Author Topic: Investing for Income  (Read 2568 times)

TrMama

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Investing for Income
« on: September 30, 2016, 10:40:43 AM »
Long story short we have had a windfall. DH and I are now managing both our investments and MIL's. We have a plan for our own investments, but since DH and I are 42 and 36, respectively and still employed (not quite FI) our goals/needs are pretty different from MILs and we're feeling a bit lost on how to manage her portfolio. MIL is 69 and cannot work.

Up until now MIL has been living partly off the income from a rental property. We sold the rental and need to replicate at least $1500/mo in income for her. We have $500K to invest. We're all Canadian. What would you suggest?

We would like to preserve as much of the principle as possible while retaining enough liquidity to handle large medical expenses. She currently lives with us, but at some point will likely need in home or nursing home care, at which point we'd like to be able to have lots of cash available to keep her as comfortable as possible.

Financial.Velociraptor

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Re: Investing for Income
« Reply #1 on: September 30, 2016, 02:06:20 PM »
1500/mo out of 500k is 3.6% withdrawal rate.  You don't even have to stretch. 

I recommend you start by determining what your stock/bond allocation is going to be.  Err on the side of having "too many bonds" until she weathers a 20% or more downtown in the market and knows how she will react to such.  She can always rebalance when stocks are cheap if she finds out she has an iron gut.  Otherwise, total global stock index and forget about it.

triangle

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Re: Investing for Income
« Reply #2 on: September 30, 2016, 04:05:55 PM »
I don't follow the Canadian economy closely, though it is my understanding that the currency is still relatively low, making a lot of foreign investing risky. Though some portion should obviously be outside of Canada for the growth opportunity.  Some of your banks such as Royal Bank of Canada or Toronto-Dominion yield enough by themselves though you probably want to buy a fund for simplicity. Since the money was obtained through real estate your MIL may be comfortable with a slice of it buying a REIT to give an income boost, allowing other slices of the 500K to be in lower yielding but faster growing stocks for inflation protection.

erp

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Re: Investing for Income
« Reply #3 on: October 02, 2016, 12:06:53 PM »
I know it's unconventional in these forums, but I might consider putting 250k into an annuity and indexing the rest - on some level it depends what your MIL's risk tolerance is, but at 69 I'd likely be very conservative. Based on the annuity calculator on Sunlife's website it looks like you can get about $1250 a month for 250k, dividends on VCN or VUN would easily top off the rest of the money and growth of the index funds should cover inflation.

The downside of this approach is that you're writing off half your capital, but for me the certainty is probably worth it for someone else's finances.

arebelspy

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Re: Investing for Income
« Reply #4 on: October 03, 2016, 06:09:53 AM »
I know it's unconventional in these forums, but I might consider putting 250k into an annuity and indexing the rest - on some level it depends what your MIL's risk tolerance is, but at 69 I'd likely be very conservative. Based on the annuity calculator on Sunlife's website it looks like you can get about $1250 a month for 250k, dividends on VCN or VUN would easily top off the rest of the money and growth of the index funds should cover inflation.

The downside of this approach is that you're writing off half your capital, but for me the certainty is probably worth it for someone else's finances.

I'm not sure I agree with half in a non-inflation adjusted annuity, but looking into a SPIA is a good idea--pricing an inflation adjusted one for 1500/mo could be worth it, if there's fear of the market there.

IMO, as FinancialVelo said, you're at a 3.6% WR, which has never failed in the US historically.  I'd personally invest it conservatively, say, 40/60 stocks/bonds, and ride it out.  Then you still have the principal to fall back on for medical necessity or whatever.

But looking into a SPIA and thinking about that is a good idea.
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TrMama

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Re: Investing for Income
« Reply #5 on: October 03, 2016, 10:44:34 AM »
Thanks for the advice so far. I suspect I'm making this more complicated than it needs to be. When I say, DH and I are managing her finances, I mean that literally. MIL has not financial sense at all. We are literally managing it for her and she has no concept of risk tolerance or how to figure out her own tolerance. So it's really about DH's and my risk tolerance for her portfolio. And our risk tolerance for her money is pretty low. The 60/40 split is probably pretty spot on, or possibly even too aggressive.

We won't be doing an annuity. Her health is bad, the chances of coming out ahead on an annuity are low. Plus, if we do need access to the principle for medical expenses, an annuity really limits our options. I guess another goal we have that I didn't state was that we'd like to preserve some of the capital for future generations. This windfall came to MIL courtesy of her ILs and I'd really like to pay it forward to our kids or grand kids.

I think I need to do some more research on how different types of investment income are taxed in Canada. I think dividends are taxed differently than capital gains, but I'm pretty fuzzy on the details.

erutio

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Re: Investing for Income
« Reply #6 on: October 03, 2016, 11:41:40 AM »
If she's 69yo and already failing health, I'd agree that an annuity is probably not a good idea.  Still a good exercise to think about and see what the options are though. 

I'd probably do a 50/50 allocation and and just draw down from that as needed.  Now that she is living with you, will she still need $1500 a month expenses?

TrMama

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Re: Investing for Income
« Reply #7 on: October 03, 2016, 12:02:45 PM »
Now that she is living with you, will she still need $1500 a month expenses?

Yes, at least. The $1500/mo is only a portion of what she was earning from the rental. She spends $1000/mo just on prescriptions plus she still drives and has her own car. She is not mustachian at all and we have a very limited ability to influence her in that regard. She lives in a separate suite in our home, so meals and things like that aren't shared. Yes, we could all save money if we pooled more resources, but it would be at the expense of everyone's sanity. I'll happily work to avoid that. I just mentioned that she lives with us to indicate her housing expenses are $0 and she no longer has any RE equity.

As for income, she also has a small pension, plus CPP (not very much), and OAS (Canadian version of social security). She'll lose the OAS in 2017 because her 2016 income will be inflated due to the large capital gain from selling the rental. She should be able to collect it again in 2018, when her income normalizes.

arebelspy

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Re: Investing for Income
« Reply #8 on: October 03, 2016, 05:53:19 PM »
The 60/40 split is probably pretty spot on, or possibly even too aggressive.

40/60, not 60/40.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.