need advise for my 85 year ol father

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need advise for my 85 year ol father

Postby phannee17 » Sun Jun 23, 2013 4:54 pm

new to forum...my 85 year old father has no debt. owns home and has small ss income and small penion both together are less thn $1500 per month income. i've been out of the country for several years and haven.t been into much contact and certainly, unfortunately, we did not talk financials. i just found out that he has been living off of a $1000000 in a single cd account paying 5.25% annually and that it is expiring in august 2013...now he is asking me what to do. he wants the $1m a fdic like protection...he is very very conservative to say the least...i was thinking about some debt specific tax exemt bonds for long term...anyone else have other suggestings...is there anyway to conservately diverify and get close to his former income level off the $1m 5.25% cds anymore regardless of the duration?

Thanks!
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Re: need advise for my 85 year ol father

Postby Grt2bOutdoors » Sun Jun 23, 2013 10:25 pm

Your father could purchase $500,000 in a single life annuity that could generate $5,267 per month, however that would entail giving up ownership of that money forever. The remaining $500K could be preserved and kept in an FDIC insured savings account. Sorry, there is no free lunch and there are no CD's even with 10 year durations yielding anything close to even 3%, let alone 5.25% with FDIC insurance.
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Re: need advise for my 85 year ol father

Postby cheese_breath » Sun Jun 23, 2013 10:54 pm

How is your father's health? In the example above he would have to live almost eight more years to break even. Of course, if he lived longer he'd be ahead of the game. But if he's in poor health you might consider just putting a year or two living expenses in a FDIC insured savings account and the rest in laddered CDs and spending down the principle as needed.
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Re: need advise for my 85 year ol father

Postby joe8d » Sun Jun 23, 2013 11:13 pm

cheese_breath wrote:How is your father's health? In the example above he would have to live almost eight more years to break even. Of course, if he lived longer he'd be ahead of the game. But if he's in poor health you might consider just putting a year or two living expenses in a FDIC insured savings account and the rest in laddered CDs and spending down the principle as needed.


Yes.He should be glad he locked in that 5.25% for as long he did.Now, rates are lower, i would just use various Online Savings ( Ally / Barclays ) and a 1 year CD Ladder. Keep in mind, more than one POD on a account will increase the FDIC.
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Re: need advise for my 85 year ol father

Postby phannee17 » Wed Jun 26, 2013 10:31 pm

Thanks for the comments sos far...his health is ok...no way would he go for an annuity...laddering is definiately something to consider...what about some extremely long term tax exempt muni (diversity in all in one) and/or class AAA companies (i see some offering 5% plus but with a premimun to get one)...maybe a 25% in cash, 25% in various duration laddered tax exempt munis, 25% in LT laddered CDs, and maybe the final 25% in a balanced very safe vanguard fund....
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Re: need advise for my 85 year ol father

Postby phannee17 » Wed Jun 26, 2013 10:33 pm

sorry meant (diversity - NOT all in one tax exempt muni)
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Re: need advise for my 85 year ol father

Postby bsteiner » Wed Jun 26, 2013 11:09 pm

If any of his children might (i) have a taxable estate, (ii) be concerned about creditors, (iii) get divorced, (iv) outlive his/her spouse and remarry, or (v) go into a nursing home and want Medicaid, he should make sure his Will provides for his children to receive their shares in separate trusts for their benefit rather than outright.
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Re: need advise for my 85 year ol father

Postby hicabob » Wed Jun 26, 2013 11:16 pm

phannee17 wrote: i just found out that he has been living off of a $1000000 in a single cd account paying 5.25% annually and that it is expiring in august 2013.

Thanks!



Wow - nowadays a couple of those would be so nice! How long ago did he buy it?
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Re: need advise for my 85 year ol father

Postby thebogledude » Thu Jun 27, 2013 12:09 am

+1 on CD laddering. You should look into a super jumbo cd rate but there's nothing out there as high as 5.25%.
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Re: need advise for my 85 year ol father

Postby Sheepdog » Thu Jun 27, 2013 1:23 am

Welcome,
For your father: Nothing 100% safe pays anything much today.
You have already said that he would not consider an annuity, but I believe he should consider it. I am 80 and only recently decided to purchase two immediate annuities.I reviewed Annuity Shopper http://www.annuityshopper.com/ from which I found 2 highly rated insurance companies to provide me with Single Premium Immediate Annuities.(SPIA)
For your father, I checked what an 85 year old male could purchase in my state If he wished to continue to receive $52,500 a year ($4375 per month). An estimated $360,000 would purchase an SPIA to provide that amount for the rest of his life. He could start receiving payments within a couple of months after applying. If he wished, he could purchase that amount divided among several insurance companies, although each may have slightly different payouts, so as to spread out any risk. Annuity Shopper supplies multiple company choices to pick from. The remaining $640,000 could be invested in laddered CDS or anything else.
If it would make him more comfortable, he could also purchase an SPIA costing approximately $525,000 to pay $4375 for life, but with at least a guaranteed 10 year payout. If he passes before 10 years, his beneficiary would receive the balance of the 10 year payments.
If he is in good health now, he should consider an SPIA option especially if he is not willing to invest in stocks and bonds. Otherwise, he is going to spend down his $1 million with today's virtual no interest environment. Even if he is not in perfect help, he could apply for a medically underwritten SPIA which could provide higher payouts.
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Re: need advise for my 85 year ol father

Postby phannee17 » Sat Jun 29, 2013 9:59 pm

Thanks for all of the posts so far...i take it that no one advises or believes the senario that i outlined using both laddered cds and LT tax exempt munis and/or grade AA+ corporate fixed rate bonds in todays environment is a good idea...comments?
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Re: need advise for my 85 year ol father

Postby dhodson » Sat Jun 29, 2013 10:09 pm

I think people need more ideas on what his objective are. Is it pass along as much money as possible or to ensure a certain amount of income for himself?

You cant have everything you want. The goals need to be clearly established.
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Re: need advise for my 85 year ol father

Postby jimmy » Sat Jun 29, 2013 10:23 pm

I'm not sure why you would be looking at tax exempt bonds, he doesn't appear to be in a tax bracket that would justify it, especially now with the 5% cd going away. Also long term bonds wouldn't make sense since he is 85.. He sounds very conservative and buying long term bonds would have significant price fluctuation over the years, look at what 20 year bonds did the last 2 weeks. I would look at laddering cd's because that is what he is comfortable with but unfortunately that won't get him what he has been getting but with 1MM he shouldn't have a problem of out living it. One thing I would look into is corporate bonds that have a survivor option (or put). This way you can buy longer term corporates and if he passes you can put the bond back to the corporation. I have seen some good ones available but make sure you know what you are buying. A lot of them have a certain amount a year that can be put back, something like 2% of issue. Survivor option bonds are great investments for older clients who need income and want to leave the principal to there heirs because if the price is down on the bond they can put it back at par and in the meantime collect the coupon.. Good luck..
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Re: need advise for my 85 year ol father

Postby MN Finance » Sat Jun 29, 2013 10:37 pm

phannee17 wrote:Thanks for all of the posts so far...i take it that no one advises or believes the senario that i outlined using both laddered cds and LT tax exempt munis and/or grade AA+ corporate fixed rate bonds in todays environment is a good idea...comments?


No, not a good idea. Long munis could easily drop 10% in a short time. Corp bonds have default risk, or more so downgrade risk. You are suggesting taking term and credit risk to increase yield. This is dangerous for, what sounds like, a very conservative person. There are certianly options for him but they come with risk. The annuity is a very good option but without stating why, that doesnt sound like something he/you would consider. The best thing to do is come to terms with the fact that his interest income will be much lower. Thats it.
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Re: need advise for my 85 year ol father

Postby Watty » Sat Jun 29, 2013 10:47 pm

is there anyway to conservately diverify and get close to his former income level off the $1m 5.25% cds anymore regardless of the duration?


No

I don't have a good suggestion on what to do but one thing to check on is to make sure that the CD is not set to be automatically reinvested.
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Re: need advise for my 85 year ol father

Postby Kevin M » Sun Jun 30, 2013 2:27 am

You must remember that you can't get higher expected returns without taking more risk. In today's environment, you simply cannot get anything close to a 5% expected return (nominal) without taking significant risk. You can get close with something like Vanguard Long-Term Investment-Grade bond fund, but you are taking lots of interest-rate risk and some credit risk in a fund like this.

You can get about 2% on decent CDs. I just posted about a 2-year 2% CD, but usually you have to go out to about 5 years to get close to 2%.

One very nice thing about CDs purchased directly from a bank or credit union is that there often is a reasonable early withdrawal penalty (60 days to 180 days of interest), so if rates increase, you can do an early withdrawal and reinvest at the higher rate. This limits losses to no more than about 1%, which is much less than you can lose in a bond fund.

I am retired and a conservative investor, but perhaps not as conservative as your father. My asset allocation is about 30% in stock funds and 70% in fixed income. Of the fixed income, about 65% is in CDs, 30% is in mostly intermediate-term investment-grade and muni bond funds, and 5% in cash (much of which is earning about 1%).

Be sure to look around for local CD deals. Some posters have mentioned 2.5% 5-year CDs, and I recently saw a 3% 5-year CD for residents of certain areas of PA. See http://www.depositaccounts.com for CD deals.

As someone else said, muni funds may not make sense unless his marginal tax rate is high enough. He might be better off with say Vanguard Intermediate-Term Investment-Grade Bond fund (but I still would recommend keeping more in CDs).

If he is going to be concerned by any losses, then forget about bond funds (and of course stock funds). Just look at the last month.

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Re: need advise for my 85 year ol father

Postby gks » Sun Jun 30, 2013 3:40 am

Can I put a different spin on this? Why not just put the money in a savings account and spend $52,500 a year out of it. At 0% interest it is still going to take 19+ years to go through the million. Your father may be in good health, but there aren't too many 104 year old people out there.

Or, put the money in Wellington, Wellesley, or Balanced Index and spend it down. It will probably last a little longer that way, but it may ratchet the risk past your father's tolerance.

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Re: need advise for my 85 year ol father

Postby frugaltype » Sun Jun 30, 2013 5:02 am

gks wrote:Can I put a different spin on this? Why not just put the money in a savings account and spend $52,500 a year out of it. At 0% interest it is still going to take 19+ years to go through the million. Your father may be in good health, but there aren't too many 104 year old people out there.


Why would he want a 0% account when he can ladder CDs at about 2% and get access to that money if he ever needs extra by paying an early withdrawal penalty. 0% is throwing away $20,000 a year.

I'm not quite as old as the Dad, but I would never be comfortable going from CDs to an annuity in his situation.

As to the current single CD account, it sounds to me like $750,000 must be with no FDIC insurance, due to the $250,000 insurance limit? Yikes. I have multiple CDs in different credit unions primarily for the insurance reason.
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Re: need advise for my 85 year ol father

Postby HomerJ » Sun Jun 30, 2013 7:32 am

SPIA (Single Premium Immediate Annuity) is the way to go...

Throw away $360,000, but be assured of getting that monthly income for life, no matter how long he lives... That leaves $640,000 which he can invest in 2% CDs or even some in stocks, if he's looking to leave it as an inheritance.

Having that guaranteed income stream takes a lot of stress off of everyone. Plus, if your Dad gets dementia 5 years from now at 90, he doesn't have to handle his investments, and he can't lose all his money to some scammer.

A nice check every month for the rest of his life... And he still keeps a huge nest egg. He might feel a little more free spending some of that money knowing that he's got enough coming in guaranteed to take care of his expenses.

If I was him, I'd definitely go the SPIA route, then spend some money taking my family on a cool vacation.
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Re: need advise for my 85 year ol father

Postby kenschmidt » Sun Jun 30, 2013 7:44 am

I think Sheepdog / JIm and GPS / Greg present the best options - either some portion of principal used to fund a SPIA or to draw down principal to supplement income. I just don't think you will be able to hit your income target without needing to draw down some principal and/or take on a lot of risk to principal.

I don't know how your father will feel about using some principal to generate the money he needs but if he has reached 85 before he has even needed to consider it, he is WAY ahead of most.
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Re: need advise for my 85 year ol father

Postby gerrym51 » Sun Jun 30, 2013 9:22 am

there is a 10 year brokered cd on fidelitys website at the moment paying 3 percent up to 3.6 at 21 years
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Re: need advise for my 85 year ol father

Postby MN Finance » Sun Jun 30, 2013 10:04 am

gerrym51 wrote:there is a 10 year brokered cd on fidelitys website at the moment paying 3 percent up to 3.6 at 21 years

That doesnt fit. Theres just as much term risk as long bonds, except some might redeem at death for par, with less credit risk. For someone used to direct cds brokered cds are often a very confusing product.
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Re: need advise for my 85 year ol father

Postby dhodson » Sun Jun 30, 2013 10:10 am

doesn't this still go back to my question of what his goals are?

im guessing but it seems like he wants to live off the interest and then give away the 1mil at death. If that is the case then purchase the SPIA and give away the rest whenever you want (possibly even at least some now). This way you too can take pleasure in the gift you are giving. It is hard to feel the love from the grave. If the rest is going to be used in the distant future then it can be invested in a less conservative manner.
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Re: need advise for my 85 year ol father

Postby dbr » Sun Jun 30, 2013 10:39 am

dhodson wrote:doesn't this still go back to my question of what his goals are?

im guessing but it seems like he wants to live off the interest and then give away the 1mil at death. If that is the case then purchase the SPIA and give away the rest whenever you want (possibly even at least some now). This way you too can take pleasure in the gift you are giving. It is hard to feel the love from the grave. If the rest is going to be used in the distant future then it can be invested in a less conservative manner.


Indeed, and at this point in time it isn't possible to spend $50,000 out of the assets and preserve the $1MM with certainty. When CD's paying 5% were available, it was possible. That is an illustration of the fact that one risk in holding 100% "cash" is that such an investment doesn't always pay enough to support withdrawals and maintain the principal. Nothing can be done to meet that objective today that does not involve accepting uncertainty that the objectives of taking income and maintaining the principal can be met. Of course, we have also not discussed that at every point both the income and the principal are being undercut by inflation.

The suggestions to buy an SPIA are coming from the fact that this probably actually is the most efficient combination of future income and certainty to be obtained from the situation. I would agree with that but not jump on an SPIA immediately until there is more conversation about what is really wanted.
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Re: need advise for my 85 year ol father

Postby gerrym51 » Sun Jun 30, 2013 10:41 am

MN Finance wrote:
gerrym51 wrote:there is a 10 year brokered cd on fidelitys website at the moment paying 3 percent up to 3.6 at 21 years

That doesnt fit. Theres just as much term risk as long bonds, except some might redeem at death for par, with less credit risk. For someone used to direct cds brokered cds are often a very confusing product.



on brokered cd's make sure to get one's with SURVIVOR OPTION(SO).

the ops father is 85 years old. his most pressing need is the highest current income from his CD"S.

with the survivor option he can get back his money if he dies. since the interest on a brokered cd is paid out as interest as opposed to rolling over with survivor option will get all money back.

Hey-it's an option. the op did ask us.

but to op-a brokered CD is actually an FDIC guaranteed principal and interest BOND. it works like bonds do. however in your case for an 85 year old father you want max interest and the Survivor Option.

also i hae been watching fidelitys websidte for 2 months. the higher end CD's are going up every other week.

if you decide to consider this in august i would just put in 250,000 in highest cd. then do 250,000 a month for next 3 . i think rates will keep rising. MOST IMPORTANT make sure it has the Survivor Option
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Re: need advise for my 85 year ol father

Postby archbish99 » Sun Jun 30, 2013 10:52 am

All brokered CDs (that I've ever seen, at least) redeem at par at death.
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Re: need advise for my 85 year ol father

Postby gerrym51 » Sun Jun 30, 2013 10:57 am

archbish99 wrote:All brokered CDs (that I've ever seen, at least) redeem at par at death.



thats true. But the brokered cd pays out it's interest as it goes along-it does NOT roll it over into the CD. so all there is only par price to get. remember it is a Bond.
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Re: need advise for my 85 year ol father

Postby reggiesimpson » Sun Jun 30, 2013 11:07 am

To be blunt i doubt he will live another 20 years so start shifting his assets and house out of his name.
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Re: need advise for my 85 year ol father

Postby Kevin M » Sun Jun 30, 2013 2:35 pm

frugaltype wrote:As to the current single CD account, it sounds to me like $750,000 must be with no FDIC insurance, due to the $250,000 insurance limit? Yikes. I have multiple CDs in different credit unions primarily for the insurance reason.

Not necessarily. One can easily go far above the $250K limit using POD or trust accounts: $250K per beneficiary. With my four children, I get $1M coverage with trust or POD, and I utilize it.

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Re: need advise for my 85 year ol father

Postby MN Finance » Sun Jun 30, 2013 4:04 pm

No the most pressing need is not the highest current income. If that were the case wed all be agreeing on some 40 yr corp bonds. The most pressing need appears to be controlling risk. A brokered cd, be one that pays par at death, is not appropriate. Dad will not sleep well at night if it drops 10% during some future quarter. The fact that it has fdic doesnt make it much different than a aaa rated insured lomg muni, which weve advised against / the credit risk between the two is pretty small.
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Re: need advise for my 85 year ol father

Postby dhodson » Sun Jun 30, 2013 4:18 pm

Im not sure that controlling risk would be the highest need from what has been written (although it could be)? In the context of most of the above posts, it assumes that defaulting or down turn in the market is the only risk. Most of the low/no risk strategies mentioned will risk decreased purchasing power. Money is only useful bc you can buy something with it. Even with downturns in the market, given the current spending listed and amount already saved, its likely that this person could invest in a lot of different options and still keep their current spending for the duration of their life. if the money is really just for him to use during his lifetime then probably decreased purchasing power isn't an issue. If the desire is to live at the current spending level and use the rest to pay for someone much younger's retirement (kid or grandkid) then it affects the strategy since there are many more years for this to be invested over.

What are the intentions for this money?
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Re: need advise for my 85 year ol father

Postby gerrym51 » Sun Jun 30, 2013 4:53 pm

MN Finance wrote:No the most pressing need is not the highest current income. If that were the case wed all be agreeing on some 40 yr corp bonds. The most pressing need appears to be controlling risk. A brokered cd, be one that pays par at death, is not appropriate. Dad will not sleep well at night if it drops 10% during some future quarter. The fact that it has fdic doesnt make it much different than a aaa rated insured lomg muni, which weve advised against / the credit risk between the two is pretty small.



brokered cd's DO NOT DROP. they are CD's in principal and interest. they are bonds in how they are bought and sold
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Re: need advise for my 85 year ol father

Postby Kevin M » Sun Jun 30, 2013 7:51 pm

MN Finance wrote:The most pressing need appears to be controlling risk. A brokered cd, be one that pays par at death, is not appropriate. Dad will not sleep well at night if it drops 10% during some future quarter.

Then why are we even discussing it. He should just stick with non-brokered CDs with reasonable early-withdrawal terms. Expect to earn about 2%, and as others have said, simply dip into principal if more income is needed.

Put some in a 2-year CD @2%, some in a 5-year CD @2%, and for additional income required in the first two years, use a savings account earning about 1%. Consider Ally 5-year CDs earning about 1.5% with an EWP of only 60 days of interest for money that might be needed in the first six months to two years, unless he would be paranoid about them disallowing an early withdrawal, in which case just stick with a savings account and/or a 1-year CD.

As you understand, brokered CDs do indeed drop in market value if interest rates increase. Say rates increase from 2% to 3% in the next year or two; you will take a larger loss on a brokered CD if you sell it before maturity to reinvest at a higher rate than the 1% or less you'll pay to do an early withdrawal from a non-brokered CD to reinvest at the higher rate. The larger the rate increase, the more beneficial the non-brokered CD, and since we can't predict the future and he is extremely risk-averse, the non-brokered CD is the clear winner.

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Re: need advise for my 85 year ol father

Postby MN Finance » Sun Jun 30, 2013 10:28 pm

gerrym51 wrote:
MN Finance wrote:No the most pressing need is not the highest current income. If that were the case wed all be agreeing on some 40 yr corp bonds. The most pressing need appears to be controlling risk. A brokered cd, be one that pays par at death, is not appropriate. Dad will not sleep well at night if it drops 10% during some future quarter. The fact that it has fdic doesnt make it much different than a aaa rated insured lomg muni, which weve advised against / the credit risk between the two is pretty small.



brokered cd's DO NOT DROP. they are CD's in principal and interest. they are bonds in how they are bought and sold

I'm not entirely sure how to interpret this, but on its face someone who doesn't understand cds might read this to imply that the principal value of a brokered cd does not fluctuate, which is obviously not true. Possibly you are implying something different but Im not sure. You also dont need to yell.
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Re: need advise for my 85 year ol father

Postby dhodson » Mon Jul 01, 2013 12:10 am

the whole thing in caps is yelling. I think he/she was just trying to highlight.
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Re: need advise for my 85 year ol father

Postby archbish99 » Mon Jul 01, 2013 9:47 am

Yes and no. A CD is a bond, brokered or not. The principal of the CD doesn't fluctuate, brokered or not -- if held to maturity, you get back that amount. The value of a CD decreases if interest rates rise, brokered or not. The difference is that a bank CD has no market at all, and so no one is going to explicitly tell you what the "market value" is. The only options you have are to hold to maturity, or exercise a put option.

The advantage to the bank CD, which the brokered CD doesn't have, is that the put places a floor on how far the "market value" you don't see can drop -- it's always worth at least the principal minus the price of the put.
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Re: need advise for my 85 year ol father

Postby gerrym51 » Mon Jul 01, 2013 10:14 am

after reading the posts questioning me i should add that I was just saying a brokered cd does not fall in price directly-unless it is sold in the secondary market. in that instance of course a cd can lose money. i was talking of holding to term and did not consider the other ramifications of not.

However one thing i never see mentioned is that the value of a brokered cd can also rise-if interest rates go down-and is then sold on secondary market.

however i only see interest rates rising in the forseable future.

sorry about the perceived yelling. :mrgreen:
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Re: need advise for my 85 year ol father

Postby gks » Mon Jul 01, 2013 10:23 am

From frugaltype

"Why would he want a 0% account when he can ladder CDs at about 2% and get access to that money if he ever needs extra by paying an early withdrawal penalty. 0% is throwing away $20,000 a year.

I'm not quite as old as the Dad, but I would never be comfortable going from CDs to an annuity in his situation.

As to the current single CD account, it sounds to me like $750,000 must be with no FDIC insurance, due to the $250,000 insurance limit? Yikes. I have multiple CDs in different credit unions primarily for the insurance reason."





Frugal,

First, 0% was an example because I'm too lazy to try and figure out the depletion of $1,000,000 figuring a 2% interest rate. Second, simplicity. I see a lot of plans above that will take some planning for a situation that is not long term compared to traditional investing.

I'm with you on annuities.

Ok, so complicate it a bit and put the million in four banks.

Greg
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Re: need advise for my 85 year ol father

Postby HomerJ » Mon Jul 01, 2013 1:33 pm

frugaltype wrote:I'm not quite as old as the Dad, but I would never be comfortable going from CDs to an annuity in his situation.


Why not? When you're that old, SPIAs pay ridiculously well, and are a great option for peace of mind.

My 81 year-old FIL won't spend his money... My wife and I tell him to live a little.. He says, "What if I live to 100?"... I'm explained how an SPIA works, but he's still not sure he wants to go that route.

Me, I'm getting one when I hit 70-75 to cover all our basic expenses.
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HomerJ
 
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Re: need advise for my 85 year ol father

Postby Kevin M » Mon Jul 01, 2013 2:49 pm

gks wrote:Ok, so complicate it a bit and put the million in four banks.

Once again, this is not necessary, depending on the person's circumstances. I have up to $1M in FDIC coverage with POD accounts at a single bank naming my four children as beneficiaries.

Kevin
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Re: need advise for my 85 year ol father

Postby phannee17 » Tue Jul 02, 2013 10:41 pm

Thank all of you for this very useful and instructive information and the various ideas that of you are providing...and to answer one of the questions...yes he was planning on living off the interest of these assets and leaving the principle to the family. As mentioned he does have other income...ss, retirement pension and some rental income of about $3000 per month.
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