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Scott,

My mother-in-law was recently widowed and has a $150,000 term life ins payout to invest.  She will be 71 years old next month.  She currently owes about $60K on her house (valued at $137K), receives a monthly pension payment of $2,273 guaranteed for her lifetime, as well as $990 monthly from social security.  Her financial advisor (a commission-based sales rep from Edward Jones) is recommending a variable annuity with an inflation-adjusted guaranteed payout of 5% for the $150K.  From what I understand, variable annuities are horrible investments for the investor, but great for the salesman.  I don't feel good about sticking her money in one of those.  

Would something like your AB 06 or 07 portfolio make more sense for the $150K?  Or would you recommend something else?  If we did go with the AB 06 or 07 portfolio, what are the tax implications of drawing out a small monthly portion from the portfolio at her age?  Would it be best to wrap it in a traditional IRA, or can you even do that at her age? 

Thanks in advance.

Hi Matt.

I'm not Scott, but I have faced some of the same questions about my mother.  To take your last question first, an IRA is not available for insurance proceeds.

I don't know the details of the Ed Jones annuity, but I would ask serious questions about how the inflation adjustment is figured.

For comparison, I went to the Vanguard web site, and for $150,000, they will pay out $11,130.48/yr with a 3% inflation adjustment, or $10,250.64 with a 4%/yr inflation adjustment.  If you want to duplicate the excercise, I told the online calculator that she was born 1/1/1937, and would start receiving payments 1/1/2009, and would get paid once per year.  This is for a single life annuity, with no remainder.

Bryan

Matt,

 I'm not Scott either but you leave so much information out. 

Does your MIL need income now?  She has just over $3,200 coming in per month.  Is that enough to cover her current expenses?

How is her health?  People that suspect they won't live "forever" or at least a very long time probably shouldn't consider any type of annuity.  Buying it through Edward Jones pretty much guarantees a poorer financial product than Vanguard.  The prior post showed a much better return through Vanguard but there are all sorts of details that may be distorting this.  I'm almost always against annuities because of their poor financial performance.  

Does she have any other assets?  Her biggest financial concern is probably long term care.  What are her plans for that?  Realistically, she should have a combination of fixed and equities.  Between her pension and SS, she has a pretty high "annuity" level.

Can she physically live in her home for the the next 5 years without assistance?  If not, it's probably time to sell and pocket the equity.  If she can, the $60K mortgage is probably a good thing to pay off since I suspect she doesn't itemize.

 Good luck.  My wife and I are dealing with my FIL's finances.  It's a thankless pain in the rear.

Ken 

Bryan - thanks for the input.  The annuity he's pushing is actually from AIG.

Her expenses are more than covered by her monthly pension and social security.  On the $150K, I think I'm leaning more towards a conservative index portfolio, such as the Asset Builder 06 or 07.  She could draw a minimal amount (if she needed it, which she doesn't, at this point) plus, be able to pass on the money to us kids when she dies.

So, if I go with the AB 06 or 07 (or any mutual fund portfolio, for that matter) can I put that into an IRA to minimize her tax burden? 

Ken,

Good thoughts - thank you. 

Her monthly pension and social security benefits more than covers her monthly expenses, so she doesn't really need any additional income at this point.  She is in relatively good health right now, although my wife and I are starting to see early signs of dementia.  She will be starting drugs to slow the process, but it cannot be stopped.  There is certainly the possibility she will need some sort of care in the future.  She may be able to live in her home for the next 5 years without assistance, but it all depends on how fast the dementia progresses.

I don't feel good about the annuity, honestly.  I like your suggestion to have a combination of fixed and equities.  And, as you say, her "annuity" level is pretty high between the pension and social security.  So, if I park the $150K in some sort of index portfolio (Asset Builder or otherwise) and let it ride, what's the best way to minimize her tax burden on that?  Stick it all in an IRA?

She has to have earned income (wages) to contribute to an IRA, so that is probably not going to be an option.  You can still do an assetbuilder or couch potato portfolio in an after-tax account.  The equity portion will be pretty tax efficient but she will have some tax liability due to the TIPs in the bond portion.

 She could also look into Vanguard's Tax-Managed funds.  VTMFX is the Balanced fund and has returned 7.08% annualized since 1994 after taxes and sale of shares.  It is about 50-50 split between bonds and stocks and has expenses of 0.12% a year.  There is a 1% charge on shares held less than 5 years so you may not want to put the whole $150K in there initially.

 Also, it may be too late but have you considered Long-Term Care Insurance?  If she has to go into a nursing home the $150K will be history in just a few years.

noppenbd,

She actually works about 20 hours a week still.  Her employer is very flexible with her schedule and the "intensity" of work (her employer is a health care provider and also a long-time friend of the family, and he has been very understanding of the whole situation). 

So, given that, as long as she's still drawing a paycheck, would it be advantageous to do some sort of mutual fund portfolio through an IRA?  I doubt she'll continue working much longer - but we may want to take advantage of setting up the IRA now while she's still drawing a paycheck.

I'll need to look into long-term care insurance.  Good suggestion. 

 In that case she can make a contribution of up to $6000 this year and for each year going forward that she has earned income.  She can only make a contribution up to the amount of salary she reports to the IRS.  So if she only earns $5000 this year then she can't put more than $5000 in for 2008.  Unfortunately, due to the contribution limits a Roth is not going to do much for the bulk of the $150K, so look into the after-tax brokerage accounts for the remainder of the insurance proceed.  Also, Roth monies can't be withdrawn until 5 years after the account is opened, so at least a portion of the $150K should be set aside in CDs or simple savings for her monthly withdrawals for the next 5 years or so.  To clarify, here is one possibility, assuming she needs to withdraw $1000 a month from the portfolio to supplement her income:

$6000 into Roth IRA (invested in couch potato portfolio)

$60000 in ladder of CDs (5 years @ $12000 a year)

$84000 in after-tax brokerage account (invested in couch potato portfolio)

Matt,

This is what it's all about. The decisions we make aren't based on pronouncements from an oracle. They are based on conversations in which all the alternatives (and nuances) are slowly revealed--- witness the train of observations from other forum members.

My personal take on this is as follows:

1) her immediate income needs are already met by annuity-like income sources so the annuity suggestion most likely if for the benefit of the salesman, not the widow.

2) Monthly cash flow can be significantly improved simply by using cash to pay off the mortgage, while still leaving enough for a small portfolio of liquid financial assets.

3) An alternative to consider is becoming part of a continuing care community. This would by-pass the need for long-term care insurance, provide an immediate safety net, take home maintenance chores off the table, and establish a new social milleau at the same time. This is best done while healthy and capable--- entering healthy is a good way to start a new social network of friends who provide mutual support.

Scott

Matt,

Alarm bells went off when you mentioned dementia.  My FIL went from "great" to "not capable of paying his own bills" in less than two years.  He was taking Aricept (sp?).  He continues to decline and now within four years he is in a memory care facility and is pretty much confused most of the time.

Noticing dementia and getting a solid diagnosis are two very different things.  I hope she has been to a neurologist and that is how she got her meds.  If she has Alzheimer's or any of the close conditions you should really consider Scott's suggestion of a continuing care community.

This is far beyond your original question.  You need to make sure that your wife (or someone) has a durable power of attorney and medical power of attorney.  It would be even better if she opened a custodial account while still functioning. 

My wife and I had nothing but trouble through the whole process.  The right paperwork helps but he fought us most of the way.

 Good luck.

We obviously have more to consider than just finances - no doubt about that.

Scott, I've been reading your stuff in the DMN for a while now.  You seem to really have investors' interests and well-being at heart.  Thanks for the good advice here.

Bryan, Ken, and noppenbd, thanks also to you for taking the time to think about my situation and offer some well thought out input.

Best,

Matt