The ‘Safe 10% Return’--Have You Heard Any Other Good Ones Lately?
Q: You recently wrote that two questions mark a person as a “newbie” to personal finance. One is asking how to get in on an initial public offering, and the other is, “How can I make a safe 10% return?” I have heard financial advisors and brokers tout safe 10% returns for years. If there is no such animal, why do financial people say there is? Is it all a big joke?
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A: It can be, and ignorant investors are often the butt.
The safest investments in the world are short-term U.S. Treasury bills. They’re backed by the full faith and credit of the federal government. And the 91-day Treasury is yielding about 5% right now. You can get a bit higher yield by locking up your money for longer periods; at the far end, 30-year Treasuries are yielding about 6.3%.
“Safe” is a bit of a misnomer, of course. You’re pretty much safe from losing principal, since it’s extremely unlikely that the U.S. will default on its obligations.
But most Treasuries, especially the long-term version, don’t give you much protection against inflation. The exception are the new inflation-adjusted Treasuries, which now offer a real return of about 4%.
You still have to pay taxes on the interest. So hiding in “safe” investments often exposes you to a terrible risk: the erosion of your buying power.
If you’re earning more than these piddling rates right now, you’re taking additional risk of some kind. Typically, the higher the expected return, the higher the risk you’re taking.
Common stocks, for example, have returned an average of about 11% before taxes in the modern era, but at any given time you risk losing a significant chunk of your money. Losses of 20% or more are not uncommon; investors in the Depression saw the Dow drop nearly 90%--and it took years for the market to recover.
Anyone who promises you a safe 10% return, or more, is taking you for a fool. Just make sure he or she doesn’t take your money too.
A Living Trust’s Price at Death
Q: My wife and I established a living trust at a cost of about $1,500. We did not mind paying this for a professionally prepared trust. However, now I find that upon my wife’s death, although I will not have probate costs, there will be a charge of 1.5% to file her federal estate tax return and “finalize” her legal obligations. On a $1-million estate, the cost would be $15,000.
Is this an exorbitant charge or is it par for the course? It seems a shame to save on probate yet have to pay so much just to file the federal estate tax return.
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A: An informal poll of my estate-planning sources reveals that 1% to 2% is about right for settling an estate of that size. If you think that’s exorbitant, try tackling a tax return for a big, complicated estate sometime. It’ll make your head spin.
And because every estate tax return is actually reviewed by an IRS employee--in contrast to personal tax returns, which stand less than a 1 in 100 chance of being audited--you have a much-better-than-average shot at winning a cozy chat with the feds should you make a mistake.
Still, that doesn’t prevent you from shopping around. You have no obligation to use the same law firm that prepared your trust, although it can be more convenient, because it’s already familiar with your estate.
You may not realize how much you’re saving in probate costs by having a living trust. Probate in California typically costs between 3% to 4% of the gross estate, or $30,000 to $40,000 on a $1-million estate.
Notice that the fee is figured on the gross estate--in other words, on the value of the property rather than on the dead person’s net worth. So if you have a $1-million house and a $900,000 mortgage, the house adds $1 million to your gross estate.
You also might not realize that your living trust by itself does not save on estate taxes--and that could be an issue with an estate that big. Many people confuse probate--the court process that living trusts are designed to avoid--with estate taxes, which are taxes the federal government levies on estates worth more than a certain size, currently $650,000.
To avoid or reduce estate taxes, your living trust needs to include language to set up other trusts upon your deaths. If you’re still unclear on this issue, Denis Clifford’s “Plan Your Estate” ($24.95, Nolo.com) is an excellent primer on dealing with the financial side of death.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
