Seniors: Where to put $200,000

A concerned son is looking for the best type of investment for his mother's money. Money Magazine's Walter Updegrave weighs in.

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) -- Question: My 76-year-old mother has sold some land and now has $200,000 to invest. This is all the money she has. What type of safe investment should she put this money into? - Michael Martin, Columbus, Georgia

Answer: Your mom is in a position that a lot of retirees find themselves in. They can take comfort in the fact that they've managed to accumulate a nice sized nest egg that can make a real difference in the way they live the rest of their lives.

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But they're also anxious because they know that a couple of wrong moves in today's volatile markets can wipe out much of their savings - and they know they don't have the time to rebuild it at their advanced age. So I appreciate your urge to want to play it safe with the two hundred thousand bucks that's come your mom's way.

That said, however, you don't want to make an investment decision based purely on fear - in this case, the fear that your mom might lose the only nest egg she has. You could easily find investments that will give you plenty of stability - Treasury bills, a money-market fund, short-term CDs, to name a few.

But by avoiding the risk of seeing the value of your mom's money fluctuate in the near term, she may be setting herself up for other risks, such as her money running out later in life or not being able to support her as comfortably as she would like. All of which is to say I don't think you need a list of safe investments. I think you need an investing strategy, and to create one you need to think about what your mom needs from this money.

Does she need it for current living expenses? If so, how much does she require on a regular basis after figuring in what she gets from other sources such as Social Security and a pension, if she has one? Does she have other assets, such as the cash value of life insurance policies or equity in her home, that she could tap if she experienced even a temporary loss with this money? Or is this money truly the only asset she has aside from Social Security?

Assuming your mom will want to tap this money for regular income, you will probably be tempted to put much, if not all, of it into income-producing assets such as bonds or CDs. But remember, even at age 76, chances are good that your mom will live another 15 years or more.

So you probably want to create a mix of investments that has at least some prospects for growth that can help maintain her long-term spending power. And that means you likely want to have a bit of exposure to stock funds. Exactly how much someone your mom's age might invest in stock funds depends on a variety of factors, including what other reserves she's able to tap into and how anxious even a short-term setback in the market might make her.

Generally, though, I think it's reasonable for people in their mid-70s to keep roughly 30 percent to 40 percent of their assets in stocks, with the rest split between bond funds and short-term cash-like investments such as money-market funds and short-term CDs.

The more nervous the person is at the prospect of swings in the stock market and the fewer other resources he or she has to fall back on, the more toward the lower end of that range of stock holdings the person would fall. As your mom ages, she can gradually dial back the stock exposure even more, perhaps lowering it to 20 percent to 30 percent by age 85.

Another thing your mom might consider is putting a portion of her money into a type of annuity known as an immediate annuity. With this type of annuity (which is also sometimes known as an income or payout annuity), you hand over a lump sum of cash to an insurance company (or an investment firm that acts as an intermediary) and in return you get guaranteed monthly payments as long as you live.

So, for example, a woman your mom's age who invests $50,000 in an immediate annuity would receive somewhere around $425 a month for the rest of her life. (For actual annuity quotes, click here.) This type of arrangement might sound inviting enough for someone to figure, "Hey, why not put it all in an immediate annuity so I get guaranteed cash as long as I live?" But there are several reasons you don't want to do that.

For one thing, those annuity payments remain the same over time, so inflation will erode their purchasing power. Also, when you buy an immediate annuity, you typically lose access to the money you used to purchase the annuity. So if you put all your dough in an annuity, you would have nothing left if you need additional cash for unanticipated expenses or emergencies.

So if you like the idea of supplementing Social Security with guaranteed income from an annuity, you're better off putting only a portion of your stash into the annuity and then investing the remainder in a portfolio of stocks, bonds and secure short-term investments.

Bottom line: Rather than thinking of a "safe" place to put your mom's money, you should really be thinking of a long-term investing strategy that can get her the regular income she'll need for the rest of her life, while also providing sufficient security against market downturns in the short-term.

I'll be the first to admit that this isn't the easiest task in the world. If you want to take a crack at creating this strategy on your own, there are a couple of online calculators where you can plug in information about your mom and her finances and then get estimates of how much income a specific type of portfolio might be able to reliably generate over the next 10 to 20 years.

One such tool is the Retirement Income Calculator at T. Rowe Price's web site. Another is the Retirement Income Planner tool in the Retirement and Guidance section of Fidelity's web site. This tool, which is available to non-Fidelity customers as long as they register at the site, also allows you to factor an annuity into your investment strategy.

If you're not comfortable doing this sort of number crunching, then you might want to have an adviser help you run some numbers and help you develop a retirement income investing strategy that makes sense for your mom.

One caution: Unfortunately, there are many people passing themselves off as senior advisers or elderly counselors these days who are little more than glorified salespeople or even outright flim-flam artists. (To read columns I've done highlighting this problem, click here and here.)

More often than not, these pretenders are often pushing types of annuities that (unlike the immediate annuities I mentioned earlier) have high annual fees and/or charge outrageously high surrender charges if you want to get at your money.

So if you do decide to seek the help of a pro, you can get recommendations from reputable organizations such as the Financial Planning Association, National Association of Personal Financial Advisors and the Garrett Planning Network. For more tips on choosing an adviser, click here.

So I suggest that you and your mother start talking a little more about her financial situation with a particular eye on just how much income she requires on a regular basis from her two hundred grand.

Once you've done that, then the two of you, on your own or with the help of an adviser can come up with a long-term retirement income investing strategy that has a reasonable chance of getting her what she needs.  Top of page