How to invest 300k for a 40 year old who needs to live off of it.
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How to invest 300k for a 40 year old who needs to live off of it. gotcode 01-04-2007
Posted by on January 4, 2007, 4:59 am
My mother recently won a lawsuit. She will have about 300k to invest.
She will be able to work part time (25k annually?) and will need about
another 25k annually to live on.
An 8% return on her money seems reasonable, which allows the interest
to make up the missing 25k, but this is best case, and doesn't allow
for compounding the interest. She may need more/make less and need to
dip into the principle to make ends meet.
I know this is a tough spot to be in and there isn't a "winning"
answer, but I'd like to know, in general terms, what a solid plan would
be. Here is what I'm thinking so far:
1) Keep 50k (2 years of expenses) in an very liquid state - maybe a
high interest (4+%) savings account with monthly allocations to a
checking account.
2) Ladder 150k in safe investments - CDs, T-Bills, etc., reinvesting
as they mature.
3) Invest the remaining 100k in a long term equity investment -
Probably split across a few Index Funds.

I'm hoping that by keeping the 50k relatively liquid I can avoid her
watching her equity account, allowing it to ride out dips in the market
and letting the investment grow over (hopefully) a minimum of 2 years.

I don't have any practical experience with this, but these are the
things I've picked up along the way. I'd appreciate input from someone
a little more experienced. She is a little nervous about just handing
it to an advisor and letting them have their way.

Thanks!
-Ryan


Posted by jIM on January 4, 2007, 8:30 am

gotcode@gmail.com wrote:
> My mother recently won a lawsuit. She will have about 300k to invest.
> She will be able to work part time (25k annually?) and will need about
> another 25k annually to live on.
> An 8% return on her money seems reasonable, which allows the interest
> to make up the missing 25k, but this is best case, and doesn't allow
> for compounding the interest. She may need more/make less and need to
> dip into the principle to make ends meet.
> I know this is a tough spot to be in and there isn't a "winning"
> answer, but I'd like to know, in general terms, what a solid plan would
> be. Here is what I'm thinking so far:
> 1) Keep 50k (2 years of expenses) in an very liquid state - maybe a
> high interest (4+%) savings account with monthly allocations to a
> checking account.
> 2) Ladder 150k in safe investments - CDs, T-Bills, etc., reinvesting
> as they mature.
> 3) Invest the remaining 100k in a long term equity investment -
> Probably split across a few Index Funds.
>

The important aspect of this is not having a down year in the
beginning.

A few ideas:

start with 5 years in cash- this gives the other portion longer to
compound and ride out a market dip.
of the 5 years in cash, put 2 months in CDs as you suggested, with the
other 3 years in something indexed to inflation (IMO the biggest risk
with 5 years of cash is high inflation at some point).

invest remaining in equities and withdraw in up years only. If this
account is taxable, consider favorable tax treatment of dividends.

for 50k in annual income, is there a need to increase this income over
time (inflation)?
for the 50k in annual income, is there a way to project expenses going
away over time (like a mortgage, car payment or other debt)?
how long does the 50k in income stream need to be maintained?
When can she collect Social Security? If you know a SS payment is
coming in 20-25 years, consider making sure the 300k lasts until SS
kicks in. Or invest the 300k more aggressively because you know SS
behaves like a cash/bond investment.


Posted by woessner@gmail.com on January 4, 2007, 10:18 am
> My mother recently won a lawsuit. She will have about 300k to invest.
> She will be able to work part time (25k annually?) and will need about
> another 25k annually to live on.

How long do you envision this being the situation? If it's permanent,
or for the forseeable future, you're going to need to think about
inflation. If you're looking for an 8% REAL return (i.e. after
inflation), you're looking at a 100% stock portfolio. The average real
return on the S&P 500 from 1987-present is 8.33%. I don't need to tell
you how volatile stocks are.

There's a rule of thumb in financial planning called the Rule of 25.
It says that to earn $1 from your investments, you need $25 invested.
The Rule roughly accounts for inflation. Stated another way, it says
that you can expect a 4% real return on your investments. The Rule of
25 is pretty conservative.

On the plus side, your mom may need less money than she thinks. The
money earned from investments is not subject to payroll taxes. In
addition, qualified dividends and long-term capital gains are taxed at
a rate lower than earned income. If your mother has earned income,
she'll be able to start moving money in to a tax shelter, like an IRA
or 401k. That will also lessen the tax burden, further reducing her
income requirements.

--Bill


Posted by kastnna on January 4, 2007, 10:24 am
I am not usually a pessimist, but I think what you are asking is
probably not going to turn out like you hope.

$25K a year on $300K is 8.33% average annual return NOT accounting for
taxes or inflation (two of the most important things you should be
considering). Remember both the investment and her earnings will be
taxed. Her earnings should rise with inflation, but her investment will
not. The return you need to ensure that your mother has $50k in
SPENDING POWER every year is much higher and probably not even
attainable if she is invested 100% in equities. 20 years from now she
will need over $45K annually to buy the same things that $25K will buy
today (assuming 3% inflation).

Furthermore, placing $50K in cash and another $150K in CD and t-bills
will reduce risk (which sounds like the appropriate thing to do, if
your Mother will sleep uneasy invested totally in equities) but means
that 2/3 of your principal is invested in vehicles that are almost
guaranteed not to produce your target return. 4% - 6% is common for
these investments which means the remaining $100K has to earn around
15% to get a total return of 8.33% and you will still be losing ground
to inflation and taxes every year.

Of course, as someone else already said, in 23-25 years SSI may
supplement your mother's income but if she retires the benefits will
not even replace the $25K she was earning at work. She will need even
more support from the lawsuit money than before.

In conclusion, you and your Mother should seriously reevaluate your
expectations for this money. Also, while there are many posters on this
site that have educated themselves thoroughly enough that they are more
than capable of handling their investments without paying a financial
planner, I highly recommend you consult one (fee based, not
commisions). You are new to this world and have had a large sum of
money "dumped in your lap." The consequences of learning-as-you-go are
simply too great.

Good luck


Posted by Elizabeth Richardson on January 4, 2007, 11:47 am

>
> $25K a year on $300K is 8.33% average annual return NOT accounting for
> taxes or inflation (two of the most important things you should be
> considering). Remember both the investment and her earnings will be
> taxed.

I believe this is incorrect. Her investment will not be taxed. Insurance
settlements are non-taxable events. Only the earnings will be taxed.

The remainder of Kastna's post is spot on. The mother definitely needs to
rethink her income needs. Additionally, this is a situation that screams for
professional advice.

Elizabeth Richardson


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