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Hi,

I would like to ask a hypothetical question. Say you had two million dollars that was given as a gift in cash & put into a trust. What would be the safest way to invest with the intention of not touching principal but living solely off of the income. I realize its a losing game due to inflation but with the idea of locking into Municipal bonds or other 'safe' investments whats the best 10 year plan? How could you do better than 4% tax free?

What could you expect in returns in this market while still keeping the safe (minimal principal risk).

I thank you for your feedback.

Ron

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Is this a school project? Or a real question?

The best use of your effort is learning how to live on less that 4% of 2M (80,000) a year. You could do fine on a quarter of that, which means you only have to make 1%, which is far easier to accomplish

This is a flawed question from the start.

You should *not* be trying to live off of the principle. You should be drawing down on the return and the principal together.

Think about it: What happens when you die? The principal is still there, right? What good does it do to die with all this money?

You might then think about the risk of not knowing how long you'll live. This is where insurance companies come in who can sell you a product that will pay a certain amount for the rest of your life, not a set amount of time like 10 years.

The problem with assuming 4% is that you never get a straight 4%--even from "safe investments." The other problem with your assumption is that something returning 4% over time is "safe" at all. If you're getting a 4% return and using that 4% return to live on, inflation will start to eat away at what that 4% will buy you. 20 years from now, that 4% won't do nearly what it does today.

You haven't provided enough info for anyone to give you a serious answer yet. What is your time horizon? Investing experience? Tax situation? Lifestyle or expected lifestyle? Etc, etc, etc.

PRHYX

Depending on your age you could get an 8-10K per month annuity.

I am 40 years old, in good health. I have two children (age 2 & 5) who have college paid already. I am married, taxable income close to 175 per year (for my wife & I).

I would like my wife (works full time now) to work part time (she needs to do something). I do not trust money managers from bad experiences & I dont really like losing control of assets which is why I am not a huge fan of insurance (aside from that my family already has a few large policies). I have more experience with municipal bonds & would rather my own ‘bond fund’ than a managed fund. My intention would be buy & hold until maturity.

The trust is designed to end up with my children (in a trust for them). We live in the NY where it is expensive. I have my own businesses which I enjoy very much.

Probably I spend too much. I would like to spend more time with my children as well as a goal.

Ideally I would like to earn enough to stay in the NY area, have my wife not work for money but find something she enjoys part time. I want to keep working. Healthcare costs (which my wife supplies at her full time job) would run about 2K per month. My house is paid off but I think I want to upgrade to something larger or move to Florida (yep thats quite a swing).

So my goal is to work less but still work.

Saving the principal is for my children.

EndlessKnight said:   Depending on your age you could get an 8-10K per month annuity.

What happens if the annuity company goes out of business? Or I die unexpectedly? I am a die hard worst case scenario person (probably why I love zombie movies)

10% TIPS or equivalent fund
10% Other Bonds(fund or micromanage)
20% Broad Market tracking fund
20% Fixed payout annuity or other insurance product
10% PM
10% International Fund
20% Emerging type market, speculative, etc fund

Any place you see fund, you can replace it with individual stock picks per your knowledge and risk tolerance. Any place you see Bond, you can replace it with dividend paying stable stocks per your knowledge and risk tolerance

rpeterson2011 said:   EndlessKnight said:   Depending on your age you could get an 8-10K per month annuity.


What happens if the annuity company goes out of business? Or I die unexpectedly? I am a die hard worst case scenario person (probably why I love zombie movies)


Annuities or life insurance policies are protected by state guarantee associations up to $100,000 value (or possibly more depending on the state). Its vaguely similar to FDIC but not the same thing. National Organization of Life and Health Insurance Guaranty Associations (www.nolhga.com).

What happens when you die depends on the details of the annuity. Some are written so that your benefits end when you die and you get no principal back, period.. its gone. Some policies allow you and your spouse to be covered so payments only end when you're both passed. Some annuities have a clause to guarantee return of principal so that if the covered dies before all the money is paid back then beneficiaries will get the rest of the original principal.


Since you're only 40 years old a fixed annuity wouldn't pay out much. You'd be getting like $5-6k a year out of $100k. Plus it might be partially taxable. (tax details I'm not sure of)

Protecting principal while simultaneously living off interest is not something you can pull off without having a ludicrous amount of money and relatively low standard of living. Protecting principal is just code for not taking risk. If you refuse to take on risk, then the best you can do is whatever the market rate on an FDIC-insured deposit account is. Since you're in a high tax bracket, then yes, individual municipal bonds would be the way to go. You won't have any capital gains, but you won't have any losses either, assuming the bond doesn't go under. Again though, yields are priced by the market, and if the market decided an asset was risk-free, the yield would be close to 0% (or whatever the equivalent duration Treasury rate is). Since your bond will likely not have such a low yield, just be aware that the risk on that bond is no different than a wide array of other financial products with similar average returns.

By starting a franchise of H&B. Good times for owner, good times for clients.


skansiewicz said:   10% TIPS or equivalent fund
10% Other Bonds(fund or micromanage)
20% Broad Market tracking fund
20% Fixed payout annuity or other insurance product
10% PM
10% International Fund
20% Emerging type market, speculative, etc fund

Any place you see fund, you can replace it with individual stock picks per your knowledge and risk tolerance. Any place you see Bond, you can replace it with dividend paying stable stocks per your knowledge and risk tolerance


I think OP is looking for non stock options. 'What would be the safest way to invest'.

You know what I would do? I would invest half of it in low-risk mutual funds, and then take the other half over to my friend Asadulah who works in securities....

I would buy solid and reputed dividend paying stocks that give 5-7% annual return. The dividend is taxed at 15% rate leaving about 4.5-6% after tax. On a 2 Million principal this comes to over 100,000 annual payout ( after taxes ). Even though the principal may fluctuate based on the market price, the returns will stay the same. There is a good chance that the principal may grow as well depending on which and when you in pick the stocks. Good Luck!

http://crawlingroad.com/blog/harry-browne-permanent-portfolio-archives/

http://gyroscopicinvesting.com/forum/index.php?board=1.0

9% average (4% over inflation) for 20+ years with very low volatility and only 2-3 very small negative gain years that were bookended by good years.

by now we all have understood there is no risk free investment and no risk free rate. We leave in strange times when governments ask you to take 50% capital loss on government backed bonds "voluntarily", at the same time threatens you should not claim insurance you paid for and then turns around and declares your investment decision reckless & greedy.


Assuming you have an account with a very low practically zero commission rate broker (example IB):

Invest in arbitrage only or quasy arbitrages or synthetic bonds with say, >85% protection of getting more than say 6% effective within shortest timeframe. These opportunities do not come up all the time. So when you don't see such an opportunity, invest 80% in shortest term TIPS. With the 10% buy long term calls on commodities gold, silver, oil, gas and food when volatility is low. Final 10% is your gambling money so choose where you want to try your luck depending on what you enjoy - play blackjack (if you can count cards, apply basic strategy and apply approximate adjustment depending on the scenario), poker, sports betting, unidirectional bet on any asset - example buy and hold or sell and hope, etc.

habibbijan said:   You know what I would do? I would invest half of it in low-risk mutual funds, and then take the other half over to my friend Asadulah who works in securities....

EPIC response!

TIPS would be safest and sound like the perfect product for your needs. Of course the most recent yield was only 1%.

jatwell said:   http://crawlingroad.com/blog/harry-browne-permanent-portfolio-archives/

http://gyroscopicinvesting.com/forum/index.php?board=1.0

9% average (4% over inflation) for 20+ years with very low volatility and only 2-3 very small negative gain years that were bookended by good years.



•25% – Stocks (S&P 500 Stock Index Fund)
•25% – Long Term Bonds (US Treasury 30 Year Bonds)
•25% – Gold (Physical Gold Bullion)
•25% – Cash (Treasury Money Market Fund)

That portfolio would be a guaranteed loser in this interest rate environment.

rpeterson2011 said:   I would like my wife (works full time now) to work part time (she needs to do something).So my goal is to work less but still work. Saving the principal is for my children.

My first comment would be that having your wife quit work and staying home with children ages 2-5, would be a better gift to them than the $2 million when they are of age.

My second comment would be, if your goal is just to have your wife work part-time, and you continue to work full time and preserve principal, you answered you own question. Muni's (5 years or less duration) would give you income to supplement you wife salary going to part time easily and preserve principal.

OP - a couple of suggestions:

If your wife stops working full time (and loses healthcare benefits), try to find a lower cost policy. The $2K/month premium is > 1% return on your principal. If you don't have any pre-existing health issues, then a high deductible or "catastrophic" health insurance policy may make more financial sense as you can absorb a once every 5 years $5-10K catastrophy better than most. Or can you get insurance through your work?

Interested in relocating to a lower cost/lower tax state? Now may be the time to try it out before the kids get much older and have more roots.

Is your wife wired the right way to stay at home with the children? Some people are/some aren't. My wife has stayed home with our children for 10+ years now and if I had it to do over again, I am not sure I would have encouraged it - as I'm not sure it was the best thing for her.

Ten $100k rental homes that $1000+ per month each. This gives you $10k a month income (of course some months less for repairs and vacancies )

Five $100,000 annuities from different companies so they are fully protected if the company folds. Ones which pay your heirs if you die before receiving the principal

A $1m SBLI 10 pay whole life policy , which is less than $10k/year premiums for 10 years, then you can stop paying but have coverage for life

The remaining $500k on something liquid or for opportunities that emerge.

You've got your lifetime income , protection for your family etc

If you are willing to take slightly more risk, a diversified portfolio of good large caps with good dividend yield and and covered calls is a good bet. You can dial the security versus return by going more "in the money" with the calls.

Muni 4% is nothing to scoff at - but if your investment income is the main income, then you lose some of the advantage of the tax free nature of muni's - i.e. even a 6-7% taxable return may be better than the muni 4%.

A few months ago, I plunked down a bunch of money buying stocks like VZ, T, KO, PEP, PG, Lowes, INTC - most of them with long term covered calls expiring in Jan 2013. This was before the market turmoil started and even with the turmoil, most of my positions remained positive (when treating the call premium as reducing my purchase price). With the market recovering, most of my options are on track to be exercised. If they get exercised before expiration, my returns go up even higher. If exercised at expiration, I would earn around 10-12% (with dividend included). My only positions with some challenge were NOC and UTX - both of which went green today.

I haven't done the analysis since these options became available later, but it may be even worth looking at Jan 2014 instead - use the longer option to increase the call premium and hence increase the downside protection. And collect dividend in the meantime.

Note: Taxation wise, the cap gains and dividends are mostly long term gains/dividends.

mazeroth said:   habibbijan said:   You know what I would do? I would invest half of it in low-risk mutual funds, and then take the other half over to my friend Asadulah who works in securities....

EPIC response!


good one.............I know of few "low risk mutual funds" one that invested only in true blue chips like BAC, C, AIG, GE, you see? There was another that only invested in govt backed / quasy govt backed bonds seleted by a strict underwriting process......and even insured default risk............then down the line a different set of politicians got elected having brilliant (vissionary?) fiscal & monetary ideas...........the rest is history.

For OP it's a theoretical question but for me it's an actual question I face. I have a low risk tolerance while I'm still working, partly due to the stress of my job. I've used 5 year CDs with a low early withdrawl penalty, with a personal limit of $2MM at no lower than 2.5% (to limit how little risk/reward I'm getting). For now Munis are too long term for me, esp with the inflation risk. At the start of the year I was ready to put the remaining surplus in dividend stocks or funds (to get income and inflation protection), but Dow12,000 seemed to high to me. I took advantage of the market drop, and up 12% on VYM as of today's close. TBD what I'll do now that we're back up to 12,000 (besides hope for another drop).

rpeterson2011 said:   I am 40 years old, in good health. I have two children (age 2 & 5) who have college paid already. I am married, taxable income close to 175 per year (for my wife & I).

I would like my wife (works full time now) to work part time (she needs to do something). I do not trust money managers from bad experiences & I dont really like losing control of assets which is why I am not a huge fan of insurance (aside from that my family already has a few large policies). I have more experience with municipal bonds & would rather my own ‘bond fund’ than a managed fund. My intention would be buy & hold until maturity.

The trust is designed to end up with my children (in a trust for them). We live in the NY where it is expensive. I have my own businesses which I enjoy very much.

Probably I spend too much. I would like to spend more time with my children as well as a goal.

Ideally I would like to earn enough to stay in the NY area, have my wife not work for money but find something she enjoys part time. I want to keep working. Healthcare costs (which my wife supplies at her full time job) would run about 2K per month. My house is paid off but I think I want to upgrade to something larger or move to Florida (yep thats quite a swing).

So my goal is to work less but still work.

Saving the principal is for my children.


Let me be 100% clear - if you had the knowledge and skills to do this, you would not be posting here. The fact that you're discussing this so broadly tells me that you shouldn't be considering managing your own fund.

I understand about being burned by investment advisors and so let me ask you a few questions:
1. Did these individuals have a long track record?
2. Do they disclose their own total net worth?
3. Do they tell you how much of their own money is in what they're selling you?
4. Do they keep things simple?

It's funny how people buy all sorts of investments, yet the richest man in the world sells an investment, Berkshire Hathaway common stock, and writes a really long annual report every year designed to be able to be read and understood by his sister who is not a business person: http://www.berkshirehathaway.com/letters/letters.html

I'm not saying to buy Berkshire Hathaway, but that there are good money managers out there.

If I were you, and adamant about maintaining it myself, then I'd just buy TIPS. Let it all get indexed for inflation and draw down on principal as necessary.

Even if you invest for an interest return... call it 4%, and live off of the interest, you are VERY FLAWED in thinking that you're maintaining capital. In numerical numbers, fine, but in reality, you are not. Inflation will eat away at the $2 Million in principal even though you won't numerically see it until the goods and services you purchase move up in price.

As a business owner, you stand behind everything you do, right? You are constantly on the line and even with 15 years of good reputation, it just takes a few bad customers to ruin a longstanding reputation. Trust me when I say that it is worth having someone knowledge manage your money.

FWIW, one recommendation of a good bond fund in my opinion is Bill Gross' PIMCO funds.

And finally - the insurance policies I was describing were not for insurance, but rather annuities that pay until death. You can designate a beneficiary, like your kids.

PrincipalMember said:   If you are willing to take slightly more risk, a diversified portfolio of good large caps with good dividend yield and and covered calls is a good bet. You can dial the security versus return by going more "in the money" with the calls.

Muni 4% is nothing to scoff at - but if your investment income is the main income, then you lose some of the advantage of the tax free nature of muni's - i.e. even a 6-7% taxable return may be better than the muni 4%.

A few months ago, I plunked down a bunch of money buying stocks like VZ, T, KO, PEP, PG, Lowes, INTC - most of them with long term covered calls expiring in Jan 2013. This was before the market turmoil started and even with the turmoil, most of my positions remained positive (when treating the call premium as reducing my purchase price). With the market recovering, most of my options are on track to be exercised. If they get exercised before expiration, my returns go up even higher. If exercised at expiration, I would earn around 10-12% (with dividend included). My only positions with some challenge were NOC and UTX - both of which went green today.

I haven't done the analysis since these options became available later, but it may be even worth looking at Jan 2014 instead - use the longer option to increase the call premium and hence increase the downside protection. And collect dividend in the meantime.

Note: Taxation wise, the cap gains and dividends are mostly long term gains/dividends.


completely agree. this is a strategy that has worked well for me as well. With some screening you may even get close to 100% capital protection if you settle for a bit lower return.

kesta said:    With some screening you may even get close to 100% capital protection if you settle for a bit lower return.


I don't believe that you can get close to 100% protection - people on wall street are generally not that stupid . I can see situations where you can get $20 protection on a $70 stock by selling a $50 call option. But at this point, you are barely collecting any real premium - you probably get back $20 as the call premium. However, this does become interesting in different ways. If the dividend yield was 3%, the new dividend yield becomes 3% * 70/50 -> 4.2%.

SUCKISSTAPLES said:   Ten $100k rental homes that $1000+ per month each. This gives you $10k a month income (of course some months less for repairs and vacancies )

Five $100,000 annuities from different companies so they are fully protected if the company folds. Ones which pay your heirs if you die before receiving the principal

A $1m SBLI 10 pay whole life policy , which is less than $10k/year premiums for 10 years, then you can stop paying but have coverage for life

The remaining $500k on something liquid or for opportunities that emerge.

You've got your lifetime income , protection for your family etc


very sound strategy but I am not as adept as you to spot a 100k rental that will do 1000+ per month. but I must admit it has a very lucrative income potential and is tax efficient as well. I really liked the rental properties thread. Myself & wife tried to find some but could not get one with all variables. Offcourse we need to make a more serious effort & time commitment. The ones we got were mostly ghetto type and felt there would be credit risk. How do you manage credit risk? someone not paying rent and not vacating either? is there specialized services available to take care of these situations?

If you can't find 1% cashflow properties in your area , or they are ghetto, you need to consider different areas. Its as simple as that

high price areas like the bay area ,la NYC etc. Won't work. It has absolutely nothing to do with being adept, you just look elsewhere. the numbers either make sense in your area or not.

There are dozens of people posting in the rental sticky who are getting properties that flow 1-2-even3%. There is no guarantee tenants will pay, which is why you screen carefully . Or go section 8.

Go over to bogleheads.org. They will give much better advice on this question.

habibbijan said:   You know what I would do? I would invest half of it in low-risk mutual funds, and then take the other half over to my friend Asadulah who works in securities.... How about two chicks at a time? With a million dollars you could probably swing that.

PrincipalMember said:   kesta said:    With some screening you may even get close to 100% capital protection if you settle for a bit lower return.


I don't believe that you can get close to 100% protection - people on wall street are generally not that stupid . I can see situations where you can get $20 protection on a $70 stock by selling a $50 call option. But at this point, you are barely collecting any real premium - you probably get back $20 as the call premium. However, this does become interesting in different ways. If the dividend yield was 3%, the new dividend yield becomes 3% * 70/50 -> 4.2%.


by close to 100% i mean >90%. No it does not happen everyday and does not last long. In your example the yield i believe is bit more. for a $70 stock your margin is say atmost $21 you got $ 20 as premium for selling the $50 call. So your locked investment is really $1. if div yield is 3% on 70 =2.1 you are hitting 110% return just from dividend. say this is a 3 yr call you don't loose unless the value goes down to 50 - 6.3= 44.7 so your capital protection is 25 /70 % = 5/14 = 35%. you can sell a much deeper call to reduce your return and up your capital protection. Obviously these are not real numbers thats why calc is not realistic. But if you target <10 on your margin

SUCKISSTAPLES said:   Ten $100k rental homes that $1000+ per month each. This gives you $10k a month income (of course some months less for repairs and vacancies )



I like the way you think. I am working on a 2nd and 3rd property with similiar numbers (a little less). I also account for $50/month for maintenance and only count 10 months a year for tax/insurance.

Venturion said:    How about two chicks at a time? With a million dollars you could probably swing that.

That's it? If you had a million dollars, that's what you'd do, two chicks at the same time?

I'm bracing myself for tonnes of RED.....

OP, if I were to find myself in your situation......I would buy large tracts of agricultural land that I can grow corn, within the US....(better yet if it's already being used for growing corn).....for me this is the most safest long-term investment.....

I very well am aware you mentioned about monthly income while I'm talking of something that is not-exactly-a-monthly-income-thing.......but lemme ask you 'why do ya need monthly income from this 2M, when you already have a couple pretty decent income-sources'......invest and allow the farmland to appreciate in a gradual phase....the more the inflation, I'm hopeful, the equal(or more) appreciation in farmland values..........you can explore means to lease those farmlands till the day you call it shots with your current-income-sources........and then you can choose to get rid of the farmlands if you find something more exciting in life.....more chances farmlands would have appreciated.........

here's a good article, IMHO, that speaks of both sides of the coin......
LA Times

Skipping 142 Messages...
This is the best plan I have been able to execute. Holdings are split between a roth and a rollover ira, the roth is currently used to get my 3 to 4% out as I'm not 59 yet, the ira retains the inflation protection portion. In both accounts I hold preferred, convertable preferred, and trust preferred (some backed by bonds) shares, as well as 5% in the JNK high yield etf. The averaged yield is 7% I reinvest the accumulated inflation protection money when an opportunity comes by, or buy a little more of a current holding when it doesn't. I don't count capital appreciation in yield, but might sell something that has appreciated to buy a better yielding alternative.

Any comments, warnings, questions, or suggestions ?

PS.
Wish I had the stones to have bought BAC.L when it sold for $166 share & yielding $72.5 yr.



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