How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

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boblite
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How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by boblite » Wed May 15, 2019 4:42 pm

BACKGROUND:

My nonspeaking disabled son is 31 and living at home. My wife is 67 and I am 76. Sometime in the next few years we expect our son to transition to a group home paid for by government, but in the long run, of uncertain quality.

Our son is especially vulnerable because he is nonspeaking. To try to protect his quality of life we are establishing a Special Needs Trust that, for his entire life time, will pay for the following items, in 2019 dollars:

/----------------------------------------

[1] a social worker to visit him in his group home every month, at a cost of about $500 per visit, to keep a close eye on how he is being treated. Hopefully family members will visit too, but in the long haul we feel this kind of contracted visiting offers much greater certainty, at a cost of $6,000 per annum

[2] to administer the trust in a manner that guarantees continuity over the long haul and avoids mistakes, we are hiring a succession of Professional Trustees (defined as people familiar with Special Needs Trusts, SSI Rules, Medicaid Laws and Regulations, Tax Law, must have investment management expertise, must have only the interest of the disabled beneficiary at heart, have no conflict of interest, and must be able to navigate the disability system). This may cost as much as the social worker, at $6,000 per annum.

[3] to supervise the Professional Trustee, a succession of family members or others as Trust Protectors, with powers to fire the Trustee, with expenses paid for annual visits to our son, at say up to $2,000 per annum;

[4] to provide for desirable items not provided for by government programs (such as discretionary medical and dental expenses not covered by government), an average annual expenditure of $6,000 per annum

/-------------------------------------

So far we have totalled a requirement for $20,000 annually in 2019 dollars. To provide for unforeseen contingencies, we multiply this by a factor of 1.5.

So in total we would need an assured income of about $30,000 per annum in 2019 dollars. Also, we would like principal increasing faster than inflation.

We expect to leave our son at least $1.5 million.

We do not want his Trustee to make investment decisions or play the stock market paying high fees. Instead we would like to require investment in a pre-specified list of index funds, not allowing any deviation except if a fund is clearly going bad, and requiring reinvestment in a similar fund.


QUESTION:

Assuming we leave $1.5 million, what is our best way of safely achieving these objectives ? What funds should we invest in, with what allocation ? I would much appreciate advice on this.

mhalley
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by mhalley » Wed May 15, 2019 7:21 pm

1.5 million would be 45k a year at a 3% withdrawal rate. I think a 60% stock allocation would be a reasonable way to go, but you could argue for anything from 50 to 70%. You could go with a one fund portfolio such as vanguard balanced index, or if you want intl exposure vanguard lifestrategy moderate growth.

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Tyler Aspect
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by Tyler Aspect » Wed May 15, 2019 7:26 pm

Welcome to Bogleheads.

An initial investment amount of $1.5 million, and withdrawing $30k initially (inflation adjusted) translates to a withdraw rate of 2% per year. I assume a withdraw period of 60 years, and a typical asset allocation of 50% stock / 50% bond. I consulted a safe withdraw calculator hosted by EarlyRetirementNow, and that calculator stated that any withdrawal rate lower then 3% per year should be safe.

An example portfolio for 50% stock / 50% bond is:

25% VTI (US stock)
25% VT (Global stock)
50% BND (US bond)
Last edited by Tyler Aspect on Wed May 15, 2019 7:33 pm, edited 1 time in total.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Sandtrap
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by Sandtrap » Wed May 15, 2019 7:29 pm

In your special circumstances, Vanguard VPAS services are low cost and will take care of your needs without fear of intrusion, "fiddling", etc.
Vanguard VPAS:
https://investor.vanguard.com/advice/personal-advisor
Contact them and see what they can do for you.

You can set things up now and oversee your portfolio while you are "here", and then have Vanguard VPAS take over at any point in time should you choose.

A viable alternative to a portfolio is an SPIA annuity. (Only an SPIA).
Here are some rates to give you an idea of what can take place.
Immediate Annuities Calculator
https://www.immediateannuities.com

*Outstanding job structuring for your child's needs. :D

MarkRoulo
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by MarkRoulo » Wed May 15, 2019 8:51 pm

boblite wrote:
Wed May 15, 2019 4:42 pm
My nonspeaking disabled son is 31 and living at home. My wife is 67 and I am 76. Sometime in the next few years we expect our son to transition to a group home paid for by government, but in the long run, of uncertain quality.

Our son is especially vulnerable because he is nonspeaking. To try to protect his quality of life we are establishing a Special Needs Trust ...

So far we have totaled a requirement for $20,000 annually in 2019 dollars. To provide for unforeseen contingencies, we multiply this by a factor of 1.5.

So in total we would need an assured income of about $30,000 per annum in 2019 dollars. Also, we would like principal increasing faster than inflation.

We expect to leave our son at least $1.5 million.
...
Assuming we leave $1.5 million, what is our best way of safely achieving these objectives ? What funds should we invest in, with what allocation ? I would much appreciate advice on this.
I'm sorry about your situation.

One piece of good news is that $30,000 out of $1.5 million is only two percent, which is VERY conservative ... which suggests that coming up with a plan is straightforward.

I suggest that you contact a fee only professional after you've read the responses, but I would keep in mind the following:
  • A single fund is about as simple as you can get unless you can find an inflation adjusted SPIA
  • Minimal adjustments/transactions on the fund are simple and thus preferred
  • The fund needs to have a mix of stocks (to keep up with inflation ... hopefully) and bonds (for stable income).
So ... just looking at the Vanguard choices, I find the following funds that have a broad mix of stocks and bonds. In addition, with current bond yields, the DIVIDEND payout of this fund is more than the 2% you desire, which means that one approach for now is to leave the fund alone (no selling of shares) and just take the dividend payment. If the trustee (?) encounters years in which the dividend yield is too low, they can sell some shares, but this may not be necessary for a long time if ever.

So ... funds:
  • 20% stocks, 80% bonds, 2.29% yield: LifeStrategy Income Fund
  • 30% stocks, 70% bonds, 2.25% yield: Target Retirement Income Fund
  • 40% stocks, 60% bonds, 2.24% yield: LifeStrategy Conservative Growth Fund
  • 60% stocks, 40% bonds, 2.18% yield: LifeStrategy Moderate Growth Fund
  • 60% stocks, 40% bonds, 2.23% yield: Balanced Index Fund (US stocks and bonds only)
You have a long time horizon, so I'd worry more about inflation than if your son was 65 and would probably favor the LifeStrategy Conservative Growth Fund, but I suspect that all will do the trick.

Good luck.

pkjr
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by pkjr » Wed May 15, 2019 9:17 pm

5 -6 houses in FL rent $1700 each , 8500 gross rent per month , $5k net rent per month, managed by professional

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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by Grt2bOutdoors » Wed May 15, 2019 9:25 pm

Balanced Index

Or, if you must hold international equities, then 48% Total Stock Market Index, 12% Total International Stock Index, 40% Intermediate Term Treasuries (or 40% Total Bond Market Index).
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by Grt2bOutdoors » Wed May 15, 2019 9:28 pm

pkjr wrote:
Wed May 15, 2019 9:17 pm
5 -6 houses in FL rent $1700 each , 8500 gross rent per month , $5k net rent per month, managed by professional
The risk is too concentrated; one region susceptible to frequent natural disasters (hurricanes), 5-6 positions of the same asset class, high transaction costs, illiquid, one tenant fails to pay the rent and you lose 20% of the rent and quite possibly alot more if they wreck the house or you need to hire professionals to evict them. Not recommended.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

3504PIR
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by 3504PIR » Wed May 15, 2019 9:32 pm

pkjr wrote:
Wed May 15, 2019 9:17 pm
5 -6 houses in FL rent $1700 each , 8500 gross rent per month , $5k net rent per month, managed by professional
Did you read the post or just the title? Impossible options are not good options.

To the OP, you could divide the funds into a 25/75 or 30/70 stock/bond mix using intermediate municipal bond funds as the bond portion for the most part and total stock for the stock portion. That would reduce the taxable portion of the income.

Additionally, I’d think about what to do with the funds in the future when they are no longer needed.

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Kevin M
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by Kevin M » Wed May 15, 2019 9:54 pm

So far you've gotten typical probability-based replies. No one can say for sure what stocks will return over the next 50-60 years, regardless of historical results for US stocks (look at Japan for a counter-example). I think the majority of forum members are in the probability-based camp, so you'll get mostly a stock/bond solution from most forum members. A minority of us lean toward a safety-first approach, which requires using the safest assets possible to meet future liabilities, especially when there is little-to-no ability to take the risk of stocks (i.e., not a long time ahead with a stable job and the ability to adapt to potentially very-long stock bear markets).

First, you need to think in real (i..e., inflation adjusted terms). What costs $500 today will cost much more in nominal dollars in 30 years at 2% per year inflation. It will cost the same in real terms. Of course the inflation rate for a particular type of cost might not be the same as the overall inflation rate, but it's hard to match future cash flows to liabilities where the inflation rate for that particular liability is unknown.

For matching general inflation, TIPS are the safest way to go. The real yield on a 30-year TIPS is a little less than 1%, and the real yield on a 5-year TIPS is about 0.5%. One issue is that the longest-maturity TIPS is 30 years, so you can't really match a real liability for anything beyond 30 years with TIPS.

Another option is an inflation-adjusted annuity with your son as the beneficiary. In theory that will last his lifetime, although there is the risk that the insurance company you buy the annuity from will go bankrupt. Also, I understand that it's hard to find inflation adjusted annuities.

For demonstration purposes, let's assume you use TIPS, and let's assume a 0.5% average real yield. So if inflation is 2%, the TIPS will return 2.5%.

Starting with $1.5M, at a 0.5% real yield, spending $30K per year in real dollars (nominal dollars increase at the CPI inflation rate), the money will last about 58 years, which seems pretty safe. You can calculate this with this spreadsheet formula:

=NPER(0.5%, 30000,-1500000,0)

A TIPS fund would be an alternative to individual TIPS. You would start out with a long-term TIPS fund, assuming you expect your son to have a long life. The finance trustee could eventually gradually move some of the assets to a short-term TIPS fund, so the average duration matches that of your son's remaining expected lifetime.

The bottom line is that you probably don't need to take stock risk to solve this problem. TIPS, a TIPS fund, an annuity, or some combination of those is likely to meet the goal with minimal risk compared to stocks.

Kevin
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Kevin M
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by Kevin M » Wed May 15, 2019 9:57 pm

Of course you have to include taxes in your your son's expenses too. There are some issues with taxes on individual TIPS in a taxable account, but TIPS funds largely ameliorate these issues.

Kevin
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Watty
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by Watty » Wed May 15, 2019 10:03 pm

boblite wrote:
Wed May 15, 2019 4:42 pm
Assuming we leave $1.5 million, what is our best way of safely achieving these objectives ? What funds should we invest in, with what allocation ? I would much appreciate advice on this.
I don't have a clue how they would be taxed in a trust and that would be critically important but you could look at buying a 30 year ladder of individual TIPs where $20,000 matures each year. That would cost $600K and the other $900K could be invested in a balanced fund like one of the Lifestrategy funds.

https://investor.vanguard.com/mutual-fu ... estrategy/#/

The other $10K that would be needed each year could easily come out of the dividends and interest of the investments.

TIPs only go out 30 years so you cannot buy them farther out than that so a new 30 year TIPS for $20K could be purchased each year as they become available.

pinhead
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by pinhead » Thu May 16, 2019 12:42 am

Can OP not do 3+% CD for 30 years?

Longtermgrowth
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Re: How invest $1.5 million to assure at least $30K income per year in 2019 dollars?

Post by Longtermgrowth » Thu May 16, 2019 4:02 am

Very sorry to hear the situation. Glad you can put enough away to ensure future care though.

I like the idea of a CPI annuity, at least for the fixed income portion, but must take into consideration your state guaranty limit. As far as I know, there is only one annuity provider currently offering a CPI annuity.
The link Sandtrap provided will guide you to them if selecting the CPI option in your quote. This site goes over the state guaranty limits:https://www.blueprintincome.com/resourc ... contracts/

Maybe somewhere in the range of 50/50 total stock indexes/fixed income, with your determined percentage of international stocks (maybe 20% minimum?:viewtopic.php?f=10&t=196956&sid=6ca6b86 ... d904aa89d4), and as much as possible in a CPI annuity for fixed income with the remainder in total bond market?

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