A friend of mine

[A HERETIC I AM]

7. If he is looking for absolute safety, then either CD's or Treasuries are his best bet.

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.