I did a mix of the most popular options mentioned so far working with the same amount. I used some of the money to put a down payment on a 4-flat, the rest is in Vanguard index funds with low fees. The bldg generates only a little income but in about a decade it’ll be paid off without any more of my own money - sweet.
I agree with the people that think the market is due for a dip, but so what? It always rebounds fairly quickly. The dip will be a chance to buy low.
Yes, it is expected to be down from the average over the last few years of 18-20%
I wouldn’t recommend gold to anyone but especially not to someone who needs income. In the long run gold’s value seems to increase a bit faster than inflation but not nearly as fast as equities or a balanced portfolio of equities and bonds. Over the last 30 years, for example, gold has increased in value by 3.6% per year. Inflation has run about 2.6% per year over the same time. A more balanced portfolio of 50% stocks and 50% bonds might be expected to earn something like 5.5% per year. It would have done even better if you looked at the last 30 years but equity performance over that period (roughly 10.7% per year) is not likely to repeat itself when we’re starting at today’s very high levels.
Gold is also surprisingly volatile (i.e., risky). It is currently down about 30% from its highs. Gold offers no income and the transaction costs of buying and selling gold can eat up years of gains. You pay a premium from dealers to buy gold and they will take a discount when you sell it. The difference between the purchase price and the sale price is easily 6 or 8%, or 2-3 years of average gains. Plus you have to store it and or/insure it. Gold is a really poor investment in my opinion.
A fixed annuity might make some sense for someone who cares only about maximizing retirement income and not at all about leaving money for heirs. I’m still accumulating retirement assets so I have not even considered whether fixed annuities at today’s rates and terms would generate enough income over a Treasury portfolio to be worthwhile. Given the high transaction costs for annuities in general, I tend to doubt it but I can’t really say without researching them.
My hunch is that 7-8% over the next ten years is more realistic but this is not a crazy estimate. You will have problems though if you experience large downturns in an equity portfolio just when you need to take money out to live on or if you get scared into selling at a market bottom. Either could devastate your retirement income for a long time. Most people want a retirement portfolio that is less volatile than investing purely in equity securities.
I would use it as a down payment on an investment property in an up and coming area that’s relatively close to where I live. Rent it out nightly (Airbnb) if you live in a place that gets a lot of tourists, or monthly if you don’t. I have two vacation rentals that I rent out nightly during the summer season and monthly during the off-season, and they appreciate in value every year, even if the stock market goes down. Diversify.
I’m young. I’d just add to into my usual investment mix. Since this would have to be in taxable accounts, it would get a larger allocation of the tax-efficient part of the portfolio.
I agree with the negative statement about gold. There could be the umpteenth debate whether the guideline of responsible gold bugs/purveyors that it should be 5-10% of a portfolio has any merit. But there’s no rational basis to put most or all of a big windfall into it.
Annuities were probably omitted in part because relatively younger people answered for the most part and annuities aren’t relevant to them. If you go to the right providers annuity transactions costs are not high (Vanguard has a service, low cost like almost everything they are associated with and competitive among providers). That is if your needs fit the main part of the annuity market and the standard products in that part. Which is mainly fixed rate immediate annuities. You can calculate from actuarial tables that the market gives you a quite high % of the true actuarial value of those. If you have good reason to think your longevity prospects are better than standard tables, all the more. Again doing it through a low cost broker. Inflation adjusted* immediate annuities are not as competitively priced but can still be worth looking at considering that one buys an annuity in case one lives really long, which means high uncertainty what non-inflation adjusted payments will be worth decades from now.
Where annuities tend to give a worse deal relative to true actuarial value, or even border on a rip off in some cases, is long deferred annuities or so called variable annuities which are marketed to younger people. If you’re already say in your 60’s and get a windfall, annuities are among the things to look at IMO, though depending obviously on personal circumstances besides age.
*not the kind that increase the payment a fixed say 2 or 3% a year, those are still fixed annuities. I mean ones where it goes up by the CPI, 20% if the CPI rises 20% in a year.
My parents had one of these and it was the worst investment they ever made. The upfront commission they paid was equal several years of promised payments.
The only annuity I ever see recommended by non-salesmen are ‘single-payment’ or ‘income’ annuities. These are like buying your own monthly Social Secuity check. For example, with today’s rates the online calculators show that at age 67, a $100,000 will buy you & spouse a monthly check of $488 for life.
I’m already retired, and $100,000 is not all that much, so I’d more or less keep it in cash to take out when the crash comes.
If retirement is a ways off, I’d put it in an index fund. I have not paid off my mortgage, and the returns I’ve been getting, especially over the past 8 years, have been far better than I would have gotten from doing so. Also, at this point what I owe is just over 10% of the value of the house, and so is fairly trivial.
I have an annuity which I put my pension cashout in. I have not taken anything from it yet. In general it grows more slowly than the market, and I wouldn’t make that my primary investment. My pension turned out to be far bigger than I expected, so this was kind of found money.
Other single investments violated the diversity rule. Index funds are not perfect for this but better than buying real estate say. But $100,000 is not enough to be truly diversified.
I’m assuming the person’s cashflow is okay, and that a savings buffer already exists. If not, paying off the mortgage, or some of it, could help.
I have looked at annuities but was unsure which to choose. Then a neighbor screamed that they are all a scam. Another said I must buy gold. A financial advisor I interviewed wants a minimum of $100,000 and will charge me %1. something to invest in stocks and bonds. So I thought I would ask you.
An income annuity sounds safe, my parents had that and that is where I got some of my wealth. But what one to pick and are fees high?
I agree with the suggestion to buy Vanguard index funds.
Again, that depends. What sort of debts do you have? What do you need the money to do? Do you need easy access to the principal, or do you want to create an income? What other assets do you have?
Full disclosure - I’m a financial advisor. There’s no easy answer to this question as posed. There are a lot of good directions that people are giving, but they all vary wildly based on your circumstances.
A 1% fee is not unreasonable, especially if you are uncomfortable making these decisions. The flag for me is the minimum investment - that’s shady, and asks more questions than it answers. Depending on your circumstances, I would find a fee-based financial planner that can give you an honest assessment. This should run you ~$1000 for a full plan.
Please ignore all of your neighbors. There are dozens of types of annuities, and your neighbor is probably aware of 1-2 versions. They may or may not be appropriate for your situation, but I’m willing to bet your neighbor does not know all of the relevant details of your situation.
Munch, thanks. Just learning of the different types of annuities was new to me. I have much work to do.
I have ignored my neighbors on this. I thought buying gold was silly because of the tv ads I used to see.
Vanguard will partner you with a financial advisor for only 0.3% with a minimum balance of $50,000.
The thing to remember is that a conservative portfolio is only going to generate 4% income, so if you’re giving an advisor 1% you end up turning over 25% of the income to that advisor. With Vanguard you only have to turn over 7.5% of the 4% income.
That assets under management fee is over and above any fees charged by any investment vehicles the advisor puts you in, so over the long term fees are a huge factor in portfolio performance.
Some curious responses above. Some people here are suggesting that the stock market will return 8-10%, but I’m not sure how they arrived at this figure. If it’s based on the recent history of the stock market, then they’ve failed to notice that the high recent returns have skewed the calculated average, so higher recent returns = higher future returns. This is the opposite of mean-reversion. In reality stock market valuations appear to mean-revert.
It’s also worth noting that the real return on the S&P 500 (dividends reinvested) for the 17-year period ending January 1983 was -0.001% (S&P 500 Return Calculator, with Dividend Reinvestment). 17 years of nothing would try most people’s patience.
It’s also interesting to see people who think it’s a great idea to invest in equities rather than pay down their mortgage. Would they also be willing to take out a second mortgage to invest the proceeds in stocks? Why not? And why do they suppose banks would invest in mortgages with returns of 3-4% fixed when they could easily double that return by investing in stocks?
It’s only worth noting if you have a shorter investment timeline or if you fail to compare how that investment stands next to other options such as paying off a 1960s mortgage, stuffing it under your pillow, etc. Never mind how those mortgage rates are higher than what many people have today. Or if you think CPI accurately reflects buying power.
It’s only interesting if you think you can get a second mortgage at the same rate as a first. Or if you don’t know about how highly leveraged businesses like banks are regulated.
The bottom line is that many people who would happily buy stocks instead of paying down their mortgage would be reluctant to borrow against their house in order to buy stocks, even though they are roughly the same thing.
Another curious thing I’ve noticed is that young people will sometimes throw around 8-10% expected returns for the stock market. At 8% your investment would be worth over 10X as much in 30 years and at 10% over 17X as much. So why aren’t they scrimping and saving as much as they possibly can to invest more?
No, they are not even close to being the same thing. A second mortgage may not be affordable thanks to cash flow issues. Buying stocks using what would be paid in second mortgage interest has the advantage of dollar cost averaging and the advantage of not being mandatory if there is a crisis. And buying all stocks today, which might be close to a high, is not a good idea either.
However paying off a first mortgage may not be a good idea if the effective interest rate, considering tax advantages, is lower than expect growth - and that can be a lot lower than 8 - 10% to make this work. You also lose in terms of diversification. Plus money in a house is a lot less liquid than money in the market.
8 - 10% as far as the eye can see sounds like predictions from 2007. A recession is long overdue. Perhaps the upcoming trade war will trigger it. I should do an analysis some time of my investments over 30 years but it has been pretty substantial. We still don’t know how close the OP is to retirement which makes a big difference.
I tend to put my money into stocks, and stocks of things that I use and that most people will use. So I have some energy stocks, food, entertainment, and those have all paid dividends year after year, along with appreciating in value and even splitting. I had Netflix for awhile, bought it when it was fairly new (but not during the IPO), held it for awhile, and reaped several thousand when I sold it, and I kinda wish I hadn’t sold it, but I thought some other company was going to come in with something brand new and better, so, oh well.
I also have some kind of index fund that my broker recommended. On the whole the stocks I picked have done better.
I did think about paying off my mortgage, but the interest rate is low, and I can always do that if I have to. Well, I hope I can always do that…
For those who are wondering what level of return to expect from the stock market, a reasonable starting point would be to look at the historical averages. Credit Suisse has collected annual return data from 23 different developed countries from the year 1900 to the present (2,714 data points):
“Over the 118 years from 1900 to 2017, the left-hand chart shows that the real return on the world index was 5.2% per year for equities and 2.0% per year for bonds.”
It’s not any elaborate plan, but 100K isn’t that big of an investment these days. My house is worth several times that.