Variable Annuity Comparison

Great, for your mom. It’s her choice, and her money, I am sure she will do what she feels is best.

buy a brand new house or two in a good area and put it up for rent. My parents have been collecting rent on some houses for 30 years.

I can give an opinion but I must caution that it is only an opinion. $100,000 in 6-mo t-bills. This will provide a current income of about $5000. Unfortunately, it is not a lot but the capital is relatively safe. And the income generated is comprable to that generated with longer term bonds currently.

The other $100,000 in an equity income fund such as
T Rowe Price equity income fund There is some risk to this portion of the portfolio but the stocks that fund invests in are of a conservative nature. The fund will pay capital gains distributions once or twice a year. Consequently, the dividend stream will be somewhat eratic, which is unfortunate. Although the average return of this fund has been about 10% annually over the last 10 years, it has varied greatly from year to year from about a +28% to a -10%. For an equity based fund, that is not a bad variance. Actually, shares of the fund can be redeemed as money is needed to smooth out the income stream.

So currently there would be an expected income stream of about $15000 a year more or less.

Your question doesn’t say anything about her probable life expectancy or her tolerance for risk. So we’re in the dark a bit. Nevertheless, think about these two possibilities.

1. If she has a good chance of living into her 90’s, a lifecycle fund for retirees may be best. Lifecycle funds are mutual funds where the money is allocated by fund employees into a diversified portfolio. A lifecycle fund for retirees is one that will be heavily invested in bonds, but with somewhat less than half of its assets invested in stocks as a hedge against inflation. The advantage of a lifecycle fund is that your mother doesn’t have to do any money management. The fund personnel do it for her. And they can send her a monthly check in whatever amount she specifies. Whatever she doesn’t spend during her lifetime, her heirs will inherit. Vanguard offers inexpensive lifecycle funds.

2. If your mother has little tolerance for risk and/or may not have many years left, consider investing the money in 10-year U.S. Treasury notes. These “notes” are actually bonds and are safe, since they are obligations of the U.S. government. You can buy them from a stockbroker or from the U.S. Treasury at a website called Treasury direct. They don’t give her much protection against inflation. But if she doesn’t have many years left, that won’t matter a lot. These bonds pay about 5.15% at the moment, so that would be around 10K a year in income. Most likely, the interest wouldn’t be taxed by the State of Wisconsin (since states generally don’t tax interest paid by the federal government). If the interest payments aren’t enough, your mother can sell whatever bonds she needs for living expenses. Whatever she doesn’t use will be left for her heirs.

3. Annuities aren’t a good idea, not if she wants to leave an inheritance. Annuities either eliminate the inheritance, or significantly reduce it. Besides, they tend to be expensive (in terms of fees and other charges).

See the webpages listed below for more info. Good luck