Need Help Helping Mom

[splais]

Boy, where to start. My mom (92 and going strong)has $770,000 in CD’s and one Tax Free Municipal Bond fund ($100K). She lives off the interest from these investments, it’s her only source of day to day income. She is adamant about not spending any of her principal. Well, as you can guess with most $100K CD’s paying around 1% or less for a 6 month or 1 year CD, things are tough financially for her. She has eaten through much of about $30,000 in liquid assets she had and now I’m looking for something to put about $100K of her money in that would pay her 2 or 3% if that is possible. I’m leary of putting any more money into a bond fund. But that may be the only option. Can anyone make a suggest. Ask any questions you want. Thanks.

[bjl584]

Does your Mom qualify for Social Security? That is an option if possible.

I would be inclined to invest in state muni bonds because of their relative safety and their tax advantage.

There are also some floating rate funds that could be a possibility. They are relatively safe and pay a nice monthly dividend. I currently own a Hartford fund.

[disneysteve]

You can get 2.25% on a longer term (5-year) CD.

I would really try to encourage her to start dipping into principal. With 870K in savings, she could spend $48,000/year until age 110 and still have money left. Why is she so adamant about not touching principal?

[splais]

mom's income includes social security. While I don't necessarily agree - the one big thing in mom's life is leaving something for her two kids. She is also one of those people who grew up in the drepression and WWII. Saving is her top priority. We are both leary (and hoping) that interest rates cannot remain at this level much longer. Locking into a 5 year CD is taking a big gamble in her mind. She also lived through the Carter years when CD's were paying 12-15%. While I try to tell her that will never happen again, at least in our lifetime, she keeps hoping.

[BuckyBadger]

She lives off the interest from these investments, it’s her only source of day to day income.

mom's income includes social security.

So did you just mis-speak in your OP, or is she doing something different with her Social Security, like trying to save it?

What are her monthly expenses, and how much does she get from SS? i.e How much money does this money have to make her?

[splais]

PS: could you expand on what a floating rate fund is. thanks.

Her social security is about $1700 a month. she is not trying to save anything new anymore. Just live off the income generated by social security and her CD's. When CD's were paying 3-4% she was ok. Actually she was ok when they dropped to 2%. but now that they are down around .8% for 6-12 month term. she is probably 200-400 a month short.

[bjl584]

PS: could you expand on what a floating rate fund is. thanks.

Her social security is about $1700 a month. she is not trying to save anything new anymore. Just live off the income generated by social security and her CD's. When CD's were paying 3-4% she was ok. Actually she was ok when they dropped to 2%. but now that they are down around .8% for 6-12 month term. she is probably 200-400 a month short.

Floating-Rate Mutual Funds: Rewards And Risks

[bjl584]

mom's income includes social security. While I don't necessarily agree - the one big thing in mom's life is leaving something for her two kids. She is also one of those people who grew up in the drepression and WWII. Saving is her top priority. We are both leary (and hoping) that interest rates cannot remain at this level much longer. Locking into a 5 year CD is taking a big gamble in her mind. She also lived through the Carter years when CD's were paying 12-15%. While I try to tell her that will never happen again, at least in our lifetime, she keeps hoping.

CD rates were higher then, but so was inflation. While it's not a 1 to 1 ratio when compared to today, you really can't compare the past to today in that regard.

I wouldn't lock into a 5 year CD. The most I'd do was 6 months. I'd keep rolling it into new CDs every 6 months, but that would only be part of an overall investment plan.

What are your Mom's monthly expenses? Is her social security plus her investment income not enough to support her? If not, then why? What are her monthly outflows? Does she have any debt? Is she financially supporting members of the family? I wouldn't worry about her spending some of her principal. I'd probably tell her that it's ok to do so.

[disneysteve]

When CD's were paying 3-4% she was ok. Actually she was ok when they dropped to 2%. but now that they are down around .8% for 6-12 month term. she is probably 200-400 a month short.

Higher returns require taking more risk. I don't think it is advisable for a 92-year-old woman to be taking much more risk at this stage of her life. She needs to preserve principal. That said, one option with at least a portion of her money would be to get into some good dividend-paying stocks. With another portion of money, she could get into some longer term CDs. She could keep the rest in shorter term CDs to be able to take advantage if rates rise in the near term (though I really don't see that happening any time soon).

She needs to decide if she either wants to:
a) cut expenses
b) go longer term on CDs
c) take more risk, including principal risk
d) start spending some principal

[disneysteve]

I wouldn't lock into a 5 year CD.

I wouldn't put the whole portfolio into a 5-year CD but I'd see nothing wrong with putting some, maybe 20%, into a longer term CD to boost returns but still maintain safety of principal.

[bjl584]

I wouldn't put the whole portfolio into a 5-year CD but I'd see nothing wrong with putting some, maybe 20%, into a longer term CD to boost returns but still maintain safety of principal.

I like having access to my money and not having it tied up for long lengths of time. I realize that that type of investing isn't for everyone, and that I am not 92 and am not in a "preserve principal" mindset. That being said, I'd be more inclined to build a CD ladder of short term CD's that I could keep rolling every 6 months that way I would be able to take advatage of any changes in interest rates moving forward while still keeping my principal safe.

[Slug]

Consider ALLY bank's 5 yr CD. Decent rate AND very low penalties for pulling it out early so it's more liquid than the 5 years would appear.

Consider also I bonds. Same concept, the penalty you would pay for cashing it in early is low enough that it is better to buy this and redeem it early than to go with short-term CDs in terms of interest gained.

I also like Steve's idea of dividend yielding stocks. Take a look at a 10 year chart of something like MO which is not a volatile stock (beta=.4) and yields you about 6% at current prices.

[disneysteve]

I like having access to my money and not having it tied up for long lengths of time. I realize that that type of investing isn't for everyone, and that I am not 92 and am not in a "preserve principal" mindset. That being said, I'd be more inclined to build a CD ladder of short term CD's that I could keep rolling every 6 months that way I would be able to take advatage of any changes in interest rates moving forward while still keeping my principal safe.

As you note, you aren't 92 and dependent on the interest to live. I don't tie up my money for 5 years either (except for when I bought some I bonds).

This woman needs higher interest. That is going to require either longer term or higher risk. I'd tend toward recommending longer term.

And keep in mind that the money isn't locked away. You can always cash out a CD early and lose a few months worth of interest as a penalty.

[disneysteve]

Consider also I bonds.

I bonds don't pay out interest until you cash them out so that wouldn't work here. She needs a regular income stream.

[KTP]

What are TIPS paying nowadays? Those are pretty safe and at least will keep up with inflation (unlike the 1% CDs). If her only income is SS, she probably wouldn't even pay much tax on the TIPS income.

Man the things I could do with 800K and a low tax rate.... (dreaming of writing 60 naked put contracts on SPY at a strike of $100 and an expiration of Jan 2013 and pocketing immediately the $43,200 income with no tax due until 2014....) Better keep me away from your mom's money!