My father is 83 and is moving into a senior care center so we just sold his house for $600,000.  He has a couple of rental properties that are producing income, but really no portfolio except for the $600K. He needs $3,000 a month in addition to what he gets from the rental properties which are rented to stable tenants. None of his heirs need an inheritance. How should we invest his money? CD returns are pathetic and I'm leery of our banker's suggestion– an annuity. 


Great news! Your father has several options and all of them are good, mostly because it is a large nest egg and a small income need. While the income need/portfolio size ratio (6%) might not seem large to a 60 year old, it is quite good for an 83 year old. Let me explain why:

Standard Investment Portfolio

Remember the Trinity Study, with its 4% rule? It basically said that if you want a very high probability that your money will last at least 30 years in retirement, you can only spend about 4% of it a year. However, an 83 year old isn't going to live 30 years. In fact, an 83 year old has a life expectancy of 7 years. Certainly planning for 15 seems plenty conservative to me. So how much can you withdraw from a portfolio if you only need it to last 15 year? According to the Trinity Study, 6-7%. And it doesn't even matter that much how aggressive the asset allocation is as long as it is at least 25% stocks. Per the Trinity Study, at 6%, the likelihood of lasting 15 years ranges from 94-99%. At 7%, it's a little lower, but still pretty good–77-87%. Well, 6% of $600K is $36,000 a year, or $3000 a month. There you go. Problem solved. In fact, if you don't need inflation adjustments, you could just put the money under a mattress, pull out 6% of it a year, and you'd last almost 17 years. That's with no earnings at all. So just using a standard stock/bond portfolio is one great option for your dad.

If you want to keep it really simple (which can be very useful because you don't need an investment advisor's help to implement it), you can just take that $600K and put it all into a Vanguard Target Retirement Income Fund (30% stock/70% bonds) or the Life Strategy Income Fund (20% stock/80% bonds) both of which essentially own all the stocks and bonds in the world. It doesn't matter that it is in a taxable account since you'll be spending 100% of the income every year. They both yield around 2% right now, so spend that 2%, and then sell 4% of the fund each year and that will give you the 6% you need for his spending. It's possible that a more complex portfolio might work better, but it is also possible it might work worse. One thing to keep in mind is that if you hire an advisor, his cut has to come out of that withdrawal. So in the first year, that means your dad gets 5% and the advisor gets 1%. Technically, paying the advisor 1% doesn't lower your SWR by a full 1% over the long haul, but it certainly lowers it by 1% that first year.

Start em young -- The WCI employees earning their pay.

Start em young — The WCI employees earning their pay.

Buying Security

However, there is an even better option here. At the age of 83, even a healthy male can purchase a Single Premium Immediate Annuity (SPIA) that yields 13.20%. 13.20% of $600K is $79,200 a year, or $6,600 a month, twice as much as he needs. The downside? Well, if he dies next year, the money is gone. That's okay, since no heirs need it, but it's probably buying insurance you don't really need. It would be smarter to only annuitize as much as you need- $300,000. That will produce an income of $39,600, or $3,300 a month, enough for his needs and to spare. Plus, the other $300,000 can keep growing or even be used for lump sum purchases that may be needed. And if they're not needed, the heirs won't complain.

This question (and answer) illustrates an important concept–people don't live forever. Retirement planning at 50 is very different from retirement planning at 80. Here are some of the differences:

  1. Annuities pay more
  2. Inflation will have less of an effect on your financial life
  3. Your asset allocation doesn't matter as much
  4. Your house, if sold, can cover your rent for the rest of your life and then some
  5. You spend less in your 80s (at least until you get sick) than you do in your 50s and 60s

What do you think? What would you recommend to your family member in this situation? Investments? Annuities? Both? Comment below!