Where to put money after retirement

masraum · 10-09-2012, 04:16 PM

Ok, if your mother had some money in savings, and had some income from SS and retirement, where would you suggest that she put the savings for maximum stability and maximum interest?

Savings accts, MMSA, CD, all have crappy interest rates. So what's the way to maximize return while staying very secure?

recycled sixtie · recycled sixtie's Garage

I was just watching a money show on Amer. tv and that very question came up. It is impossible to have a good rate of interest unless there is some risk involved.

Buckterrier · 10-09-2012, 04:24 PM

Bury it in your back yard, safest place there is.
Oh but you won't make the .05% interest that banks are paying.

74-911 · 10-09-2012, 04:37 PM

Local credit union is paying 2% on insured 2 year CDs. That is about the best you can find with absolute safety and you will not get killed if interest rates go up.

fintstone · fintstone's Garage

I would have my mother loan the money to me at the same rate I pay on my mortgage. Then I would use the money to pay off/down my mortgage. She would get a good, safe rate.

RWebb · RWebb's Garage

and do it in writing so you can defend if the IRS gets nosy

Jim Richards · 10-09-2012, 05:07 PM

Dividend paying blue chip stocks. Forget the market price fluctuations and enjoy the dividend income.

masraum · 10-09-2012, 06:09 PM

Quote:

Originally Posted by fintstone

I would have my mother loan the money to me at the same rate I pay on my mortgage. Then I would use the money to pay off/down my mortgage. She would get a good, safe rate.

That's a !GREAT! idea.

Quote:

Originally Posted by Jim Richards

Dividend paying blue chip stocks. Forget the market price fluctuations and enjoy the dividend income.

uh, stocks can crash, there comes a time when they aren't a smart investment, at least not as the only or majority investment.

dennis in se pa · dennis in se pa's Garage

Nuveen pays 6% ETF

dan88911 · 10-09-2012, 06:37 PM

You need a well diversified portfolio which may have a bond ladder of CDs.
Maybe have some money in a Ginnie Mae Fund. I like Vanguard funds.
Maybe some in the Vanguard Short Term Investment Grade fund.
The Vanguard Wellesley Income Fund. Maybe the Dividend Growth Fund.

Esel Mann · 10-09-2012, 06:48 PM

Per your post, your constraints are: maximum stability and maximum interest. However I get the sense (from the rest of your post) that you (or your mom) desires stock market like returns but with interest. Not gonna happen (satisfying both constraints) at this time. Sorry.

Maximum stability infers insured, as in FDIC insured or treasury insured (if you can call it or trust it as that). Maximum interest, with maximum stability infers a CD. Perhaps a TIPS? Hence shop for the best CD. TIPS are what they are. If you are willing to tolerate some risk, but still desire interest, consider micro-loans. Again there is higher risk.

Taking that micro loan (and higher risk) one step further is as some have suggested, loaning it to family. Here you need to consider the paradox: (a) fundamental rule of life: money and family don't mix , (b) for risk assessment who would one know better than family.

I feel your dilemma. I am in a similar situation with in law parents. Unfortunately with the current economic landscape stable/safe interest ain't going anywhere for the foreseeable future. It's one of the downsides to shall we say certain directions taken for the "recovery".

74-911 · 10-09-2012, 06:52 PM

Quote:

Originally Posted by fintstone

I would have my mother loan the money to me at the same rate I pay on my mortgage. Then I would use the money to pay off/down my mortgage. She would get a good, safe rate.

Are you prepared to come up with the full amount you owe her at any time? Do you have siblings? What kind of health is your mother in ?? Lots of gotchas in that scenario.

HarryD · 10-09-2012, 06:56 PM

Quote:

I would have my mother loan the money to me at the same rate I pay on my mortgage. Then I would use the money to pay off/down my mortgage. She would get a good, safe rate.

I did this with my dad. 30 yr interest only loan. We did it proper with a loan agreement and filed as you would a regular mortgage. If my dad passed prior to maturity, I would inherit the loan as part of his assets and own my home.

Done right not a bad thing.

My dad passed after 20 years and all is ok.

motion · 10-09-2012, 07:10 PM

Quote:

Originally Posted by HarryD

I did this with my dad. 30 yr interest only loan. We did it proper with a loan agreement and filed as you would a regular mortgage. If my dad passed prior to maturity, I would inherit the loan as part of his assets and own my home.

Done right not a bad thing.

My dad passed after 20 years and all is ok.

I think its a brilliant idea.

fintstone · fintstone's Garage

Quote:

Originally Posted by HarryD

I did this with my dad. 30 yr interest only loan. We did it proper with a loan agreement and filed as you would a regular mortgage. If my dad passed prior to maturity, I would inherit the loan as part of his assets and own my home.

Done right not a bad thing.

My dad passed after 20 years and all is ok.

I did very similar to this when I bought my mother's house that way after my Dad died and she moved out (10% down and a 10 year mortgage), and converted it to a rental. I was very careful to get a lawyer to drew up papers and make sure it was kosher. Especially since there were other brothers who might think I pulled a quick one. No qualifying, etc and only about $100 to a lawyer. It was for 8% interest when that was around the going rate. It worked just like an annuity for my mom and I didn't refinance when rates dropped but paid the original amount until it was paid off. We both got a good deal and I preferred for her not to get the money all at once because she would have blown it and I would have had to take care of her anyways. If she had died before it was paid off, I would have just paid my 2 brothers each 1/3 of the remaining balance.

lukeh · lukeh's Garage

What is your definition of "maximum stability? FDIC insured, government backed, backed by an insurance company?

What does she need the money to do? Does she need to live off the income? Is it an emergency fund that she needs liquid? Is it money that has been sitting for decades that she never plans to use and leave to the kids?

How much are we talking...$10,000 or $100,000?

How old is mom...65 or 85?

Has she done any estate planning? What is the plan if she needs assisted living.

Hard to answer your question unless you know the answer to these and other questions.

As was mentioned, well diversified portfolio is usually the correct answer.

If you leave it all sit in the bank it will earn crap and she won't keep up with inflation. If you dump it all in the market it could be worth less when she needs the money. That is why you come up with different buckets for the money. If she has a portion that she doesn't plan on touching for life then that should go in something like a balanced fund, utilities, market linked CD....

If she needs to keep some liquid for short term needs that needs to stay safe in the bank or credit union.

If she needs it to provide an income to live on one place to look at is a bond fund and take 1% less than what the yield of the fund is. I have done great with high yield bond funds and using this strategy. My income has stayed level while my principal has grown at the same time. Sure the share price will move around but by taking less than what it yields she will be constantly buying more shares and if it's income she needs then who cares if the share price moves around some.

Another option is that their are some annuities out there that will pay 5% for life. I'm usually not a big annuity fan but in certain situations they make sense. If mom needs an insured 5% income for life to make ends meet that isn't a bad option to think about.

The loan option isn't a bad one but you can get a 15yr rate of 2.5% which isn't a super great rate for mom and by paying mom you lose the mortgage deduction. Also, what if mom has a stroke and needs the cash back ASAP to pay for care. If that happens when rates are up around 7% you will wish you just locked into a fixed rate at 2.5%.

fintstone · fintstone's Garage

Quote:

Originally Posted by 74-911

Are you prepared to come up with the full amount you owe her at any time? Do you have siblings? What kind of health is your mother in ?? Lots of gotchas in that scenario.

Yes. If necessary...but you really want to set it up like an annuity so her money is returned over time...only she gets a safe, but higher rate of return and you pay a slightly lower interest rate than you would have. Obviously, she can invest her money any way she likes, but it is best to get a "buy in" from any concerned parties.

I had an amortization schedule and claimed it on my taxes as interest paid because I needed the deduction and she claimed it as interest income received because her income was low enough that it did not impact her tax wise. In my case, I would probably even pay a bit better than the low rates now and use the money where I would have to normally pay a higher rate (no down, no qualifying rates are higher).

In my case, the loan is long paid off and her financial situation is much better now as she has inherited a bit from her mother and aunt.

74-911 · 10-10-2012, 05:39 AM

Quote:

Originally Posted by fintstone

Yes. If necessary...but you really want to set it up like an annuity so her money is returned over time...
In my case, the loan is long paid off and her financial situation is much better now as she has inherited a bit from her mother and aunt.

The OP's situation may be entirely different. If any siblings are involved it can get nasty really fast if the parent dies or needs long term care.. What collateral does she have for the loan other than his house and his word?

I know of a similar situation where parent died very unexpectedly and the two siblings wanted their shares of the estate which included the loan made to oldest brother and were not interested in getting it in monthly payments. That loan pretty much broke up the family for years.

lukeh has the best response. The best way to handle the money is the way that best fits you and your parents situation. There is no easy answer these days.

fintstone · fintstone's Garage

I guess it depends on the family. It worked very well for me. If the paperwork is drawn up properly, it is just business and everyone gets a deal. Obviously if everyone involved does not trust the other's ability to follow through with their commitment, there is a problem and one would be advised to choose another solution.

I would do the same again today. For example, I have an "underwater" home (by about $300K) at 6.5% variable rate that I cannot refinance at the current low rates because I would have to bring about $350K cash to the table to do so. I could pull that much out of my 401k, but I would incur a penalty and it is pulling in about twice that rate. If a relative had $350K in the bank drawing .05%, I would happily give the 5% for that money and buy down my loan to an amount where I could refi the remainder for 15 yrs at 2.75%. It would be a win/win. I can clearly show that I have the ability to repay the amount (because it would be a no collateral loan or the collateral would be just my word, another rental home, another investment, or my 401K)...so I could get the mortgage on the remaining amount. Both of us would "win" in this scenario. Obviously, we would have to trust each other and draw up papers. In this case, it would look more like a bond than a mortgage.

masraum · 10-15-2012, 06:01 PM

I thought that this was an interesting article. There are a bunch of similar articles on the 'Net if you do a search for something like "personal loan family" or "personal loan family IRS".

Making a Tax-Smart Family Loan - SmartMoney.com

Quote:

If you make a loan to a family member and charge zero interest, you may face unfavorable and complicated tax rules (as I'll explain later). But you can avoid tax-law complications if you charge an interest rate that at least equals the IRS-approved applicable federal rate (AFR). Because AFRs are almost unbelievably low right now, you can be nice to yourself by charging the AFR while still being plenty nice to the borrowing family member as well.

Here's what I mean. As this was written, the AFRs for term loans -- which means loans with a defined repayment schedule or a specific balloon payment due date were as follows (based on semi-annual compounding).

0.23% for "short-term" loans of up to three years
1.07% for "mid-term" loans over three years but not over nine years
2.61% for "long-term" loans over nine years.

Wow! AFRs are updated monthly in response to ever-changing bond-market conditions. Today's super-low AFRs reflect the current super-low interest rate environment (which may not last too much longer). AFRs for each month are published in Internal Revenue Bulletins and can be found at Internal Revenue Service. With a term loan, the AFR on the month you make the loan applies for the entire term.

Tax-Smart Family Loan Strategy in Action

Say you want to lend $50,000 to your adult Sonny Boy so he can buy his first home at great price that seemed inconceivable a few years ago. You could make a nine-year term loan with a balloon repayment at the end and charge the mid-term AFR, currently just 1.07%. Sonny Boy can pay that super-low rate for the entire nine years.

Say you want to make a 15-year term loan instead. No problem. Just charge interest equal to the long-term AFR, currently about 2.61%. Sonny Boy can pay that low rate for the entire 15 years.

On your side of the deal, you must include the interest income on your Form 1040. On Sonny Boy's side of the deal, he can deduct the interest as qualified residence interest as long as you secure the loan with his home (a relatively simple legal procedure). Otherwise, he generally can't deduct the interest.

Here's the thing to avoid: If you make a demand loan (one where you can demand repayment at any time) as opposed to a term loan, the AFR isn't fixed in the month you make the loan. Instead, you must charge a floating AFR based on ever-changing short-term AFRs. So if you believe, as I do, that interest rates will eventually go higher, you'll want to make a term loan if the objective is to offer a great interest rate to the borrowing family member.

Avoid Interest-Free Loans

If you insist on making a totally interest-free loan to a family member, the dreaded below-market interest rules may apply. If they do, you must follow complicated rules to calculate imaginary interest payments from the borrower to you. Then you get to pay real, live income taxes on the imaginary interest. The imaginary interest payments can also trigger imaginary gifts from you to the borrower, which may eat into your valuable federal gift and estate tax exemption. Crazy? Yes. But I didn't make these rules.

For loans under $100,000, there are some exceptions to the below-market loan rules. But the preferable approach is to avoid them entirely by charging an interest rate equal to the AFR. Plus I think it's best to charge some interest on family loans, just to keep the arrangement on a business-like footing. Believe me when I say that keeping things business-like can save a lot of unnecessary grief.

Mind the Details

Last but not least, please put the loan in writing to make sure the IRS (and the borrower too) will respect the deal as a loan rather than a gift. This is easy to accomplish because several online services offer do-it-yourself loan documents for just a few bucks (for instance, check out Lawyers, Legal Forms, Law Books & Software, Free Legal Information - Nolo.com). I also advise collecting loan interest payments at least semi-annually and principal payments promptly when due. That shows you're serious about getting your money back -- with interest (albeit at a very favorable rate). Follow these simple precautions, and you can give your family-member borrower some great loan terms while keeping the IRS off your back.

I think we're going to do this. I've got no siblings, so that isn't a consideration. We could pay the loan outright if we really had to, but hopefully, we won't. We were planning to refinance anyway to take advantage of the lower rates that are out there. We actually aren't going to go as low as a refi would because a big part of this is getting some income for my mom, even if it's not a ton, and it's going to lower our rate and monthly bill a fair amount.

Thanks for the suggestion.