PP for Old Age Pensioner

[Hal]

Hello All,

Just after some opinions regarding the PP for an old age pensioner with a small amount of funds.

Would it make sense to set up a PP with around $5000 in each of the four investment categories (20K total).
After being asked about this, I am wondering if it wouldn't be just as effective to put the 20K into a cash fund or short term bonds so they have the cash flow.

The only other income they have is the old age pension which is not much to live on....

Always a challenge to give advice to someone else!!  Wish to err on the side of caution.

What are your thoughts on this?

Hal

[MediumTex]

Does the old person have any debt?

If there is any debt, I would be inclined to pay it off first with a sum of this size.

[Hal]

Hi MediumTex,

She has no debt and the (very modest) house is paid for.
Other than the 20K, no other assets.

Hal

[KevinW]

Wish to err on the side of caution.

Any portfolio consisting of a single asset class is risky because the entire portfolio can be wiped out by economic conditions unfavorable to that one asset.

A 100% cash portfolio may feel safe, but can lose significant purchasing power under inflation.  Even in good times it won't generate much, if any, of a sustainable return above inflation.

The PP is the safest portfolio I've found, taking the entire spectrum of economic conditions into account.

[MediumTex]

I would tell her to set up a PP for herself.

This approach should protect her purchasing power and allow her to participate in the market without taking on too much risk to her principal.

[cowboyhat]

If she is really old why not an annuity for current income plus a small gold holding as a guard against inflation?

[moda0306]

cowboyhat,

I'm pretty sure most annuity products are not worth the cost of admission.  Yes, you have longevity risk to worry about, but to be honest until SS looks really insolvent, that's what I consider my longevity risk portion.

Considering a Long-term treasury will pay you 4.3% PLUS let you keep your principal, I'd often want to compare that to an annuity to see if it's really worth giving up the principal.

I tend to default any insurance policy as a quasi-scam, and have to convince myself of a true risk or need to even consider it.  Even then, insurance is a type of product where the seller's interests are so much different than your own that I rarely trust what they say.  For instance, the day you buy an annuity, there's an entire company that is effectively hoping that you die.  I'm supposed to have trusted that company to accurately advise me on how to strategize my retirement income.

[quenali]

I'd be inclined to put the $20,000 into PRPFX and be done with it.  If she had $200,000, then I could justify a 4x25%.

[LifestyleFreedom]

What is the investment objective of the $20K for the pensioner?  Income?  Preservation of capital?

PRPFX declined 25% in value when the S&P 500 declined 50% during the depths of the financial crisis (I presume the 4x25% version declined in a similar fashion).

If $20K of initial principal invested in PRPFX becomes $15K because we have a repeat of the crisis, how will the pensioner react?  What happens if the pensioner has an emergency during this crisis and needs to cash out the investment to cover the emergency costs?

Perhaps a high-yield FDIC-insured savings account might be more appropriate in this case (I don't know since I'm not a financial adviser).  The upside is limited (you can still get interest rates greater than 1%, although these rates can be adjusted at any time), but the downside is limited also.

[Hal]

What is the investment objective of the $20K for the pensioner?  Income?  Preservation of capital?

PRPFX declined 25% in value when the S&P 500 declined 50% during the depths of the financial crisis (I presume the 4x25% version declined in a similar fashion).

I think the objective is more capital preservation, and eventually I see her drawing down on the capital. On giving it some more thought, the 20K could almost be considered emergency money. If a need arose, thats all she has.

Harry Brown mentioned that some funds split between cash trusts is a "second best" option to the PP. This might be a case that fits that option.

As an aside; is there a minimum amount below which the PP is not viable?

Hal

[Pkg Man]

What is the investment objective of the $20K for the pensioner?  Income?  Preservation of capital?

PRPFX declined 25% in value when the S&P 500 declined 50% during the depths of the financial crisis (I presume the 4x25% version declined in a similar fashion).

I think the objective is more capital preservation, and eventually I see her drawing down on the capital. On giving it some more thought, the 20K could almost be considered emergency money. If a need arose, thats all she has.

Harry Brown mentioned that some funds split between cash trusts is a "second best" option to the PP. This might be a case that fits that option.

As an aside; is there a minimum amount below which the PP is not viable?

Hal

Given that you can do a near-pure PP with 4 ETFs, I don't think there really is much of a limit anymore.  If she has a few years before she thinks she will need the money, then I would recommend the PP.  Assuming a reasonable 7% cumulative average growth rate, in five years she would have almost one-third more than she began with.  The dividends and interest should provide about 1.5% return assuming the investments on balance are flat.  That is currently better than CDs are paying.

This assumes that she can handle the possibility of a loss.  I know some people who cannot, in which case any investment other than CDs or T-bills will not be acceptable.  The worst thing would be that she sees a small loss and then bails on the approach. 

[magneto]

We do not seem to have the age of the pensioner.  For my elderly mother I do not want to be responsible for any loss even temporary of capital.  Anything volatile is therefore out.  At my suggestion all her savings have been fed gradually into the UK equivalent of I-Bonds.

I realise this may not be the best approach longer term but with her now in her 90s, this removed any responsiblity from me for losses.

[Hal]

We do not seem to have the age of the pensioner.  For my elderly mother I do not want to be responsible for any loss even temporary of capital.  Anything volatile is therefore out.  At my suggestion all her savings have been fed gradually into the UK equivalent of I-Bonds.

Thanks for the suggestion Magneto,

The lady is in her mid 70's but unfortunately is not in good health. Probably will take a staged approach. Suggest some bonds/gold coins and if she is mentally OK with that, then suggest shares later.

It raises an important point. You are better with a worse strategy if you see it through (eg all cash)  rather than abandoning a good strategy (PP) when losses occur such as during a sharemarket fall.

Hal               

[MediumTex]

Hal,

Not to be morbid, but what funds woud be needed for funeral and burial expenses (or whatever her wishes are)?

I would have this amount set aside if she is elderly and in poor health.

[Storm]

Hal, I would strongly caution you against taking a partial PP approach, such as gold and bonds without the stock or cash portions.  The PP assets don't do well in isolation.

If you need to set aside some portion, just take the remaining amount and put it into a straight 4x25.  Without buying all 4 assets, you will not gain any of the protection the PP gives you when you hold all 4 in equal amounts.

[cowboyhat]

Seems like a couple of people on the thread have pointed out that the best choice for your friend depends on her financial objective. She may be in ill health, but there is no telling how long she will live. My grandmother thas been in ill health for the last twenty five years. But she's still getting her hair done and eating brunch out on Sunday mornings after church with her friends. A little folding money on top of her social security and pension goes a long way toward improving her quality of life.

For $10,000 a 70-year-old woman can buy a simple annuity that provides $65 per month for life with no return of prinicple. That's $780 per year (7.8%). There is counter party risk and there is inflation risk, but no outliving your money risk. If things are too tight for your friend to enjoy her life and $65 a month would fix the problem, then maybe using part of her captial for an annuity would be a good idea for her.

Maybe not the best idea, but also not a crazy idea.

[Hal]

Just a quick update;

After having a chat with the elderly lady and explaining the options, she has decided to go for the PP.

She also passes on her thanks for everyones advice. (So you have done your good deed for the day  )

As an aside; she was wondering why her financial advisor didn't tell her about this. The same clown that lost her retirement savings by putting it all in shares before the stockmarket crash a couple of years ago.

So well done everyone, you saved what little she had left.

Hal

[Pkg Man]

Just a quick update;

After having a chat with the elderly lady and explaining the options, she has decided to go for the PP.

She also passes on her thanks for everyones advice. (So you have done your good deed for the day  )

As an aside; she was wondering why her financial advisor didn't tell her about this. The same clown that lost her retirement savings by putting it all in shares before the stockmarket crash a couple of years ago.

So well done everyone, you saved what little she had left.

Hal

Hal I just hope that she doesn't watch the portfolio too often.  I can only imagine that even a small loss could unnerve her. 

I think you did a good deed as well.

I wish her and you all the best.