Sell house, invest to pay rent

[guelphinvestor]

Hi


My 76 year old mother is considering selling her house and renting.


I would like to get some advice on how to invest the proceeds of selling the house to provide income to pay the rent.

Annuities ? Dividends ?



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[twig21]

If it was me I would invest that in low risk bonds or possibly a high yield savings account. 

[RWD]

A normal stock/bond portfolio should be fine with a heavier weighting towards bonds due to her age.

Playing around with cFIREsim should give you a good sense of what reasonable level of rent can be sustained with the proceeds from the house for various splits between stocks/bonds.

[RichMoose]

She should be good with a simple solution like VCNS.TO--40% stocks and 60% bonds. Globally diversified and very easy to manage.

I would seriously skip annuities, they rarely make sense. A lot of dividend stocks in Canada are expensive relative to the rest of the market.

[ILikeDividends]

Annuities ? Dividends ?

Depends on her risk tolerance.  If she doesn't know her own risk tolerance, and if she doesn't have a preference for annuities, I would stick with fixed income options.

If you can make her feel comfortable with a modest equity exposure, that might mitigate the risk of future increases in rent that a purely fixed income allocation might struggle keeping up with.

Personally, I would never recommend annuities.  But it's not my preferences or risk tolerance that matters in this case.

[ChpBstrd]

What kind of ROI would she need to earn on the proceeds from the house in order to cover rent?

E.g. Is it a $500k house and rent will be $12k/year?

[MustacheAndaHalf]

You could have her open a Vanguard account, and buy into:
Vanguard Target Retirement Income Fund (VTINX)

One problem with annuities is knowing how much both the insurance company and salesmen take in profit.  With the above fund, you know using the expense ratio: 0.13%.  I give a zero percent chance an annuity leaves you with 99.87% of your assets after a year - but usually the terms are hidden in the contract.

You can set the Vanguard Target Retirement Income Fund to leave it's income and dividends in cash, at Vanguard.  When extra money is needed, you can sell an amount of the mutual fund to turn the assets into cash.

Vanguard not only takes just 0.13% per year, but by law they have to disclose the correct amount.  The SEC is watching them.  But annuities are a very different story, and usually they sound good until you discover what's in the fine print - usually when it's too late.

[TomTX]

The only annuity which should be considered is the fixed SPIA - Single Premium Immediate Annuity, with a built in inflation adjustment.

Not saying all SPIAs are a good deal - there are certainly some bad ones. But they are the ones where you can actually find a good deal, especially for an older person who just wants to guarantee income.

The basic tradeoff is that you are giving up the possibility that you(your mother) will leave a residual (more money) for your (her) heirs. The upside is that the annuity company can therefore offer you a higher monthly payout than any other guaranteed fixed income investment (bonds, CDs, etc).

I Googled up an article for you:

https://obliviousinvestor.com/single-premium-immediate-annuity/

You obviously would need to get quotes from a variety of different companies, ones that you are reasonably sure will be around. I did some quick online quotes, and it seems a lot easier to find non-inflation-adjusted quotes. It looks like with NO inflation protection your mom could get around a 9% return (ie, if they put in $500k from the sale of the house, they would get $45k per year for life) - an inflation adjusted SPIA would start with a somewhat lower return.

Personally, I would start somewhere like Fidelity - they have discussion here:

https://www.fidelity.com/annuities/immediate-fixed-income-annuities/overview

...and then hit a bunch of online brokers, etc.

So again:

SPIA
Fixed
Inflation adjusted (probably)

[catccc]

I don't have much advice, just wanted to pop in and say I think this is sound advice as someone who is a life long renter.  One of the advantages of renting is that maintenance is taken care of, and I think most 76 year olds don't want to deal with that headache.

Actually, I have a little advice.  Maybe a 1 year's worth of rent cash buffer would be good to ride out any downturns, invest the rest in 40/60 stocks bonds, but pull from cash and refill cash later if the market has a momentary freak out?  I realize this equates to market timing, but I'm sure there are some instances in which it would nice to have an option... like if you were planning on drawing down from investments to pay rent last week, for example.

[Classical_Liberal]

My vote is Vanguard Wellington