Need Help Helping Mom

[splais]

Really appreciate all the comments. Mom has a $100K CD coming due next week. I'm beginning to think that going with a 5yr CD may be the way to go at least with this $100K.

Mom lives in a retirement facility and her expenses are pretty basic. she owes nothing but the cost of the facility, her meds and daily living. Her $770K is plit up as follows: $250K in a loan to me (mortgage)that I pay her 5% on. $100K in a tax free municipal bond fund (American funds) that she got from her bank. and finally $440K in various 6 and 12 month CD's.

Aside from the 5yr CD idea. What do you think about putting another $100K in a second bond fund? thanks.

[disneysteve]

$100K in a tax free municipal bond fund (American funds) that she got from her bank.

What do you think about putting another $100K in a second bond fund? thanks.

If you do decide to invest more in a bond fund, absolutely do not do it the same way. The fund she bought from her bank (actually from the brokerage department of the banking corporation) almost certainly charged her a load and likely a relatively high expense ratio. If you want a bond fund, go through a no load, low cost mutual fund company like Vanguard, Fidelity or T. Rowe Price to name a few.

That said, with 100K to invest, I would go with individual bonds rather than a bond fund. That way, you can control the actual interest rate and term, something you can't do with a bond fund. With a fund, both the principal and the interest rate are variable. You can lose money. With an individual bond, as long as the issuer doesn't default and the bond is held until maturity, you will get back your full principal and have collected a fixed interest rate for the length of the term. You can purchase individual government bonds at Treasury Direct. You can purchase municipal and corporate bonds through a discount broker.

[bjl584]

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.

I don't think that the difference in interest rates is that drastically different to make much of a difference. And if she cashes out early and takes a hit on a penalty, the transaction is a wash. With the current volitile economy I feel that interest rates could rise rather rapidly. When they do, I'd like to have my money available without penalties. The Fed said no changes in rates till 2013, but after that, who knows. I may do a 3 year CD, but no longer than that.

With 870K avsilable to me I think that being higher risk with say 100K isn't a bad strategy. Maybe invest it in a mix of high yielding funds and stocks and take the dividend payouts as cash. With the rest I'd build my CD ladder and put the rest into muni bonds.

[Slug]

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

Why couldn't you ladder the bond redemptions?

[disneysteve]

Why couldn't you ladder the bond redemptions?

You need to hold I bonds for at least 5 years to avoid a penalty so the earliest she would realize any income would be 5 years from now.

[bjl584]

I'd structure your Mom's account something like this:

500K in various muni bonds between 4 and 5%.
100K in higher risk funds. ERF, AGNC, CHI, HTY as examples.
270K in a 6 month CD ladder with part of it maturing each month and rolling over.

That should yield her about 37K a year in dividends and interest. That is before any tax implications.

That's a rough estimate off the top of my head, but something like that should give your Mom the ability to live fairly comfortablly without having to touch the principal. I didn't factor in her SS payment, so that would be an additional 1700 a month for her.

[disneysteve]

I'd structure your Mom's account something like this:

500K in various muni bonds between 4 and 5%.
100K in higher risk funds. ERF, AGNC, CHI, HTY as examples.
270K in a 6 month CD ladder with part of it maturing each month and rolling over.

Her $770K is plit up as follows: $250K in a loan to me (mortgage)that I pay her 5% on

You may have missed this Brian. 250K is already accounted for as a loan to OP. She doesn't actually have 770K in CDs as stated originally.

[bjl584]

You may have missed this Brian. 250K is already accounted for as a loan to OP. She doesn't actually have 770K in CDs as stated originally.

Yes. I did miss that. Thanks for pointing that out. I will have to recalculate.

The point here is that if she doesn't want to draw the principal, then her account will have to be structured with at least some portion of it high risk. At 92, I see no issue with drawing the principal, but if she is dead set against it, then higher risk investments are the only real choice.

[disneysteve]

At 92, I see no issue with drawing the principal, but if she is dead set against it, then higher risk investments are the only real choice.

I agree. OP, I'd really try to impress upon her that by not drawing on the principal, she will still be putting the principal at risk by investing in higher risk instruments. I'd say it is much better to do a controlled draw rather than take market risk which could be unpredictable.

[Slug]

You need to hold I bonds for at least 5 years to avoid a penalty so the earliest she would realize any income would be 5 years from now.

That was my point though. You buy the bond knowing you're going to pay the penalty. It still outstrips CD yields. Probably too complex for her and the strict limits on I bond purchases per year would mean you couldn't do this with a significant portion of the portfolio.

[disneysteve]

That was my point though. You buy the bond knowing you're going to pay the penalty. It still outstrips CD yields.

True, though I think you have to hold a bond for a minimum of one year before you can cash out with the penalty. So any money she tied up in I bonds would generate nothing for her for the first year.

[Ima saver]

Melrose credit union in New York is paying 2.65% on a 5 year C.D. Anyone can join the credit union, I didit all by mail.

[cptacek]

$250K in a loan to me (mortgage)that I pay her 5% on

She could loan the rest of the money to you and you could pay her 5% on all of it