Dear Dr. Don,
My father passed away and I am now handling my mother’s finances. She is 66, receives $20,000 a year in fixed income, Social Security benefits, etc. Her monthly expenses are about $3,000.
She has about $375,000 to $425,000 in cash and about $450,000 equity in her home. Her mortgage payment is $1,049 a month and the loan is a 30-year fixed-rate mortgage at 5 percent.
Where would you suggest we invest the $375,000 to $425,000 to generate at least $20,000 a year or 5 percent-plus without putting her nest egg at risk?
— Gary Guidance
When it comes to your mother’s finances, it’s far more important to review the big picture than to simply consider where she can safely invest her nest egg to earn more than 5 percent.
Meanwhile, it’s pretty hard to earn 5 percent right now on a CD. Using Bankrate’s Compare Rates feature, the best annual percentage yield I found was for 4 percent on a five-year CD.
The upside on this, at least over the short-term, is that 4 percent on an average balance of $400,000 — the midpoint in your $375,000 to $425,000 estimate of your mother’s savings — will allow her to meet her monthly expenses, as shown in the table below:
|Monthly fixed income||$1,666.67|
|Monthly investment income||$1,333.33|
|Monthly surplus (deficit)||$0.00|
You should focus on the big picture, looking beyond the interest income your mother needs to balance her monthly budget. Besides safety of principal, she also needs to consider the purchasing power of that principal.
It may be appropriate for her to buy an annuity with savings. Or, she could consider taking out a reverse equity mortgage on her home. Or, perhaps she should consider purchasing a long-term care policy.
You should get help in making these decisions. I suggest working with a fee-only financial planner. The National Association of Personal Financial Advisors can help in finding a fee-only planner in your area, and Bankrate can help you find a Certified Financial Planner. The Bankrate feature “Financial planners: not just for millionaires anymore” provides a nice primer on hiring a planner.