financial questions for a scene in my novel

I was going to answer this question, but I realized that I was going to say "If she's got enough to live on," etc. etc.

Which of the following is true?

She doesn't have enough money to live comfortably, even for another ten years or so.
She has enough money to live comfortably for a while, but if she lives to 110, she might run out.
She has enough money to live indefinitely on the income she could get if she invested her money.
She has enough money to live indefinitely on her income and then some, and the longer she lives, the more she'll be able to will to her son.

What is your risk tolerance? In other words, could you sit tight while watching the stock market drop if you had money in it? Or would you prefer to be in CDs, money markets, Treasuries - where the risk of losing capital is minimal?

How much income do you need each year? What do you want to do with your money - travel, buy art, bet on horses, eat at fancy restaurants?

Do you want to pay for the grandkids' education? Leave a pile to your son?

One common rule of thumb is 100 minus age equals the amount to put in equities. So, a 70-year-old might be advised to put 30 percent in stocks and 70 percent in bonds/fixed rate investments.

70 is retirement age, and that means she would need cash for the next 20 years (if she lives to 90 years old). Most financially advisor would not recommend stock or even mutual funds for retirees, especially well into their retirement.

That said, the person has a windfall, so the situation may be different. It all depends on her current situation.

An advisor would most likely ask her about all her assets, how much is in stock, bonds, mutual funds, CDs, annuities, IRAs, 401(k), etc. as well as income such as Social Security, annunity, pension, IRAs distributions, etc.

And then he would build a few scenarios, based on how much money a) she would like to leave in her will, b) how much she needs to live on. He would probably build a schedule for her, based on assumptions such as average return of investments (for a retiree, probably something very conservative in the sub-6% range).

Most advisors would use standard scenarios -- meaning, they're not going to project her income/expense until she's 120 years old. Lifespan in the US is expected at 80, for example. That's not to say the advisor is going to say, "oh, you're going to die within 10 years anyway..." Most likely, the projection would be for about 15 to 20 years depending on the age of the person. I know my projection is based on a lifespan of 90 years with a retirement age of 65 -- that means I need to fund my lifestyle for about 25 years.

Most projections would aim at "depleting" the assets to give the person maximum distributions. However, again, it depends on the client's criteria -- how much to leave for the descendants, how much he/she needs to sustain her lifestyle (say, she wants to see the world or buy a condo in Fiji).


I don't think a financial advisor would ask about estate planning, unless that's something agreed upon to go over. That means, how much she's going to leave her son, etc. would not be discussed. It's her discretion. Instead, the advisor would most likely ask the following questions and base his projection on the answers -- usually with a mix of financial products that match the needs:

a) expected rate of return (normally 6-8%, low-end for conservative)
b) expected expense to support lifestyle (probably about 70-80% of pre-retirement spending adjusted by inflation)
c) desired liquidity (obviously, the rate of return would be greater if invested in long-term CDs or annuity or stocks, but the money would be tied down for a long period of time with hefty penalties)
d) tax brackets
e) inflation
f) assets (liquid, non-liquid, IRAs, properties, etc.)
g) income (SS, pension, IRA, etc.)

Another thing to consider is whether she's a new client of this financial advisor or whether she's an existing client. If she's an existing client, most likely he'd be building on whatever he's already set up for her, so the discussions would be very different.

If you're talking about setting up the will, that might not be the financial advisor's domain. It might not be legally appropriate for a financial advisor to deal with her estate, so he'd probably refer her to a lawyer who deals with estate planning.

TheIT said:

If you're talking about setting up the will, that might not be the financial advisor's domain. It might not be legally appropriate for a financial advisor to deal with her estate, so he'd probably refer her to a lawyer who deals with estate planning.

Click to expand...

Right, estate planning would fall out of the advisor's domain. She will need to consult a lawyer.

70 is retirement age, and that means she would need cash for the next 20 years (if she lives to 90 years old). Most financially advisor would not recommend stock or even mutual funds for retirees, especially well into their retirement.

I respectfully disagree. Many advisers do just that, and with good reason. Lifespans are longer these days; inflation eats up capital. Most people need to have some growth if they are going to continue to have enough income to live into old age. With the rate of return on fixed income investments especially low right now, there's no hope of outpacing inflation with only those in the mix. It's certainly true that an adviser would be unlikely to recommend more aggressive funds, but not true that an adviser wouldn't recommend stock mutual funds.

He would probably set her up with a lifetime annuity with a guaranteed payback of the remaining principal on her death. The funds would be invested in income generating bonds, and certificates of deposit, etc. She would be paid a set amount monthly, until her death. Whatever amount of the balance is left, would be paid to her beneficiary. At that age, a little bit ($250K) can go a long way. She'd probably get $1,800 each month, maybe more.

There would be no point in setting up an annuity if she has enough money to live on because a annuity is a losing proposition unless she outlives her expected lifespan by a great deal. The main reason to purchase an annuity is that you have enough money to live on if you live to your expected lifespan, but not enough if you live to extreme old age.

The other reason people buy annuities is for tax purposes--the tax on an annuity is less than just keeping the cash and taking your expenses out of it. But this really only applies to the very wealthy.

Another thing he might suggest is transferring assets to her son. If her son is an a lower tax bracket, she can transfer money to him for free--I can't recall the exact amount, but I think it's around 30,000 a year. She can also do things like give her house to her son and pay him rent for it, which increases his income at the expense of hers, and saves her son from paying estate tax on the house when he inherits it. All this would depend on the size of her estate, the son's income, the state of her health, and so on.

If she's an existing client, the financial advisor is likely to suggest investments rather than ask her where she wants to invest it. I was going to say more, but many other people beat me to it.