking is admirable, keeping the brokers/leeches at bay is the first task.

Either Vanguard or TIAA are the two mutual empires that should contain
any fund you might need. The extra half percent yeld doesn't sound like much when interest yield is 5% or more, but in 2% it is a major change
of usable money.

Take a good look at coverage for extended care. I did and have sufficient assets to not choose this one. But we pump big money into a tax exempt fund that increases as we get older. It is an alternative to owning a policy IF there are other assets to cover the potential costs.
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I am not suggesting that the dear Lady spend all her time watching the bond market. Large changes are not instantaneous in the sense that she should panic . Nevertheless should she desire to get out or move money it takes a few minutes.

I am suprised by the thought that you are not aware of the fact that any bond fund can move the duration within limits. I can assure you that the trend is to shorten duration in many Vanguard Bond funds.

So I merely suggested that two or three Vanguard funds could do the job and they can.

Binturong
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"I skipped some of this string, but the first one stated a distribution that worries me. CD yeilds are in the pits. A 5 year ladder is locking in a very low yield. "

Duke,

5-year CD yields are the pits, I agree. But find me an alternative in the low-risk-to-principle category (assuming low enough tax bracket to rule out tax-exempt). EE-bonds would be my choice with 20-years until the money is needed, but otherwise, what's going to do better? You can get slightly better yields in some intermediate bond funds, but then you have to deal with interest rate risk, and even a slight nudge up in interest rates makes the total return lower than the CDs. Treasuries are worse, unless you want to lock in low rates a lot longer than 5 years. Going for short term options means sitting on even lower yields waiting for rates to go up, and it doesn't take a lot of waiting until you're better off with the 5-year CDs.
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Have you considered a variable annuity? She could put the principle in the fixed account currently paying about 3% in the New York Life annuities that I'm familiar with. She could sweep the interest into mutual funds of her liking and risk tolerance. The money would grow tax deferred and her principle would be guaranteed. She could annuitize in the future, do partial surrenders of up to 10%, or take out the gain without surrender charges if she needed the money at some point. There are lot's of other features, some of which are free and others that cost. I'd look into one for at least some of your mother's money.
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Definetely see an attorney, visit at least 3 to get their opinions. Shoudl be an attonrey who specializes in Elder law and Trusts. There are at least a couple of way to protect funds from medicare drain.

dmh
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I-bonds can beat 5 year CDs currently. I just ordered a bunch. As of May 1, they're paying 4.66%, if I recall the exact number correctly. Rates change each May and November. There's a limit as to how much you can buy in a year; I think $30,000. You can't cash in for 1 year; after that, if you cash in before 5 years, you lose 3 months interest (decreasing your interest for that last year to about 3.5% at the current rate); you get full interest cashing in any time after 5 years. You don't pay tax on the interest until you cash in the bond (unlike the deal with TIPs). Gov't has a website where you can get full info, order online, even set up an electronic Treasury Direct Account and order electronic I and EE bonds. (You cannot yet convert paper bonds to electronic bonds, but they're looking into adding this feature). I think the website is www.savingsbonds.gov -- if I'm wrong, check a search engine, which is how I got there myself. The Treasury Direct account is set up through another website, probably www.TreasuryDirect.gov -- I think I got there via a link from the savings bond site.

Other thoughts: Having thoroughly studied Gillette Edmunds' book published in 2000, "How to Retire Early and Live Well with Less Than a Million Dollars" (which, despite the generic title, is by far the best of many investing books I've read), I would do with Mom's money what I'm doing with my own: Put it into 3-5 non-correlated asset classes. The book tells you everything you need to know about this, and has certainly convinced me that it's the least risky strategy of all. I would consider the pension/SS $ as the equivalent of bonds, and divide the $100K plus any future reinvestments equally into other non-correlated asset classes, rebalancing every year or 2.

My own choice is 20% each into: US non-REIT stocks; real estate; oil & gas; stocks of developed foreign countries; and emerging market foreign stocks. (The book discusses other potential asset class choices as well, eg: gold, bonds, etc.) My personal choice of vehicles for investing in these various asset classes is as follows:

For US non-REIT stocks: Vanguard Total Market Index Fund (not sure if that's the exact name, but it's the index fund covering the entire US stock market); and two exchange traded funds: RSP (S&P 500 Equal Weight Index Fund, which is rebalanced quarterly and holds equal dollar amounts of each stock) and MDY (S&P MidCap SPDRs).

For real estate: Individual REIT stocks (you can find a list of "Blue Chip REITs" on the TMF message board on Real Estate - Investing in REITS); and Vanguard's REIT Index Fund. The latter does go against Mr. Edmunds' advice to buy no more than about 5 individual REIT stocks, because more (such as an index fund) will give you too high a correlation with US small cap stocks, but I figure the high dividend yield of REITs makes a big difference between these 2 categories.

For oil and gas: two exchange traded funds: IXC (Global Energy Index Fund -- top holdings are almost all big oil cos -- Exxon, BP, Total Fina Elf, Royal Dutch/Shell, Chevron, etc) and OIH (Oil Service HOLDRs; must buy in 100 share lots, current cost high $60s per share, invests in oil service cos as opposed to oil production cos); and one stock, KMP, Kinder Morgan Partners, large natural gas pipeline co. There's also the parent co. Kinder Morgan (KMI) which pays less in dividends but has more growth potential -- see recent TMF article about the co. I'm still researching other ways to invest in oil & gas, but these are my 3 so far.

Stocks of developed foreign countries: several exchange traded funds: EFA (Europe, Asia, Far East, tracks MSCI EAFE Index; note holdings are heavy on UK and Japan stocks; also top single holding last check was BP, which overlaps the Oil & Gas category -- ie: know what your index funds actually hold!); EPP (Pacific excluding Japan -- heavy on Australia); EZU (European Monetary Union or EMU index -- stocks of European countries using the Euro -- so it excludes UK and, for that matter, BP). The latter 2 are to balance out the heavy weighting of UK and Japanese stocks in EFA. Another to consider is IEV (S&P Europe 350; the S&P's choice of 350 top European stocks, which do include UK).

Emerging Market Stocks: One exchange traded fund - EEM - tracks index of emerging market stocks (just started trading in April 2003, up 20% already), and Vanguard's Emerging Markets Index Fund (charges a 1/2% purchase and redemption fee).

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AH, yes. I had read about this before, but it didn't come to mind. As you can tell, I am not (yet) a voracious investor, just someone with IRAs, a bond fund, and a 401(k) that needs rolling over. Can't decide what's best, still mulling.

Scott
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Have you thought about TIPS or I-Bonds?

-neondeion
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Neon:

Have you thought about TIPS or I-Bonds?

I actually lump I's in with EE's. I would put her in whichever was better given her horizon.

I am not a big fan of TIP's, and especially TIP's funds, these days. There have been some great discussions on this board about TIP's and their prospects.

Splotto
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"Have you considered a variable annuity? She could put the principle in the fixed account currently paying about 3% in the New York Life annuities that I'm familiar with. She could sweep the interest into mutual funds of her liking and risk tolerance. The money would grow tax deferred and her principle would be guaranteed. She could annuitize in the future, do partial surrenders of up to 10%, or take out the gain without surrender charges if she needed the money at some point. There are lot's of other features, some of which are free and others that cost. I'd look into one for at least some of your mother's money. "

"Annuitizing" one's remaining capital is a good way of extending one's year-to-zero date. But, except in some cases where a gift to charity in exchange for income-for-life has a tax pay-off (not applicable to Mother Splotto), there's no reason for taking this route until actually reaching the point where one can no longer live off the returns, alone, and is forced to break into principle. And, if one has a son (or daughter or Dutch Uncle) who is willing to add to one's savings in exchange for inheritance, this accomplishes the same goal, without leaving the remnants to some insurance company, if one doesn't outlive the actuarials. (Since the actuarials build in profit and expenses, the break-even age for an offspring as "annuitizer" would be several years older than for the insurance company.)

The more I read by those not actually selling after-tax annuities, the less reason I see why anyone but a few in special tax circumstances would want to use them, especialy those getting up there in years, who don't have enough time left for the tax delay to make up for added expenses. The tax changes make this all the more true for any variable annuity holding stocks, and I'm yet to see any after-tax fixed annuity that's offering a rate good enough to prefer it to an FDIC insured CD (or an EE bond, if you're young enough for the tax deferral to pay off).

Vanguard and TIAA-Cref are known for low expenses on their variable annuities, but if you run a comparison between the same bond fund offered as a regular fund and as a variable annuity, for someone in a middle class tax bracket, it takes almost 20 years before the tax deferral advantage catches up with the higher expense ratio for the annuity. With someone like Mother Splotto in a bottom tax bracket, I doubt it would ever catch up. Of course, when you talk about something that generates low annual taxes, especially with dividends now being tax-advantaged, such as an index fund, the higher expense ratio for the annuity version of the fund makes it unlikely that the annuity will ever catch up, even for the young and wealthy, let along for the aging and not-wealthy. I really wish I knew why Vanguard, which usually is pretty up-front with information, is increasing its offerings of stock funds available for annuities.
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I read this with great interest, because it sounds a lot like the circumstances many of my coworkers are in....Voluntary Early Retirement or Severance with a big one-time payout.

One of the huge disadvantages of taking the cash payout that the company is offering is the fact that they are going to withhold approx. 28% for the folks at IRS, plus FICA.

It seems to me that if a person invested it properly, it could be tax-deferred, so a person could get a refund of the funds withheld, next year. I don't know this, I'm just guessing.

Anybody out there have some suggestions?
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KW: The best way I know of to protect mom's assets is Long Term Care insurance. You can analyze it a hundred ways, but the odds are > 50% that your mom will need some kind of care in the future, depending on her age now, health, etc. One large advantage of LTC ins. is that it almost always covers care in the home (nobody wants to go to a nursing home if they can avoid it). With a policy which includes a 5% compound inflation provision, there is every likelihood that, as, if and when your mom needs the benefits, they will cover almost every dollar of cost. Typically, depending on number of yrs. you've had the policy, age, and inflation clause, you'd find that even after paying premiums for many years, you would recover the premiums paid within the first 6-8 months of receiving benefits. If you assume that the person will need benefits for 2.9 years (average), you can see that the premiums are well worth it, especially since they appear to be affordable in your mom's case. Having worked in the LTC field for 5 yrs, and being a policy-holder myself, I cannot think of a better way to preserve assets, assure good care when you need it, and gain peace of mind (which has a huge value to older people). If you need more, just ask. Curt.
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where?...NEM on the next good dip...why?...cause that chart has multi year upside....go figure?.tr
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I realize this started out as just a question of how to invest the $100,000, but the thread has turned more into how to manage your monther's finances for the next 40 years.

One option I haven't seen mentioned yet would depend on your mother's personality. For some people at that age, it is not an unreasonable option but it does depend on her health and what she wants to do with her retirement.

Does she plan to stay in the workforce? A part time-time job at someting she enjoys could be a good option. It doesn't have to be something that pays extremely well. Since her current living expenses are already more than satisfied, part time income may be entirely directed to growth investing. If she puts it all in stocks, and the market tanks, she is at least not behind the eight-ball.

Finally, I have seen retirement itself have a negative effect on some people. Not having something to do can really eat into a person's health -- both physical and mental.

Again, this is a highly individualized concern; YMMV.

Cromely.
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Cromely:

Actually, she is considering doing some consulting work for the soon-to-be-former government employer. I honestly think she will be looking for some work to keep her active and fullfilled. She works 7 days a week now. I don't see an easy transition to 0 days a week.

Splotto
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Lokicious,

Great reply with some good facts to back it up. One more thing that my neighbor says (and he's doing pretty well from what I can see-upper middle class, two grown children, vacations in Florida two months per year-you know the story) is that he's been in the market "a long time" and it's been good for him over the long term. The key here is long term and I think that (for example) 10 years is not long term for the market. History tells us that bear markets can last a lot longer than that. This is where I also disagree with the fool's advice to not put your money in the market that you'll need within 5 years. Take a look at the last five years for the correct answer on that one. My thought is 25 years minimum, or the risk outweighs the benefits. Again, just my thoughts and my risk tolerance.

The point you make is that most folks don't make a plan to see what they need for one or more specific goals. So valid! How can you make a map without knowing the destination? Great advice.

One of the best things I've learned over the last 3 years is that I am an index investor. I thought for a short period that I could devote the time to do the proper research to be a well informed individual stock picker. Not to be for ol' JP. Truth is sometimes hard to swallow.
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One of the best things I've learned over the last 3 years is that I am an index investor. I thought for a short period that I could devote the time to do the proper research to be a well informed individual stock picker. Not to be for ol' JP. Truth is sometimes hard to swallow.

jptd19355-

If you're going to be an index investor, in my opinion, it would behoove you to learn at least a little bit about the relative valuations of stocks and indexes. Think about what the average advisor that advises based on the strong form of EMT would have said in the beginning to 2000. If you were a young investor that said you were fairly risk-tolerant you would have been advised to put 100% of your long term savings in a total stock market index. A simple familiarity with various historical market PE measurements would have told you that the market was dangerously overvalued by any stretch of the imagination and would have served as a reality check against that kind of advice. Just an opinion - not investing advice.

-J8

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The point you make is that most folks don't make a plan to see what they need for one or more specific goals. So valid! How can you make a map without knowing the destination? Great advice.

JP,

This reminds me that, with all the discussion of Splotto's Mom, the idea that she would continue to do some work didn't get brought up until late (sometimes many voices do help, even if you have to sort the melodic from the noise). This is why planning requires all the available information.

If she keeps working, this probably means she should be eligible to put away much or all of what she earns in a tax deferred (pre-paycheck) account (maybe a SEP, if she's a consultant not employee), while living off her pension. And, this may also mean adding to her social security basis (even if she has to pay both parts, as self-employed). Might it be better to postpone when she starts to receive social security?

If she does have a taxable income, the difference in taxes between her and Splotto would probably be less extreme than we've been envisioning with his gift money to her. He might still want to do that, but maybe wait until she's earning less or nothing.

If she is eligible to put income from continued working into an IRA, then looking at tax disadvantaged investments (CDs, someday bond funds maybe, REIT?) in the IRA makes sense, which makes putting her lump sum buy-out into stocks even more reasonable.
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One of the best things I've learned over the last 3 years is that I am an index investor. I thought for a short period that I could devote the time to do the proper research to be a well informed individual stock picker. Not to be for ol' JP. Truth is sometimes hard to swallow.

This is a good truth to come to. I am moving in that direction. I'm not very good at picking individual stocks. I buy without fully understanding, and then I fret. I'm much more comfortable with index funds. It's less work and hassle. As another post mentioned, paying attention to valuations is useful, too.
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Splotto,
Would your mom like to adopt an aging Armenian man? I guess if she has her living expnses cared for I don't know why she would not want to put at least some of her money into a higher octane vehicle. Naively perhaps I would put 50 into Nuveens and 25 into Berkshire B's. The other 25 could go into muni's (if she has very very little desire for risk) or some sort of index fund, like the Vanguard. By the time I am ready to retire there should be a goodly amount of money to sqaunder.

Ara
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Hi everyone,
I have never actually posted but read Motley Fool alot -- but this thread on Mom's $3800 a month tax free from pension and social security sources caught my attention -- and concern. I do taxes for AARP Tax Aide as a volunteer service, and I have yet to come across any pension distribution that is truly "tax free" at least at the federal level. Almost all pensions are taxed as ordinary income now (yes, there are some ancient exceptions....). Furthermore, since Mom has total income over $25,000, (i.e. $3800 times 12 months), then some of her Social Security is going to be taxed as well (I am assuming she is filing single...since tehre is no mention of Dad). Just wanted to ensure that you all don't think that there is really $3,800 a month in post-tax income present in this discussion. Unless I missed something, I wanted to ensure that everyone knows that retirement is not a tax-free haven -- just mostly a "tax postponed haven" and the tax man shows up with distributions occur -- yes including the IRAs when she eventually starts tapping the $100,000 rollover nest egg.
Carol Smith
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'I do taxes for AARP Tax Aide as a volunteer service, and I have yet to come across any pension distribution that is truly "tax free" at least at the federal level. "

Okay, Splotto,

Ball's in your court. The tax free pension sounded strange to me, but I assumed you knew what you were talking about, and lacked Carol's expertise the raise doubts.

I know I'll be paying taxes.
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Ball's in your court. The tax free pension sounded strange to me, but I assumed you knew what you were talking about, and lacked Carol's expertise the raise doubts.

I raised the concern with my mom as well. It seems that a portion will be tax free. Initially they funded her pension with pre-tax money from her check. They then switched to after-tax contributions. She is working on getting me the % of the pension that will be tax free.

Also, after putting the screws to her even more, I learned there are 3 options for the lump sum money. full rollover, partial rollover and total withdrawl. I am trying to get my hands on the plan information now. When I combine that with the taxable % I should be able to make a better decision.

What about SS? I thought that was tax-free.

Splotto
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http://ssa-custhelp.ssa.gov/cgi-bin/ssa.cfg/php/enduser/std_adp.php?p_sid=H*CoO2Mg&p_lva=&p_faqid=493&p_created=975936428&p_sp=cF9zcmNoPTEmcF9ncmlkc29ydD0mcF9yb3dfY250PTI3JnBfY2F0X2x2bDE9NyZwX2NhdF9sdmwyPX5hbnl_JnBfcGFnZT0x&p_li=
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"I raised the concern with my mom as well. It seems that a portion will be tax free. Initially they funded her pension with pre-tax money from her check. They then switched to after-tax contributions. She is working on getting me the % of the pension that will be tax free.
Also, after putting the screws to her even more, I learned there are 3 options for the lump sum money. full rollover, partial rollover and total withdrawl. I am trying to get my hands on the plan information now. When I combine that with the taxable % I should be able to make a better decision.
What about SS? I thought that was tax-free."

Let me say, this thread is one of the best examples of where Motley Fool really matters. It looks to me like the initial impressions of her pending retirement situation you were given by your mom were misleading. Having a bunch of different thread participants pressing you (and through you, your mom) on various issues not only has potential to help your mom really get her financial situation in order, we all learn at lot about the complexity of retirement finances.

A few more questions. Is her lump sum taxable? Even with the portion of her pension that is after-tax, are there earnings that are taxable?

Social security taxes are complex. Depending on income, a large portion (I believe up to 80%) is now taxable—I'm sure Carol can explain. They made social security distributions taxable a few years ago. And the taxes flow into the general fund, not back into propping up social security. Of course, since social security is bond interest, it gets taxed at marginal rate, not dividend/capital gains rate.
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A few more questions. Is her lump sum taxable? Even with the portion of her pension that is after-tax, are there earnings that are taxable?

The lump sum is the portion that has the various roll-over options. Once I review them, I will know more.

I agree 100% with your feelings on TMF. My mom gets the benifit of 1000's of advisors for free. :-)

Splotto
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Hi Splotto, Carol here.
The ugly little secret about Social Security today is that up to 85% of it can be subject to federal income taxation, depending on your Mom's other income. And taxable pension payments (the portion you have clarified that is indeed going to be taxable) plus any other income she has in the form of traditional IRA withdrawals, regular dividends, CD earnings, income from Treasury bills, etc -- is added up in order to determine what percentage of her social security will now be "clawed back" into the IRS taxable equation. There is a worksheet in Publication 17 from the IRS called the Social Security Worksheet that you may want to visit. It is also in all of the smaller workbooks that are published each year. Go to www.irs.gov and search for Publication 17. Then see page 87, section called "Are any of your Benefits Taxable?" There is a short set of worksheet questions grouped there.... You will quickly get the idea -- and then understand that anyone who really effectively PLANNED for retirement and now has access to various tax deferred monies or income streams of the normal ilk to rovide a realistic comfortable living amount will find some or all of their social secuirty being taxed.... Carol
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Carol:

Thanks. I am looking into it.

Splotto
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