Hello! I am hoping folks will take pity on a true financial neophyte who is trying to help out his mom. After many years of inaction, my mom finally met with a financial planner who she hit it off with (the fact that the planner was about to give birth may have helped in that regard!). My mom's circumstances aren't dire, but she has a lot of expenses (including a recently aquired $350K mortgage she had to take out to rebuild a vacation home in the family for many years after it was damaged beyond repair a few years back). She is divorced and retired and has a portfolio of about $1.3 million in various assets (75% blue chip stocks, 20% bonds & 5% cash - the mix also includes some mutual funds in an IRA). Her primary home probably has a value in excess of $750K (but encumbered by above-referenced mortgage) and the rebuilt vacation home is probably worth around $500K. After her divorce a number of years back, she realized she needed to be on a more structured budget/financial plan (with better diversification, etc), but she was unable to grab the bull by the horns until now. Her inaction was partially abetted by fact that one of her largest holdings (a financial stock that made up approx 1/3 of her portfolio) was growing by leaps and bounds over the last couple of decades (until the recent setback in financial stocks). So all of that is background for the following proposal, which she received from the afore- mentioned financial planner (i have tried to edit it down a bit, but kept the essentials of what she is proposing):
Investment Recommendations
IRA Funds (approx $250,000 )
Consolidate two IRA accounts by selling and transferring funds to [name of firm]. Invest proceeds in a variable annuity with a guaranteed minimum withdrawal benefit. The account will be invested in a portfolio of mutual fund sub-accounts consistent with moderately conservative risk profile.
Required minimum distributions from annuity for the first three years will be taken from a separate cash account (set up as part of transaction). The amount to be deposited in the account will be $50,000 and will be held in certificates of deposit. Payments will be made each December for three years. During first three years, value of the account will be recorded on the anniversary of the annuity. Guaranteed minimum withdrawal benefit will be based on the highest value recorded each year investment held. Guarantee is for 6% minimum withdrawals and the cost of the rider providing the benefit is .65%. The other cost associated with annuity is the annual .85% mortality and expense fee. There are no charges for transactions, either for initial purchase or when portfolio is re-balanced. An additional feature of contract is 2% bonus to be paid at the initial deposit, based on the total amount deposited. For example, a deposit of $200,000 would mean a $4,000 bonus is paid and the initial principle value is set at $204,000. While invested, 10% of the value plus any gains are always accessible without charge, but the contract cannot be surrendered for a period of ten years without incurring a surrender penalty. Additional details regarding fees and charges as well as available funds and asset allocation models are made available by prospectus and within the account application.
Non_$B!>_(BIRA Assets (approximately $1M)
Transfer individual stocks and bonds at [name of firm] and to managed account at [new firm] under umbrella of 1% annual mangement fee, based on the total balance of the account and billed monthly. The 1% management fee covers any and all transactions and the active management of the portfolio, ongoing. Specific recommendation is to sell individual bonds with long duration/maturity and all individual stocks as they are more risky than necessary to generate income desired over the long term and are inconsistent with your investment objectives. Bonds with short duration will be held until their maturity dates as they have a higher yield and no call features. Total annual yield from the bonds to be retained is approx $6,500. As stocks and bonds are sold, proceeds to be invested as follows: to cover remaining tax payments ($60,000), possible purchase of new car ($45,000) and kitchen remodeling ($20,000), plus cash reserves equal to six monthly payments of regular expenses ($60,000) will be set aside within a brokerage account and invested in CD_$B!G_(Bs and money market funds. Monthly payments of $12,000 will be directly deposited to checking account at local bank on first of each month. There are no fees or charges for maintaining brokerage account for the purpose of holding cash, as long as the total assets at [new firm] exceed $20,000. Cash will be held in a separate account from any managed money, so there will be no 1% fee.
In addition, it is recommended that $300,000 of proceeds from sale of stock be invested in the [private REIT] offered by WP Carey company. This is a private investment offering a regular current distribution of 5.5%. The portfolio is invested in global, diversified real estate properties and income is generated though long term leases. For more specific information regarding portfolio holdings, distributions and a corporate profile, please refer to the prospectus, provided by WP Carey.
Finally, the remaining proceeds (approx $300,000) to be invested in a diversified portfolio of professionally managed mutual funds. These assets will be maintained in the managed account at a fee of 1% and reviewed on a quarterly basis for the purpose of re_$B!>_(Bbalancing and or change of investment objectives.
****end of proposal****So there it is. Sorry for the length of this - tried to trim it extensively without losing too much of the substance. The numbers may not jibe exactly because they're approximations in some cases, so don't let that bog you down. Thanks for any feedback you can provide about how prudent the proposed course of action may or may not be given my mother's circumstances. Sam
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