Q. My husband and I have pensions totaling $64,000 annually. We also have his Social Security of $18,000 a year. Next summer I’ll start receiving my Social Security of $24,000 a year. With my Social Security starting at age 66 we won’t really need to use our IRA money – at least for awhile. (We have been supplementing our income from the IRA.)
My question is this: How, at ages 67 and 65, should we allocate our IRA money? It’s all at Vanguard. Currently there is:
- $215,000 in the Total Bond Market Index, Admiral shares (VBTLX)
- $115,000 Diversified Equity (VDEQX)
- $85,000 in the Total Stock Market Index, Admiral shares (VTSAX)
- $40,000 in the Total International Stock Index, Admiral shares (VTIAX)
- And in the Roth IRA, we have $32,000 in the Total Stock Market Index, Admiral shares (VTSAX)
When I look at the pie chart on the Vanguard site, it shows that I am allocated 55 percent in stocks and 45 percent in bonds. Do you think this is an appropriate allocation for our age and income? —C.M., Wenatchee, WA
A. You can increase your allocation to equities more than most people due to your other sources of income. Let me explain. Between your combined Social Security income of $42,000 and combined pensions of $64,000, you will have a relatively secure income of $106,000 a year before you start to consider your investments. Since your investments total just under $500,000 they are not likely to safely add more than $20,000 (at 4 percent) to $25,000 (at 5 percent) to your income.
Although you have a large sum saved, its potential contribution to your other income is relatively small. This means you can take a bit more risk. You can accumulate and reinvest until you need to do Required Minimum Distributions. Even then, the starting RMD is only 3.65 percent.
As a practical matter, your pension income is fixed and will suffer from declining purchasing power, so a good use for your IRA money is to have it more aggressively invested. Then you can use the required minimum distributions as a tool for offsetting the damage inflation does to your pension income. It would not be unreasonable to have a traditional 60/40 allocation, or even greater, since less than 20 percent of your income is affected by the ups and downs of the equity markets.
Q. We have 2 pieces of real estate that we plan to leave to our children. One will be left to our son (who wants to keep it). The other will be left to our daughter. We would like to have it sold and the money put into an annuity for her. Our son is prudent with his money. She is not, and he doesn't want to be responsible for her after we are gone. If we just leave her the proceeds from the sale, it will probably be gone within a couple of years.
We are not sure that our plan for an annuity is a good idea for her. The property we are leaving her is worth about $500,000. Do you have any other suggestions that would give her a monthly income for years other than an annuity? We had been told this was the best way to do it, but you don’t seem to favor annuities. We don't want to invest it in the stock market. —M.A., by email
A. There are many kinds of annuity contracts. The ones I don't have much use for are variable annuities that allow you to invest money inside a contract that provides tax deferred accumulation of investment returns until a later date. As I have demonstrated many times, the expenses of these annuities tend to defeat their purpose. This is particularly true for individuals in a relatively low tax bracket, as your daughter is likely to be.
But there is another kind of annuity contract that may suit your purposes better. It is called a life annuity. To get such a contract you give up your principal in exchange for an income that is based on the life expectancy of the beneficiary. You can explore how much income this might yield by visiting immediate annuities.com. Recently, for instance, a $500,000 payment would provide a lifetime income of $2,293 a month for a 60-year old woman and a lifetime income of $2,889 for a 70-year old woman.
In the current interest rate environment these contracts aren't wonderful deals because it takes many years before you start getting back anything but your original principal. With that caveat, however, this is a way to provide a lifetime income for a child who isn't very responsible.