Sell Everything: A Widow, a 22% Drawdown, and a Disabled Son
Priya, 67, was widowed fourteen months ago. She has $2.1 million in an IRA, $400,000 in a taxable brokerage account, and a $650,000 house owned free and clear. Social Security pays $34,000 a year and a survivor annuity from her late husband's employer pays $21,000. She wants $150,000 a year gross, indexed to inflation. Her IRA is 88% equities and has not been rebalanced since 2019; the portfolio is down 22% over the last eight months. She calls and says, 'Sell everything. I can't lose another dollar.' She also wants to give her 41-year-old son $75,000 now to 'get him settled.' He receives SSI and Medicaid because of a disability and has no other income.
1. Priya wants to sell everything. Quantify what that actually does to her plan and give her a specific alternative.
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The gap. $150,000 of spending less $34,000 of Social Security less $21,000 of annuity leaves $95,000 a year from the portfolio.
The withdrawal rate. On $2.5 million that is 3.8%. After a 22% equity decline the portfolio is closer to $2.1 million, so the current rate is about 4.5% - right at the edge of sustainable over a 30-year horizon.
What 'sell everything' does. A 100% cash and short-Treasury portfolio at, say, 4.3% on $2.1 million generates roughly $90,000 of pre-tax income. That is less than the $95,000 she needs, with zero growth, no inflation protection, and certain depletion as she draws principal. She converts an unrealized 22% drawdown into a permanent one and simultaneously makes the plan fail.
The alternative. Hold two to three years of withdrawals - roughly $200,000 to $285,000 - in T-bills and one-to-three-year Treasuries inside the IRA, funded from the bond sleeve and from rebalancing rather than from selling equities at the low. That answers the real fear, which is running out of cash, without locking in the loss. The balance stays invested at a moderated 50–60% equity allocation and is rebalanced back to target.
Process. Name the loss aversion, put both scenarios on paper, and give her 24 hours. She has capacity, so if she still says sell, execute - but document the recommendation, the alternatives presented, and her decision. 'Sell everything' should never be processed as a routine ticket without a documented conversation, and if you see any sign of diminished capacity, route it through the firm's senior-investor procedures first.
2. The $75,000 gift: what happens if she writes the check, what should she do instead, and what is the tax filing consequence?
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What the check does. An outright $75,000 gift is a countable resource. The SSI resource limit for an individual is $2,000, so the money would almost certainly terminate his SSI and, in most states, the Medicaid that rides on it. SSI also treats a gift as income in the month received. The money would then be spent down on the very care the benefits were funding.
What she should do instead. Fund a third-party special needs trust with her own money. Because the assets never belong to the son, they are not countable for SSI or Medicaid, and the trust can pay for housing, transportation, therapies, and other supplements without supplanting benefits. The key distinction: a third-party SNT has no Medicaid payback provision at the beneficiary's death; a first-party SNT funded with his own money does.
She should also name the trust, not the son, as IRA beneficiary - a properly drafted see-through trust for a disabled beneficiary may still qualify for eligible-designated-beneficiary treatment under the SECURE Act, but that needs an estate attorney to confirm. Add a letter of intent and a successor trustee, and do not leave him an outright share in the will.
Gift tax. $75,000 exceeds the $18,000 annual exclusion, so she files Form 709 for the year. No tax is due - the excess draws down her lifetime exemption - but the filing is required. Because she is widowed, gift-splitting is not available.
Practical. Do not write the check while the trust is being drafted. If she wants to help now, have the trust, or her directly to a vendor, pay specific expenses rather than handing over cash.
3. She is also considering moving the entire $2.1 million IRA into an immediate annuity paying 5.8%. Evaluate, and say how you would size an annuity if you used one at all.
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The arithmetic looks good and is not. 5.8% of $2.1 million is $121,800 a year, which combined with $55,000 of guaranteed income covers her $150,000 with room to spare. That is the sales pitch, and it is the wrong comparison.
What she gives up.
- Irrevocability. If she needs a lump sum for a roof, a move to assisted living, or a health event, the money is not there. Commutation, where it exists, is priced by the insurer.
- No inflation adjustment. $121,800 today is roughly $90,000 of purchasing power in ten years at 3%. Her spending is indexed; this is not.
- No liquidity, no legacy. The $400,000 she wants to leave her son disappears unless a death benefit is purchased - and if that benefit pays him outright, it becomes a countable resource that ends his SSI and Medicaid. It would have to name the special needs trust.
- Tax. Payments are ordinary income and there is no step-up; she also surrenders all Roth conversion flexibility.
How to size it. Use partial annuitization to cover the essential gap only. With $55,000 of guaranteed income and, say, $75,000 of essential spending, she needs about $20,000 a year of annuity income - roughly $345,000 at 5.8%. That leaves $1.75 million liquid and invested for inflation, emergencies, long-term care, and the trust. For the longevity tail, consider a deferred income annuity or a QLAC rather than annuitizing everything at 67.
Suitability. The file has to show the recommendation against her stated objectives: income with inflation protection, liquidity for care, and a legacy for a disabled son. Full annuitization fails two of the three.