Risk Averse Widow - Investing Life Insurance Proceeds

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JerLon
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Risk Averse Widow - Investing Life Insurance Proceeds

Post by JerLon » Tue Aug 14, 2018 5:00 am

I am attempting to help my mother in law. She is recently widowed, has an extremely low risk tolerance (ie: a 5% decline would cause her to lose sleep and want to pull out all of her investments). She also wants all of this to be extremely simple and easy for her to understand.

She has $250,000 in Life Insurance proceeds that should be sitting in an Ameriprise savings account within a couple weeks. In addition to that, there is a $50,000 403b at Ameriprise and a $6,000 tIRA with Ameriprise.

She is currently 60 and plans on working for approximately 10 years. She will receive $1,700 a month in Social Security (starting in 7 years) and thinks a monthly budget of around $3,000 is what she wants to work toward.

She also has $80,000 in a savings account from the proceeds of a home sale. She wants to use this as a down payment on a new home when she is ready. She would take out a 10-15 year mortgage.

Given all of this, the plan is to:
* Place the $250,000 in CDs in a ladder outside of Ameriprise (Capital One 360, etc...).
* Roll the 403b and the tIRA from Ameriprise to Vanguard.
* Place all funds in Vanguard Target Retirement Income Fund (53% Bonds, 17% TIPS, 30% Stocks, Dom/Int Split)
* Start investing $400/month into IRA at Vanguard Target Retirement Income Fund

In this scenario, I would estimate she would have around $500,000 at age 70, $1,700 a month in SS and a paid off home.

Am I missing anything obvious or are there any huge holes in this plan? I recognize it is far more conservative than many of us would do but it seems to be what she is comfortable with.

jminv
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Re: Risk Averse Widow - Investing Life Insurance Proceeds

Post by jminv » Tue Aug 14, 2018 5:54 am

Make sure she’s taking inflation into account in how much she will need per month in 10 years time, ie, if she thinks she will need 3k/month in today’s dollars she maybe actually needs 3.8k/month in ten years.

Another thing to consider is that if she bought the house now, the interest rate on the loan would be more than the interest rate on the cds. That might lead one to buy the house in cash and then use the mortgage savings to divert to the ira, Roth, savings, 401k if she can.

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dodecahedron
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Re: Risk Averse Widow - Investing Life Insurance Proceeds

Post by dodecahedron » Tue Aug 14, 2018 6:34 am

How much is she earning from work now? I assume that the SS benefits of $1,700 are widow's benefits based on her late husband's record. She can file early for her own work record benefits at age 62 (without in any way diminishing her subsequent survivor benefits) and collect that between age 62 and her FRA. However, if she's making more than $17,040 annually, her own record SS-benefits will be subject to some reduction based on her earned income. She will lose 50 cents of every dollar of earnings above $17,040 in earnings but it is still better than nothing. (On the other hand, if she makes enough to effectively zero out her SS benefit, it's not worth applying.)

I would caution against rushing into the purchase of a home too soon if she is recently widowed. Big decisions, especially expensive ones with a lot of frictional costs, should be delayed until she has had some time to think through her long term plans.

When she is ready to buy, she might consider a reverse mortgage to purchase arrangement, but she will need to be at least 62 for that. Such an arrangement would mean no monthly principal and interest payments as long as she is living in the home, maintaining it, and paying the taxes and insurance on it. This would allow her to put away more in her retirement savings for after she stops working.

bearwithbear
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Re: Risk Averse Widow - Investing Life Insurance Proceeds

Post by bearwithbear » Tue Aug 14, 2018 7:24 am

OP,

Your MIL may be old enough to qualify for a widow's benefit from Social Security.
She could take this and let her benefit continue to grow until claiming at 70.
The widow's benefit is at least 71.5% of her husband's PIA.

Bear

GuyInFL
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Re: Risk Averse Widow - Investing Life Insurance Proceeds

Post by GuyInFL » Tue Aug 14, 2018 7:31 am

A deferred SPIA on 250K yields 24K per year starting in 9 years for a 60 year old woman.
Www.immediateannuities.com

Dottie57
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Re: Risk Averse Widow - Investing Life Insurance Proceeds

Post by Dottie57 » Tue Aug 14, 2018 7:59 am

bearwithbear wrote:
Tue Aug 14, 2018 7:24 am
OP,

Your MIL may be old enough to qualify for a widow's benefit from Social Security.
She could take this and let her benefit continue to grow until claiming at 70.
The widow's benefit is at least 71.5% of her husband's PIA.

Bear
Widows benefits may be reduced if working . The reduction stops at full retirement age.

JerLon
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Location: Western NY

Re: Risk Averse Widow - Investing Life Insurance Proceeds

Post by JerLon » Tue Aug 14, 2018 8:19 am

Her own benefits are low enough that her current income would zero them out when she claims them. The greater benefit for her is the Survivor's/Widows Benefit that she will claim a maximum benefit on at 66 and 7 months (because her husband died before FRA, her cap is his full benefit).

JerLon
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Location: Western NY

Re: Risk Averse Widow - Investing Life Insurance Proceeds

Post by JerLon » Tue Aug 14, 2018 8:20 am

dodecahedron wrote:
Tue Aug 14, 2018 6:34 am
I would caution against rushing into the purchase of a home too soon if she is recently widowed. Big decisions, especially expensive ones with a lot of frictional costs, should be delayed until she has had some time to think through her long term plans.
I agree with this 100%. Our rule #1 with her has been "no big decisions." However, getting her to agree to this has been challenging.

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BL
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Re: Risk Averse Widow - Investing Life Insurance Proceeds

Post by BL » Tue Aug 14, 2018 8:35 am

JerLon wrote:
Tue Aug 14, 2018 5:00 am
I am attempting to help my mother in law. She is recently widowed, has an extremely low risk tolerance (ie: a 5% decline would cause her to lose sleep and want to pull out all of her investments). She also wants all of this to be extremely simple and easy for her to understand.

She has $250,000 in Life Insurance proceeds that should be sitting in an Ameriprise savings account within a couple weeks. In addition to that, there is a $50,000 403b at Ameriprise and a $6,000 tIRA with Ameriprise.

She is currently 60 and plans on working for approximately 10 years. She will receive $1,700 a month in Social Security (starting in 7 years) and thinks a monthly budget of around $3,000 is what she wants to work toward.

She also has $80,000 in a savings account from the proceeds of a home sale. She wants to use this as a down payment on a new home when she is ready. She would take out a 10-15 year mortgage.

Given all of this, the plan is to:
* Place the $250,000 in CDs in a ladder outside of Ameriprise (Capital One 360, etc...).
* Roll the 403b and the tIRA from Ameriprise to Vanguard.
* Place all funds in Vanguard Target Retirement Income Fund (53% Bonds, 17% TIPS, 30% Stocks, Dom/Int Split)
* Start investing $400/month into IRA at Vanguard Target Retirement Income Fund

In this scenario, I would estimate she would have around $500,000 at age 70, $1,700 a month in SS and a paid off home.

Am I missing anything obvious or are there any huge holes in this plan? I recognize it is far more conservative than many of us would do but it seems to be what she is comfortable with.
She might like I-Bonds (10k/year, only online except for IRS tax refunds.) Keeps up with CPI, never goes below zero, changes rates each 6 months, tied up for 1 year (https://treasurydirect.gov/ )
They also have other treasury bonds, bills, notes, but I haven't used them.

Vanguard Prime money market (2.05% interest) or Federal MM, a bit lower, are decent places now for cash. Not FDIC guaranteed but generally considered safe.

Some CD rates keep changing with teaser rates, so they are a lot of trouble. We went with PenFed, not the very highest, but they don't seem to drop rates, either. Vanguard handles some CDs as well, I have not used them for that.

It seems too soon to make a major decision on a house. Most recommend a year or so wait. There is so much stress doing what has to be done, that it is good to slow down on the rest. (anecdote: I had a friend who was advised to move and buy; she said later it was a bad decision.) Also she may be paying more interest on house than she makes on CDs.

Thanks for looking out for her, and helping get away from Am.

She could start widow's benefits ages 60-FRA, or self benefits ages 62-70, depending on which is higher at FRA or self at 70. Then she could switch to the other for permanently higher benefits. So age 60 Widow's, 70 self, or 62 self, FRA(67?) Widow's benefits, depending on which ends up with highest benefits.

Buying a SPIA with a portion of her money at age 70 might be a good option. If interest rates go up, she might do better than a deferred SPIA.

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