 Investing
mom's retirement nest egg
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 Dear
Dr. Don,
My father died recently and I am helping my retired
mother with her finances in retirement. She currently draws a teacher
retirement of $24,000 per year, and after debts and other related
expenses due to the death, she will have about $450,000 to live
on for the rest of her life. Her monthly living expenses are currently
about $1,500. She is 54.
My plan is to be conservative and put one-third
into CDs that last no longer than a year, one-third in T-bills and
one-third in tax-free municipals. I figure that I could probably
average about 5 percent to 7 percent and that she could live on
that 5 percent to 7 percent in addition to her teacher retirement.
Of course she would have to put about 3 percent back onto the principal
to keep up with inflation. The idea is to generate a decent income
she can live on with the least amount of risk. Any problems with
this idea?
-- Bryan Bonds
 Dear
Bryan,
I've got a ton of problems with your idea. Your
mother, retired in her mid-50s, needs to be really concerned with
not outliving her income. Investing this conservatively keeps the
$450,000 in principal mostly protected from loss in investment value
but doesn't do a very good job in protecting that money's purchasing
power over time.
You didn't mention whether she
owns a home and if the equity in that home is part of the $450,000
she has to live on for the rest of her life. She needs to take a
big-picture approach to managing her wealth in retirement. The equity
in her home, for example, could be tapped with a reverse equity
mortgage later on, and knowing that she can tap that equity if need
be gives her some financial flexibility with how she invests the
rest of her money. An FTC
Facts for Consumers publication explains reverse equity mortgages
as does the Bankrate feature, "Reverse
mortgages: Retirement's on the house."
U.S. Treasury bills, or T-bills,
are short-term securities with a final maturity of less than a year.
Treasury notes have final maturities more than one year but no more
than 10 years, and Treasury bonds have final maturities more than
10 years. Putting one-third of her money in T-bills and one-third
of her money in short-term certificates of deposit, or CDs, is just
far too conservative for a woman who gets a $24,000 per year pension
and is living on $18,000 per year. She's got a bit of a cash cushion
there and she certainly doesn't need $300,000 in liquid investments.
Splitting the investments between
taxable and tax-exempt, or municipal, securities also isn't a great
idea. While a U.S. Treasury security always carries less risk than
even the safest municipal offering, it either makes sense for her
to be in municipals or it doesn't. I don't know enough about your
mother's taxable income and marginal tax rates to predict this now,
but her tax professional can help her decide whether municipals
make sense for her in her tax bracket. A CCH
calculator can help you decide, too.
U.S. Treasury inflation-indexed
securities, either TIPS
or Series
I savings bonds, can protect her retirement nest against the
ravages of inflation. Owning TIPS in taxable accounts is a bit of
a nuisance, because the inflation adjustments become taxable in
the year that they're earned but aren't paid until the security
is either redeemed or matured. Series I savings bonds allow you
to defer the income taxes until redemption or maturity, but purchases
are limited to $30,000 per year in paper bonds and $30,000 in electronic
securities through Treasury Direct. Municipal and corporate inflation-indexed
issues also exist but aren't widely available.
There are health-care issues to
address here, as well. Depending on her health, genetics and some
other factors, it might make sense for her to purchase long-term-care
insurance. Planning for contingencies regarding her retirement health-care
benefits is also important.
Investing some of her retirement
nest egg in fixed annuities can also make sense. A lifetime annuity
would ensure an income stream. An inflation-adjustment rider to
that annuity also protects purchasing power. Vanguard's Web site
will let you price an annuity. My shoot-from-the-hip advice is that
it's not the right time in either the market or her life to make
an annuity decision in the near future, but it's good to get an
awareness of what is out there.
The real message here is that you
and your mother should meet with a financial planner to discuss
all these issues. I recommend that you work with a fee-based planner
and pay him or her an hourly fee to discuss the situation. Don't
invest in securities or buy insurance or annuities unless you're
both completely comfortable with what's offered. Pay for a second
opinion if you need to before committing the funds.
Jane Bryant Quinn's piece
in the Feb. 13, 2006 issue of Newsweek does an excellent job in
explaining the decision process in choosing a planner. I had some
thoughts myself in an earlier Dr. Don column on "Picking
a financial planner."
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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