Investment options for a chunk of cash
April 15, 2016 10:51 PM Subscribe
If you had, let's say, $150,000 (US) that you need to draw about $1,000 per month from for as long as possible, what would you do with it?
Assume retirement needs are met. This is a U.S. Citizen.
Assume retirement needs are met. This is a U.S. Citizen.
Buy houses and rent them out.
Where I own a house, that $150K could buy 4 or 5 modest houses. Each would rent for $350 to $400 per month. Taking out property taxes and homeowners insurance, and you'd still want to sock away a percentage for contingencies / property maintenance. The net would easily be $1000 per month.
The rental income would conceivably never end. If you did choose to end it, you'd be able to sell the houses.
Multiple houses helps cushion against times when one is vacant.
For a reduced take, there are property management companies that will handle everything for you, including all tenant issues and physical maintenance.
posted by yesster at 11:34 PM on April 15, 2016
Where I own a house, that $150K could buy 4 or 5 modest houses. Each would rent for $350 to $400 per month. Taking out property taxes and homeowners insurance, and you'd still want to sock away a percentage for contingencies / property maintenance. The net would easily be $1000 per month.
The rental income would conceivably never end. If you did choose to end it, you'd be able to sell the houses.
Multiple houses helps cushion against times when one is vacant.
For a reduced take, there are property management companies that will handle everything for you, including all tenant issues and physical maintenance.
posted by yesster at 11:34 PM on April 15, 2016
A single-premium immediate annuity (SPIA) is one option, assuming person in question is healthy. $150K would buy a SPIA for a 70-year-old male paying out $1000/mo, but YMMV if age or gender also vary.
Might not be a slam dunk bet with interest rates at the lows they're at now, but if you need a guaranteed $1000/mo for life, that's a relatively painless way to do it.
posted by un petit cadeau at 12:43 AM on April 16, 2016 [2 favorites]
Might not be a slam dunk bet with interest rates at the lows they're at now, but if you need a guaranteed $1000/mo for life, that's a relatively painless way to do it.
posted by un petit cadeau at 12:43 AM on April 16, 2016 [2 favorites]
I vote standard investment policy. Vanguard mutual fund mix of stock and bonds.
posted by Kalmya at 2:51 AM on April 16, 2016 [2 favorites]
posted by Kalmya at 2:51 AM on April 16, 2016 [2 favorites]
It's not totally clear to me what you want. Do you need the 1000 a month and the question is how to maximize the length of time you can draw the 1000 a month? Or are you looking for something else?
Also there is no way the math on real estate and this would work. You would essentially be looking at an 8% net rental yield which doesn't exist anywhere in the developed world right now. And the underlying isn't liquid so you couldnt use capital + return to meet your goals.
The classic answer is some kind of annuity. However given how low rates are and it sounds like you don't need certainty I would avoid that. The flip side is that yield in general these days is expensive.
Basically there isn't an easy answer to this and will greatly depend on the risk return trade-off and some view of rates.
posted by JPD at 4:20 AM on April 16, 2016 [10 favorites]
Also there is no way the math on real estate and this would work. You would essentially be looking at an 8% net rental yield which doesn't exist anywhere in the developed world right now. And the underlying isn't liquid so you couldnt use capital + return to meet your goals.
The classic answer is some kind of annuity. However given how low rates are and it sounds like you don't need certainty I would avoid that. The flip side is that yield in general these days is expensive.
Basically there isn't an easy answer to this and will greatly depend on the risk return trade-off and some view of rates.
posted by JPD at 4:20 AM on April 16, 2016 [10 favorites]
A safe bet for that amount, given your needs, is a ladder of CDs for $12,000 with varying maturity dates, so that they come due as you need them.
If you're willing to take on more risk, you could keep, say, 2-5 years' worth liquid and invest the rest in low-fee total market index funds or ETFs (e.g. a mix according to your moderate risk tolerance of VTSMX, VBMFX and VGTSX or their ETF equivalents). That gives you a buffer so you're not forced to sell during a brief down cycle of volatility, but you'd also run the risk of selling at less than you paid during an extended downturn. And market-affecting recessions are just part of how the economy works.
Whether or not your principal amount came to you suddenly, you might get some more ideas by googling how to manage a windfall successfully.
posted by Short Attention Sp at 6:06 AM on April 16, 2016 [6 favorites]
If you're willing to take on more risk, you could keep, say, 2-5 years' worth liquid and invest the rest in low-fee total market index funds or ETFs (e.g. a mix according to your moderate risk tolerance of VTSMX, VBMFX and VGTSX or their ETF equivalents). That gives you a buffer so you're not forced to sell during a brief down cycle of volatility, but you'd also run the risk of selling at less than you paid during an extended downturn. And market-affecting recessions are just part of how the economy works.
Whether or not your principal amount came to you suddenly, you might get some more ideas by googling how to manage a windfall successfully.
posted by Short Attention Sp at 6:06 AM on April 16, 2016 [6 favorites]
You're looking for a guaranteed rate of return of 8%, paid monthly. An annuity won't get it. In fact, there's not an awful lot that will get it.
One way is to invest in a stock that will return a dividend that's paid directly to you. Most stocks that pay dividends are at around 3% though.
The problem with cashing out investments though, is the capital gains taxes associated with them.
posted by Ruthless Bunny at 6:12 AM on April 16, 2016
One way is to invest in a stock that will return a dividend that's paid directly to you. Most stocks that pay dividends are at around 3% though.
The problem with cashing out investments though, is the capital gains taxes associated with them.
posted by Ruthless Bunny at 6:12 AM on April 16, 2016
So, you could withdraw an inflation-adjusted (given that this should last a minimum 20 years or so, you probably want to take inflation into account) $400 a month from $150,000 invested in something like 60% stocks 40% bonds indefinitely, assuming the market isn't worse than it has ever been in history. If you're withdrawing $1000 a month, and you're inflexible about that (like, you need to withdraw $1000 whether the market is up or down), then a higher ratio of stocks to bonds (up to, say, 90/10) is statistically going to give you a better chance of lasting longer; a higher ratio of bonds to stocks is more likely to run out early but less likely to run out VERY early.
There are a lot of calculators (retirement focused, mostly) that you can use to run the numbers on this.
posted by mskyle at 6:50 AM on April 16, 2016 [1 favorite]
There are a lot of calculators (retirement focused, mostly) that you can use to run the numbers on this.
posted by mskyle at 6:50 AM on April 16, 2016 [1 favorite]
Which is more important to you, the about $1,000 per month part or the as long as possible part? And what sort of time frame are you thinking of? Investing exclusively in the stock market and drawing down at $12,000/year would most likely last around 15 years, including adjusting for inflation. Maybe more, maybe less. It also leaves you very vulnerable to crashes.
The conventional wisdom is that one can draw 4% out of a stock market fund over 30+ years, though I think that's counting too much on a century of US financial exceptionalism and that we're less likely to have that type of sustained market success this time around. If that's the type of time frame you're looking at, you either need to reduce what you need monthly or come up with an alternate plan.
posted by Candleman at 7:15 AM on April 16, 2016
The conventional wisdom is that one can draw 4% out of a stock market fund over 30+ years, though I think that's counting too much on a century of US financial exceptionalism and that we're less likely to have that type of sustained market success this time around. If that's the type of time frame you're looking at, you either need to reduce what you need monthly or come up with an alternate plan.
posted by Candleman at 7:15 AM on April 16, 2016
Here's what I would do: Invest in a Vanguard LifeStrategy fund that matches your risk tolerance. Withdrawal 1000/mo. If you're lucky you might be able to do this for 20+ years. If you're unlucky it might only last 7.
If you don't like that risk profile then just put it in a savings account. It'll be gone in 13 years or so, with no risk of the money running out sooner.
posted by david1230 at 7:18 AM on April 16, 2016 [4 favorites]
If you don't like that risk profile then just put it in a savings account. It'll be gone in 13 years or so, with no risk of the money running out sooner.
posted by david1230 at 7:18 AM on April 16, 2016 [4 favorites]
though I think that's counting too much on a century of US financial exceptionalism
That's not why stocks return what stocks return in the long-run.
posted by JPD at 1:13 PM on April 16, 2016
That's not why stocks return what stocks return in the long-run.
posted by JPD at 1:13 PM on April 16, 2016
It is usually a mistake to consider arbitrary chunks of money in isolation. You should make plans considering all of your assets together (house equity, bank accounts, CDs, retirement funds) and all of your income sources (earnings, pension, social security, etc).
Likewise you should consider all of your living expenses in aggregate, not just an isolated $1000 per month.
All of this combines into a big picture. In the big picture, you are less likely to make an investment mistake of trying to achieve $1000 a month from $150,000.
posted by JackFlash at 3:40 PM on April 17, 2016
Likewise you should consider all of your living expenses in aggregate, not just an isolated $1000 per month.
All of this combines into a big picture. In the big picture, you are less likely to make an investment mistake of trying to achieve $1000 a month from $150,000.
posted by JackFlash at 3:40 PM on April 17, 2016
Response by poster: Thanks for the ideas. I really was more interested in what the anonymous *you* would do rather than what I should do. I'm mostly trying to get a sense of what the range of possible responses would be and why they vary - sorry if that wasn't clear. And I left out out other details on purpose for that reason. Anyway, I understand that there are a ton of variables and things to consider and it's helpful for me to see what they might be.
And in my specific case (which isn't exactly as presented here), I'm consulting with financial advisers to get their input but so far they've had various approaches as well. I guess there isn't only one answer but I'm still hoping to have something emerge from the fog.
posted by otherwordlyglow at 9:58 PM on April 17, 2016
And in my specific case (which isn't exactly as presented here), I'm consulting with financial advisers to get their input but so far they've had various approaches as well. I guess there isn't only one answer but I'm still hoping to have something emerge from the fog.
posted by otherwordlyglow at 9:58 PM on April 17, 2016
Well, if you want to know what *I* would do with $150,000, I would invest it the same way I have my current money invested (90/10 stocks/bonds), and I wouldn't plan on touching it for 10 or so years, because I'm planning on working for the next 10 or so years, and I can comfortably cover my wants and needs with my salary. If I wanted $1000 a month in perpetuity, I would keep doing what I'm doing now and let the money grow for a few years.
This kind of decision really is *all* in the details, especially the details of what you need that $1000 a month for, what percentage of your overall income it makes up, and what you plan to do when it runs out.
posted by mskyle at 6:48 AM on April 19, 2016
This kind of decision really is *all* in the details, especially the details of what you need that $1000 a month for, what percentage of your overall income it makes up, and what you plan to do when it runs out.
posted by mskyle at 6:48 AM on April 19, 2016
I'm closer to a 70/30 split between stocks bonds, but that's the general plan for long term money. It makes little sense to invest 150000 in long term investments if I'm going to sell 1000 of it a month from now.
As written, the question is best answered with a monthly return equal to 8 percent APY. But there's many unset parameters here: when do I need to start withdrawals? Is it taxable? How big are the transaction fees? How big a problem is variance of returns -- if I tell you you can last n years, it it a disaster if it only lasts n - 5?
posted by pwnguin at 7:23 PM on April 21, 2016
As written, the question is best answered with a monthly return equal to 8 percent APY. But there's many unset parameters here: when do I need to start withdrawals? Is it taxable? How big are the transaction fees? How big a problem is variance of returns -- if I tell you you can last n years, it it a disaster if it only lasts n - 5?
posted by pwnguin at 7:23 PM on April 21, 2016
This thread is closed to new comments.
posted by Itaxpica at 10:59 PM on April 15, 2016