Listen to Scott and Pat help a caller determine if an annuity is a good investment for his aging mother whose portfolio has declined in value.

Read Full Audio Transcript:

Scott Hanson: Mark, welcome to Hanson McClain.

Mark: Hi, so I'm concerned about my mother, about 80 years old, and she doesn't have a lot of income, but she's been investing in high income. She was in oil for a long time getting a good return on it, and she had a drop in her portfolio for about 350 or so in the last year to about 250.

Pat McClain: Woah!

Mark: So, she continues to get the high yields, but she had a significant loss in her principle.

Pat McClain: What did she...

Mark: And at 80, she's not going to make that money up.

Pat McClain: What did she own that caused this drop in the portfolio?

Mark: I'm not sure. She's out of it now because some stop-loss orders cashed her out.

Scott Hanson: Has she been working with a broker for a number of years...

Pat McClain: Or is she doing it herself?

Mark: A friend of hers.

Scott Hanson: And how long has this friend of hers been helping her?

Mark: 20 years.

Pat McClain: 20 years? And is this friend being compensated for this help?

Mark: No.

Pat McClain: That is a substantial loss.

Mark: Yeah, it is.

Scott Hanson: What was her saving...how much did she have five years ago?

Mark: I don't know all the details. She was pulling out about 13 or 14 hundred a month out of this portfolio, and it was maintaining its balance.

Pat McClain: Yeah, well that is about a 4 1/2% to 5% distribution, about $350,000. Absolutely realistic, especially with an 80 year old.

Scott Hanson: So, did she have...five years ago, did she have 350, or did she have 250? In other words, we're trying to…

Mark: No, she had about 400, 350, 400.

Pat McClain: Okay.

Scott Hanson: Okay.

Mark: So, my question is, the market has been volatile. She dropped this money. That money's not coming back easily.

Scott Hanson: Yeah, I don't know what it was in. It wasn't in the broad market. It wasn't in the diversified portfolio.

Pat McClain: Yeah.

Mark: No, it wasn't diversified. So, my question is, being that she doesn't know her life expectancy in 10 years, according to the table, she wants her money to last. I said, "Why don't you take half that money, and put it in an immediate annuity in something like AARP, New York Life?” And you know, they will pay her like $1,000 a month from that.” She...

Scott Hanson: What...So, immediate annuity sometimes makes sense. She could either buy a commercial annuity through an insurance company like that, or you can buy one through a non-profit like Salvation Army, the Red Cross or something. I don't know if the Red Cross...

Pat McClain: But, that's a gift annuity.

Scott Hanson: I know, but it's still a lifetime income you could get her. What income does she have now?

Mark: Social Security and some real estate rental.

Scott Hanson: And how much income does she need?

Mark: I think she needs about $1,500, but she said she could live on $1,000 income.

Pat McClain: And how's her health?

Mark: Not so good.

Scott Hanson: So, here's the...

Pat McClain: I don't know if I would be opposed to just putting it in a bank and drawing down principle.

Mark: Just like a certificate deposit kind of thing. That would be enough?

Scott Hanson: The fact is, she's had some market experience with...If she...So, if you put the portfolio on a scale of 1 to 10, with 10 being the most aggressive and 1 being the most conservative, she's been a 10.

Pat McClain: Yeah, she has.

Scott Hanson: So, how about...

Mark: I agree.

Scott Hanson: What if you had a really broadly diversified portfolio and brought the risk to...

Pat McClain: And brought the risk to a three.

Scott Hanson: Three or four.

Pat McClain: I agree with you, Scott. And was she comfortable with the portfolio?

Mark: Well, when it was going up, she was.

Pat: Well, everyone is. Everyone is. That's funny.

Scott Hanson: If it were my 80-year-old mother...if you said she's in the most phenomenal health, everyone in my family has lived to 105, she's going to live forever, she's unbelievably strong health-wise. The thing about immediate annuity is, they do not do medical underwriting unlike life insurance. You go to buy life insurance, they do all these tests, they say, "Woah. This person's going to die young, let's charge them extra." Right? They don't do that with annuities so, if you're in great health, you're at an advantage. Go out and buy this immediate annuity.

Pat McClain: And if you're in poor health, you're not. So, I agree with Scott. I think that I would actually build a moderate portfolio, and put it in there, and maybe use an investment advisor and you pay someone for their expertise in a fee-based investment advisor. Maybe she has no risk tolerance left.

Mark: With just a S&P 500 Index Fund…Would that be too aggressive?

Pat McClain: No, that's too aggressive. Yeah, it's too aggressive.

Scott Hanson: I mean, for 5%, or for 10% of her portfolio it might be fine.

Pat McClain: :Yeah.

Scott Hanson: But ideally, you'd have a broad...For example, the kind of portfolios--I'm not trying to a plug just for our firm--the kind of portfolios that Hanson McClain does, and other good fee-based investment advisor firms, there would be a variety of different holdings. There might be some portion of this that would be in the S&P 500, there would be some fixed income in there, there'd be some very conservative type pieces of the portfolio, a broad diversified portfolio. And then you could set it up so that it sends her a check each month for $1500.

Pat McClain: Regardless of the account size.

Scott Hanson: And regardless of how the account does, you mean?

Pat McClain: Okay, right.

Scott Hanson: So, design the portfolio for total return, a check sent to her each month...

Pat McClain: I would not buy immediate annuity, especially with the fact that you said her health is not all that great. I think a moderate portfolio, and if she says, "Absolutely no, I don't want any risk whatsoever. I can't live with it." I would just put in a bank account and draw down principle.

Scott Hanson: I would, too because when you're buying immediate annuity, you're giving up...

Pat McClain: That's what you've done.

Scott Hanson: You're talking about giving up half your principle.

Pat McClain: That's what you've done, is you've given up principle.

Mark: Okay, well that helps. Thank you.

Pat McClain: All right. Appreciate the call.

Scott Hanson: All right, Mark.