Q: I have been informed about a group that finances receivables and sells them to investors, who get a return of 5 to 7 percent. I have never heard of this type of investment. Apparently you must be “invited” to invest. Have you heard of this? Is this type of investment risky? I am retired and always looking for a way to get a decent return.
A: Always worry when you get an invitation to invest.
The invitation is for people who don’t understand the size of the risk they are undertaking. The only reason receivables are offered in this way is that the borrowers don’t qualify for bank financing.
That means banks thought the risk was too high to lend, even at a premium interest rate. In spite of lapses of judgment that have been remarkably painful for all of us, it’s unwise to assume that you’re getting these rates because bankers are witless. Most of the time they know a reasonable risk when they see it.
The motivation for selling this kind of investment can usually be found in the commission structure: The salesman who contacted you is likely being paid handsomely for making a sale.
Q: I am a 64-year-old single woman with no family. I think it would be wise to have some form of long-term-care insurance, if I do not buy into a continuing-care retirement community. Since I am a federal employee, I got a quote from the federal provider (John Hancock) and an additional one from Massachusetts Mutual. The policies are both middle of the road in terms of coverage and cost. The total lifetime benefits available would be about $220,000.
It occurred to me that I might be able to self-insure for long-term care rather than pay insurance premiums. I have $315,000 in my federal Thrift Savings Plan account. I do not need these funds for living expenses, which will be covered by Social Security and pension benefits. I do not live lavishly. I have other investments, both IRA and non-IRA, in Vanguard funds. My total assets are about $750,000.
Would it be a rational option to set aside the TSP account for possible use in long-term care?
A: That’s an entirely rational approach to the problem of long-term care.
In fact, it is likely that the maximum value of your policy would be less than $315,000, so you really don’t need to reserve the entire account, just a portion of it. How big a portion depends on the assumptions you are willing to make.
Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc.Questions about personal finance and investments may be sent by email to scott@scottburns.com.
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