that there is, he could just buy U. S. Treasury bonds. I have absolutely no idea what kind of interest they are paying.

If he's capable of being a landlord, maybe buying an inexpensive property or two that he can rent out.

I tend to look at money like that and think, okay, a thousand dollars a month and it will last for 200 months, which is almost 17 years. That's assuming absolutely no interest of any kind. However, he might want to research annuities. I have no idea what kind of annuity 200k will buy, and he probably wouldn't want to tie up the entire amount that way. Maybe put half of it into an annuity that will start giving him an income stream ten years from now.

If this unexpected, windfall money as you've indicated, my personal advice (and I'm not a financial adviser) is to tuck it away as safely as possible. Since he has a good job that looks secure, he's immensely fortunate.

I wish him sincere good luck.

Last edited Mon Sep 24, 2012, 10:44 PM - Edit history (7)

At http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

The coupon On recent issue 30 year paper is only 2.75%

Just for clarity's sake, here's how to read and understand that page;



The column furthest to the left indicates the type of security, specifically its issue length.

The column "Coupon" indicates the Annual PAID rate of interest as a percent of a $1000.00 par bond. In other words, the 30 year pays $27.50 per year in interest payments, split evenly in two installments paid 6 months apart. Those that have "0.00" in that column are known as "Zero Coupon" bonds, but in Treasury parlance they are;

"Bills" - Maturities of 1 year or less
"Notes" - Maturities of 10 years or less
"Bonds" - Maturities of more than ten years.
Technically, all these securities are Bonds.

The Coupon is the column next to the maturity with a digit, a decimal and then 3 digits. You can see the 3 month, 6 month and 12 month are all Zeros.

The column "Maturity" indicates the date when the bond they are quoting will mature. On the date of maturity, the US Treasury gives you $1000.00 for each one held, regardless of what you paid for it. This is called the "Par Value". The overwhelming majority of bonds issued in the US, be they Government, Corporate or Municipal have this same Par.

The column "Price/Yield" indicates how much the bond will cost and how much the yield will be to maturity on an annual basis. It is also important to know that the price figure is quoted in two different ways. With the Bill, the price is actually the amount below Par calculated as a percent of Par. For the 12 month, it says "0.17" point one seven of a percent of $1000 equals $1.70 making the price of the bond $998.30. Hold it for a year and the Treasury gives you Par for it. Your interest is just that - $1.70. The 3 month and the 6 month are again, figured on an annual basis, but in order to realize your $1.10 on the 3 month, you have to buy one, hold it to maturity, buy another at the same rate, hold till maturity and repeat twice more. This doesn't always happen, as the yield changes all the time, but that is how they are figured.

Notice that the 2 year through the 30 year do NOT have a decimal point, but a dash (-) between the first two digits and the second two. That is because these bonds are quoted as a percentage of Par with the digits to the right of the dash in 32nds of a percent. A thirty second of a percentage point equals 0.03125. So look at the 2 year. It is quoted at 99-31 & 1/2 This is obviously just 1/2 of a 32nd below Par, which translates to $999.84375 cost per bond. Now, I know (or am 90% sure! LOL) that my math here is correct. The 2 year pays a coupon of .25% or $2.50 per bond per year. To figure yield, one must figure the annual income. Since you will gain just under $.16 in value over two years, your annual gain is going to be $2.50 plus about eight cents. 2.58/1000 = .00258 or a yield of .26%

The next column over says "Price/Yield change". This is telling you how much, again, in 32nds of a percent, the bond changed in price and the change in yield - green for an increase, red for a decrease.

Lastly the time, which is the time of day Bloomberg is relating the quote from.


Hope that helps a little, though I realize it in NO way answers the OP's question. I'm still thinking about that one!

The $200,000 will buy any of the various types of Annuities (So will $10,000, for that matter) including variable, fixed, and immediate.

on what Annuities are!

I'm afraid I didn't quite follow the whole Treasury bill thing, but maybe my friend will. I've never been much of an investor - never had anything to invest! (don't know whether to or over that statement!)

He wants to make sure not to lose the money, but of course would like to try and get some interest on it. Hiding it under the mattress has it's appeal, IMO. ha.

Last edited Sun Sep 30, 2012, 03:15 PM - Edit history (2)

is that it is an investment portfolio coupled with an insurance contract. The insurance side of it usually has a guarantee of the creation and delivery of a stream of payments for a specific period, up to including the life of the recipient.

A perfect example of this sort of payment stream is Social Security.

(I did, my Dad's), who will come up w diversified portfolio, including stocks, bonds, treasuries.
Available, among other places, Schwab, T.Rowe Price, MSSB, TIAA-CREF supposed to be very safe, productive, and publicly sensitive.

From a Financial Advisors perspective, the first thing to consider is paying off any high interest debt. Anything over about 3.4% annual - basically anything higher than a mortgage - should be settled. The reason I say 3.4% is because 3.333 on a 30 year note equals an exact doubling of the loan in interest payments. In other words, if you borrow $1000 for 30 years at 3.33, you will have paid off $2000 over 30 years (using here the concept of what a 30 year Treasury pays. The Government will pay you a thousand dollars in interest over 30 years and then gives you your grand back - effectively doubling the original cost of the note) since most car loans are considerably higher, that is the first thing I would settle, AS LONG AS he plans on keeping the car. If he plans on trading soon, then it is smarter to use other peoples money for the time being. There are other factors to consider here though, such as what the value of the car is at the moment and what it might be when he decides to get rid of it. If it is a type where the value will fall precipitously after a particular mileage threshold is reached, then he needs to keep that in mind.

Depending on what the rate on the car loan and the student loans are, that is where I would start. Being debt free is an automatic return, as you aren't paying interest, obviously.

If he absolutely does not want any risk whatsoever, then there are really only two places to look. They are, as I mentioned, US Treasuries and Certificates of Deposit. Neither of which offer squat these days, but you WILL get your money back.

Annuities were mentioned in previous posts. Many people on this board and around the internet are dead set against annuities, and for some, good reason. They tend to be complicated, often hard to understand and can have many layers of fees that eat into returns. Having said that, they can come with guarantees that ensure a stream of payments regardless of market conditions. As I said in my post above, a perfect example of such a stream of payments is Social Security. You pay into it for all the years you work, but if you live an exceptionally long time while collecting it, you basically outlive the amount you paid in, yet still get the payments. The reason this works is because there is a certain percent of the population that won't collect at all or will only collect for a short time.

There are 3 basic types of annuities;

Immediate
An immediate annuity is pretty much what it sounds like - payments start immediately. You pay into the annuity a set sum, the insurance company then takes that money, invests it is a particular way and guarantees a stream of payments for a specific time (called a "Period Certain" annuity, like say....15 years) or life. Usually the insurance company is investing in Treasury Bonds or Corporate bonds, so they are getting a stream of interest payments as well as getting the principal back when the bonds mature. The way the Powerball and the Mega Millions lottery payouts are structured are examples of an immediate annuity, if you elect to NOT take the "Cash Option".

Fixed
A Fixed annuity is also pretty much like it sounds - the payments are fixed and so is the investment scheme. These are also typically bonds. Fixed annuities can be set so that the payments kick in at a specific age or a specific year. say when the holder is 65 or perhaps ten years from the date of purchase.

Variable
Variable annuities are the most complex and the most misunderstood. The variable part relates to the investments - usually the stock market via a Mutual Fund equivalent. Obviously the market goes up and down, as we all know. When the market goes up, your account value goes up. When it goes down, ...well...you get the point. The thing is, most good variable annuities have other guarantees that can be added like an annual increase in the "withdrawal base" that allows for basically a raise in payments on the anniversary of the purchase date. They also come with a "Death Benefit" - basically, an insurance payment made to a designated beneficiary upon death.

A perfect example of this is the one I bought for my own mother. We bought one through a major insurance company and they guarantee a 6% annual increase in the withdrawal base each year and she is allowed to take out 5% of that base each year.

So we started with $100,000 in 2008. The investment model we chose was very conservative, almost all bonds. Now since the bond market has seen yields go down since 2008, her account value has fallen, but her withdrawal base has not. In fact, it has increased by 6% per year. So at the end of year one, she had $106,000, of which she could draw out 5% per year, or about $5300 in year 2. At the end of year two, she got another 6% added and she could take out 5% of that, etc. etc. Basically, she gets a raise every year, EVEN THOUGH the actual cash value of the account is now around $85,000 or so. That 85 grand is what is known as the "Surrender Value" or what she would get if he decided she wanted her money back. In my mothers case, this is not entirely accurate, as there are other factors involved here, such as a sliding scale of surrender fees for 7 years. After the 7th year there are no surrender charges, but all she would get back is whatever the value would be at that time, depending on how the investments have performed. We have no intention of surrendering it though, as the payment stream is a good one and fits her needs very well.

All the major insurance companies offer annuities - The Hartford, Pacific Life, John Hancock, Met Life, etc.

He has so many choices available to him that will generate an income stream off of $200,000 it is remarkable. He can look into a portfolio including Preferred shares, Bonds, Master Limited Partnerships, Unit Investment Trusts and a portfolio of dividend paying, blue chip stocks. ALL of these however, include risk that he may not want to participate in.


He would be wise to find an investment professional in his area that he trusts that can discuss all his options with him. Keep in mind that those that work on a commission based on the sale of a product will be inclined to sell that which has the best "RTB" or "Return to Broker", even though that is against all the rules and contrary to any decent set of ethics. If he aligns himself with an advisor who charges a percentage, then he is looking at ongoing, annual fees for the management of the account. The other alternative is an advisor who charges either a flat rate or by the hour, like an attorney would. Those fees can add up as well, and for only $200,000, it is probably not wise to go that route.

Absolutely NONE of the above should be construed as investment advice, nor should it be considered as a suggestion to purchase a specific product or investment. Wise investors do not purchase ANYTHING until they fully understand what they are getting into and read any and all documentation including a Prospectus, if applicable.

You've explained a lot of things pretty clearly.

I'm encouraging him to find a local advisor but most of them are attached to institutions who are a bit biased. Well, maybe if he talks to several he can get some ideas.

Oh yeah, his brother-in-law was telling him about "laddering CD's", do you know anything about that? And if you had to pick, would a CD or a Treasury Bill be better? Or some combination of the two?

It is a common strategy or method which allows for a regular redemption program.

Here's how it works;

Let's take that 200K.

Constructing a ladder would mean splitting that 200 thousand into say....20 lots of ten grand each.

The first 10K I'm going to buy 10 CD's (Or bonds, but I'll stick with CD's. It all works the same) that matures in 30 days.
The next 10K I'm going to buy 10 CD's that mature in 60 days.
The next 10K I'm going to buy 10 CD's that mature in 90 days.

Etc. etc. all the way out to 20 months.

(here's the edit) It doesn't have to be set up that way at all, either. The steps of the ladder can be 60 day apart, 90 days, 6 months, a year, two years etc. It's all the same. The thing is, in an environment like we have right now with rates so low, you would want to be prepared to take advantage as rates begin to rise. Keeping the maturities tight and near term allows for this.

This way, each and every month I have $10,000 that is redeemed and I can do with it as I wish, either buy another set of CD's or keep it as cash. If one wishes to perpetuate the ladder, then one just buys another set of CD's at the longest maturity - in this case 20 months.

The advantage here is that as rates rise, you have a regular lump of cash to buy at the longest maturity - that which pays the highest rate - and you are always taking advantage of an increase in rate.

The downside to doing this with CD's is liquidity. There are likely to be fees or costs associated with early surrender if the investor wishes to get his hands on all 200K at a given moment.

This is one advantage to US Treasuries, in that they are as liquid as cash. They settle same day, as opposed to the "Trade plus 3" rule that applies to almost every other security.

As far as which I would pick, it would really depend on how much I needed the liquidity. If I was quite sure I wouldn't need the entire two hundred thousand, then I would go the CD route, as you're likely to get a better rate. It boils down to that simple question.

What are the chances I'll need the money all at once, sometime in the future?

Dammit.

Saves all those future interest payments.

Buy his smaller home (prices are low now) and lease it out for a year or so, use a good property management service to manage the lease. Instant income that's a lot higher than if the money sits in a basic CD or savings account.

Make the home improvements needed to fix the large home, hire a yard service. Those costs will reduce the tax on the profits he makes when he sells the home. Best yet keep the big home as a rental when ready to move to the smaller place.