DIY Annuity

[ProdigalSon94]

My father is receiving $350k from selling his mother's house. He would like to put $200k-$250k into an annuity if he could get around $1000/month. Since I have a stream of $3,200/month from the VA, I was thinking of paying him part of my stream and then keeping the money in the family. When he passes, I subtract the difference of $1,000/month from the principal and distribute the rest between my sister and I. My father is thinking of taking the money directly from the pot but I think that will dwindle the pot. The goal should be to ensure a constant stream of $1,000 and keep the investment growing.

I'm thinking of doing this through Vanguard. Set up a mutual fund of VTSAX and then watch it grow over the years. I'll probably have covered the principal in 20 years and the mutual fund would have grown substantially in 20 years (my father is healthy vegan and devout Christian, 67). I'd prefer not to give it to a company when it seems like we can do it ourselves. My $3,200 comes from the government and is stable tax-free income. I would like to use it to help my family.

Suggestions?

[reeshau]

I Don't understand why you are mixing your finances and your father's.  If you intend to take this $350k in return for your $1,000, do you have an idea of the formal contract you would sign?  Or would you intend this to be informal?  (I would not recommend that, by the way)

 Your father seems to have things in hand.  4% of $350k would be $14k per year, so withdrawing $1k per month sounds perfectly prudent.  If he is willing to do this, why complicate things?  More likely than not, there will be plenty of money left when your father passes.  And in the meantime, you will have your full payout to invest, if you wish.

If your father is not so risk averse to try a prudent withdrawal rate rather than being stuck on annuities, then let him do it.  I would be very concerned about mixing that much money with family relations. (both your father and sister)  Fallout from misunderstandings / changed minds / differences of opinion also has to be considered with family finance.

Having said all this, I think it is relatively common to have a parent write a mortgage for a child.  This type of arrangement addresses a lot of the shortcomings I mention:  it is fairly straightforward to have a formal contract, with standard conditions that are easily understood.  If someone fails to hold up to the commitment, there are clear remedies.  (although, of course, there is still the risk of family drama / manipulation)  Could either you or your sister refinance to a mortgage note held by your father?

[BECABECA]

If he’s not confident enough to deal with it himself, you could help him set up a vanguard account with the 250k and designate you as Trusted Advisor. Then you can set up an automatic $1000 monthly disbursement from there to his bank account, and manage the annual rebalance between stock index and bond index funds and ensure that he’s still on track to not outlive the ~5% withdrawal rate. I’m basically doing this same thing for my mother-in-law. I see it as win-win: she gets more money per month than an annuity would be willing to pay, and in all likelihood there will be money leftover for an inheritance (unlike an annuity).

[Wintergreen78]

Even simpler, buy a vanguard target date fund. Sell $1,000 each month and withdraw it. Ignore the balance. Never worry about asset allocation.

https://investor.vanguard.com/mutual-funds/profile/VTWNX

[Goldielocks]

My father is receiving $350k from selling his mother's house. He would like to put $200k-$250k into an annuity if he could get around $1000/month. Since I have a stream of $3,200/month from the VA, I was thinking of paying him part of my stream and then keeping the money in the family. When he passes, I subtract the difference of $1,000/month from the principal and distribute the rest between my sister and I. My father is thinking of taking the money directly from the pot but I think that will dwindle the pot. The goal should be to ensure a constant stream of $1,000 and keep the investment growing.

I'm thinking of doing this through Vanguard. Set up a mutual fund of VTSAX and then watch it grow over the years. I'll probably have covered the principal in 20 years and the mutual fund would have grown substantially in 20 years (my father is healthy vegan and devout Christian, 67). I'd prefer not to give it to a company when it seems like we can do it ourselves. My $3,200 comes from the government and is stable tax-free income. I would like to use it to help my family.

Suggestions?

In addition to management fees, annuities are essentially a life insurance product, and have some of the annual return as non-taxable.
Because there is nothing left after death, and the insurance aspect, this means that likely MORE of the $1000 is not taxed.

Just do an apples to apples comparison of the taxes and returns.  You may need to payout $1200/mo to net the same $1000/mo on the annuity.

[mistymoney]

You should try to educate him on doing this himself, if he isn't confident enough to do it, let him buy an annuity as he has planned.

The plan you have is going cause strife. Likely much more strife than the money you think you're going to save.

One potential - he gives you the money and you die within a few months.

[Proud Foot]

Don't do anything to mix your money and his.

Like others have said this could be done with an investment account. With $250k invested a monthly withdrawal is only 5%. At 67 this should be plenty for him to live out the rest of his life without having to worry about the money being all gone. Plus the benefit of anything left getting to be split between you and your sister.

I think the biggest way to get him on board with a plan like this would be find out what his concerns are with the safety of the monthly payment. You could also get him to think of the possibility of doing something with the money beyond just his life (you and your sister, charity, scholarship funds, endowments, etc) that would not be possible with an annuity.

[MustacheAndaHalf]

Would you be surprised to be dealing exclusively with Transamerica for your annuity?  Vanguard just exited the annuity business 1-2 weeks ago.

https://investor.vanguard.com/annuityfaq
"On Monday, December 7 client service and account administration for the Vanguard Variable Annuity transitioned to Transamerica1, the issuer of the annuity.
Transamerica is now handling all annuity servicing, communications, and account access.
...
Annuity administration isn't central to Vanguard's long-term product and service plans."


Note if you invest $350k into VTSAX, the SEC yield is only about 1.6%, which is about $5,600/year.  So you'll need to sell some each year to make up the difference.  If your father's goal is providing for his children, then VTSAX might be a good fit.  But if it really needs to last him 20 years first, and inheritance is secondary, a more conservative mix might be better - like a target date fund.

Oh, one more point: do not mix your dad's money with yours.  Watch "American Greed" a few times, until you spot the pattern of fraud and mixing client's money with their own.  It's not good practice, and it's not acceptable if you're acting as a fiduciary (holding your dad's money in trust).  Siblings will start fighting when there's lots of money involved, and you can risk your own money by mixing it with your dad's.  I strongly recommend you avoid that.

[ChpBstrd]

DO NOT mix your money and his. This is a recipe for a family-destroying lawsuit.

If he is too risk averse to just plop the money into VTI and BND on his own, he won’t be able to tolerate you doing the same on his behalf. As a non-insurance-company, you don’t have the reserves to maintain his income into his 90’s while markets are down 40-50%.

[Plugra]

If he’s not confident enough to deal with it himself, you could help him set up a vanguard account with the 250k and designate you as Trusted Advisor. Then you can set up an automatic $1000 monthly disbursement from there to his bank account, and manage the annual rebalance between stock index and bond index funds and ensure that he’s still on track to not outlive the ~5% withdrawal rate. I’m basically doing this same thing for my mother-in-law. I see it as win-win: she gets more money per month than an annuity would be willing to pay, and in all likelihood there will be money leftover for an inheritance (unlike an annuity).

Exactly -- this is what I have been doing for my parents.  I have trading authority over their investment account. I transfer a regular amount to their checking account every month. Works great.

My father had originally wanted to put their money into a variable annuity that was being pitched to him.  When people want to buy annuities, it's not always that they are highly risk averse, but rather that they are intimidated by the responsibility of managing their investments.  Especially when people get older, it's a huge relief for them to hand that over to a third party.  The annuity salesman is there to take advantage.

[BlueHouse]

I agree with everyone who advises against mixing your money with his money.  Unless you want to alienate all members of your family and start a rift of distrust. 

[ProdigalSon94]

Thanks y'all for the words of advice and encouragement. First of all, I do not plan to mix my money with my dads. We will stay totally separate. Then I would like to say that being a trusted advisor and having a target fund in Vanguard for the $250k makes sense. He'll be able to pull out $1000 each month and cut into the principal as little as possible. This leaves money for me and my sister if/when he passes. Otherwise, living a good life with an extra $1000. Thank you again