Advice For An 84-Year-Old Mom

Gregg: ‘My mother is looking to me for advice and I don’t know what to tell her. She’s 84 and a recent widow. She has been advised to invest about $550,000 in the Franklin-Templeton High-Yield Tax Free Income Fund C. That money is also pretty much the extent of her assets and she needs to generate income. Social Security is the only other source. My father’s pension ended with him. The broker gave us an estimate of 5% return, with all the caveats, etc. Is that putting too many eggs in one basket? Any suggestions?’

☞ I’m sure your mother’s broker is a nice person, but there is no need for her to pay him $6,500 a year for this bad advice – and given that Franklin-Templeton charges 1.19% in annual expenses and 12b-1 fees for this fund, that’s what she’d be paying. (Multiply $550,000 by 1.19% and you get $6,500 a year. To put that in perspective, it’s about a quarter of the income from the bonds. Indeed, $6,500 is probably close to half her entire take from Social Security!)

Plus, if all your mom has is Social Security, she is not in a very high tax bracket . . . are you sure tax-free municipal bonds are the way to go?

And all in a single fund that Morningstar describes as somewhat risky?

This recommendation is geared to serve your mother’s broker nicely – he’d get about $1,500 a year, give or take (his firm and Franklin-Templeton get the rest) – but not your mom.

It’s almost enough to make one angry. (It also brings to mind the lead front page story in yesterday’s New York Times, about some mutual funds paying brokerage firms undisclosed payments to steer their clients into those funds. Is it possible your broker had a special incentive to recommend Franklin-Templeton funds? The S.E.C. has not yet released any names.)

As to where your mother should put her $550,000, that’s a much larger topic. If for some reason municipal bonds ARE where you want 100% of her money, consider the Vanguard municipal bond funds and perhaps TIAA-CREF’s Tax Exempt Bond Fund. (If she lives in a high-tax state, you may want a fund with bonds only from that state.) Or consider buying bonds not through a mutual fund but directly for her account. If you do that, stick to G.O.s – ‘general obligation’ bonds – because they are unlikely to default.

One thing to consider – if you, her son, don’t mind giving up part of a $550,000 inheritance – is to use some of the money to buy a fixed-income annuity. Click here, for example, to play around with a variety of possibilities on the Berkshire Direct web site.

I’m not suggesting your mother put all her money into a life annuity. (What if inflation roars back, and she’s stuck with a fixed income?) But if you did invest all $550,000 in such an annuity, Berkshire’s calculator offers her $6,300 a month as long as she lives. And because the first payments are considered almost entirely a return of her capital, it would be all but tax-free for the first seven and a half years. That $6,300 compares with the roughly $2,300 a month her broker’s plan might have provided (although, again, there is a very big difference: you’d still have the $550,000 in principal after she was gone).

By all means shop with companies besides Berkshire, but stick to a VERY highly rated insurer. (‘Grade inflation’ was invented not at Harvard but in the insurance industry. Well, in the olive industry, where the very smallest olives are ‘large,’ but shortly thereafter in the insurance industry. In the insurance industry, a grade of B+ is pretty awful.)

Because interest rates are low, the monthly payments any annuity will offer these days are pretty modest compared with what they might be in a year or three, when the insurer might have the prospect of earning more on their money.

You might consider using half her nest egg (or whatever is the smallest portion that will produce the extra income she needs) to buy an annuity like this, keeping the rest someplace safe and short-term for now . . . and/or in dividend-paying stocks that could eventually rise to keep up with inflation.

There are a million possibilities, and we may get better advice in tonight’s Me-Mail . . . but I venture to say that a majority of those million possibilities are better than the one your mother’s broker offered.

HOW LONG WILL YOU LIVE?

Jonathan Pond: ‘I read with interest the dialogue about planning for a longer life than most people anticipate. You might want to direct your readers to a site that allows you to answer 23 simple questions to get an estimate, to the nearest 10th of a year, no less, of your life expectancy. This site is an outgrowth of the New England Centenarian Study conducted by Harvard and BU medicals schools. I’ve been working with them for the past several years – my part is examining the financial habits of centenarians and their offspring. By the way, in my opinion the single best retirement forecaster can be found at analyzenow.com. I’m not the only one. Many others, including Jon Clements at the WSJ, have the same opinion.’

☞ Well, it’s somewhat arbitrary, of course, but it has me living to age 88.4 – or to 89.6 if I floss more diligently – so it could be worse.

HOW LONG MUST YOU GO TO SCHOOL?

Emerson Schwartzkopf: ‘Twelfth grade has ALWAYS been optional for nearly every young adult in the United States. In fact, if you want to make sure that someone comes from a place that mandates at least some high school, hire someone from Nebraska or Wyoming. Take a look at this.

Emerson Schwartzkopf a little later: ‘I took another look at that chart and saw that it was from 1908. However, here’s another one. You’ll still see that only 12 of the 50 states require compulsory education up to age 18. (Florida would make the total 11.)’

John Seiffer: Thanks for the reminder of Estimated Tax payments.
I over paid so much last year that it’s covered all my EST payments so far
except this one and, being out of the habit of it, I would have forgotten.