What should my elderly parents do with their only asset, a liquid $250K?
October 24, 2013 11:30 AM Subscribe
I'm seeking as many opinions as I can get from people with knowledge of financial advising and/or trusts & estates and/or estate planning, about what my parents (in their 80s) ought to do with their $250,000 in liquid assets. I'm NOT looking for the kind of detailed plan we'd get from an advisor whom we hire; I'm looking for short, quite general, common sense answers (such as "These ONE OR TWO types of instruments are good/bad; all others are to be avoided/considered.") I'm also looking for as many answers as I can get. In order to get that assortment of answers, I want to disclose only a very few specific things about the folks: 1. they currently rent an apartment; they do not own a home. 2. they are in their 80s--relatively healthy and can drive, shop, take care of themselves, but I'm not sure how long that'll last. I'd like to see them in a retirement community within a couple years. 3. Their only income (which doesn't amount to much) is social security. 4. They lose about $2,100 in total expenses every month. That's just about equal to what they take in each month. 5. Their one and only significant asset is a liquid $250,000. Okay, at their age, and considering all the above, WHAT IS/ARE THE MOST PRACTICAL THING(s) THEY SHOULD DO WITH THAT LUMP OF LIQUID MONEY? THANK YOU from their worried adult child with a family of my own!
I, too, would say "annuity" for income, but I think they're going to need some of that cash to move to assisted living. Can they move now? Moving to a community while they're still relatively healthy might be a good idea- some offer different levels of assistance so they can start out very independent and gradually bring in more help as needed.
posted by ThePinkSuperhero at 11:49 AM on October 24, 2013 [1 favorite]
posted by ThePinkSuperhero at 11:49 AM on October 24, 2013 [1 favorite]
It may be hard to answer this without knowing what they have in the way of insurance that may cover healthcare costs or assisted living costs. The first thing that jumped to my mind is that because their asset is liquid, some care should be taken to protect it from one bad week in the hospital effectively chewing through all of it.
posted by craven_morhead at 11:53 AM on October 24, 2013 [2 favorites]
posted by craven_morhead at 11:53 AM on October 24, 2013 [2 favorites]
You should see a financial advisor specializing in elder law issues (someone who you pay per hour for his time, not who manages your parents' assets).
If you're in the United States, there are some issues as far as qualifying for Medicaid, etc. that require the spenddown of certain assets. So you want to consider this before having them make an important decision about this money.
If I'm understanding your question correctly, the main concern is them being able to afford assisted living/increased healthcare costs, as it appears that they don't need the money now to meet their monthly living expenses. Given the limited time horizon for which this money will be needed, it is best put somewhere that will not have a lot of volatility. So an intermediate bond index fund would make a lot of sense, even if that is also not likely to generate a lot of interest. They could alternatively put it in TIPS or laddered CDs, but that may not be a level of complexity that they want in their 80s. But the wisdom of investing this at all depends on the ramifications of paying for assisted living. For example, if this is money that they intend to leave to you and other beneficiaries, there might be strategies for gifting it early rather than later.
If there were absolutely no chance that they'd need this money, then the solution would be to put it into a mix of mostly stock index funds, which could then go to beneficiaries after they've passed. But it doesn't sound like this is the case.
I'm not a huge fan of an annuity here since an annuity will just be for their life and will result in nothing going to beneficiaries (unless this is what they want, in which case it's totally fine), and also if they do need to go into assisted living, having the additional annuity income may not be that useful to them if there's an issue with spenddown.
posted by sock me amadeus at 11:56 AM on October 24, 2013 [7 favorites]
If you're in the United States, there are some issues as far as qualifying for Medicaid, etc. that require the spenddown of certain assets. So you want to consider this before having them make an important decision about this money.
If I'm understanding your question correctly, the main concern is them being able to afford assisted living/increased healthcare costs, as it appears that they don't need the money now to meet their monthly living expenses. Given the limited time horizon for which this money will be needed, it is best put somewhere that will not have a lot of volatility. So an intermediate bond index fund would make a lot of sense, even if that is also not likely to generate a lot of interest. They could alternatively put it in TIPS or laddered CDs, but that may not be a level of complexity that they want in their 80s. But the wisdom of investing this at all depends on the ramifications of paying for assisted living. For example, if this is money that they intend to leave to you and other beneficiaries, there might be strategies for gifting it early rather than later.
If there were absolutely no chance that they'd need this money, then the solution would be to put it into a mix of mostly stock index funds, which could then go to beneficiaries after they've passed. But it doesn't sound like this is the case.
I'm not a huge fan of an annuity here since an annuity will just be for their life and will result in nothing going to beneficiaries (unless this is what they want, in which case it's totally fine), and also if they do need to go into assisted living, having the additional annuity income may not be that useful to them if there's an issue with spenddown.
posted by sock me amadeus at 11:56 AM on October 24, 2013 [7 favorites]
Used to work in financial services. I'm not a fan of annuities. They are expensive, often limited in investment choices, and being in their 80's, the benefit of tax deferred growth doesn't apply.
posted by cecic at 12:04 PM on October 24, 2013 [4 favorites]
posted by cecic at 12:04 PM on October 24, 2013 [4 favorites]
>Used to work in financial services. I'm not a fan of annuities. They are expensive, often limited in investment choices, and being in their 80's, the benefit of tax deferred growth doesn't apply.
We are not talking about deferred annuities. They are indeed bad investments for most people.
We are instead talking about single premium immediate annuities. These are excellent investments for elderly people to prevent them from ever running out of money.
The way they work is that you pay the insurance company a single lump sum and then you receive monthly payments for the rest of your life. You cannot outlive your money.
A good suggestion would be for your parents to annuitize half of their money and keep the rest for unexpected expenses.
For example, go to this site and enter ages of 83 for two spouses and paying a single $125,000 premium. This will pay out annually 10.65% or $13,300 for as long as either of them is alive.
Immediate annuities can be thought of as longevity insurance because they insure against outliving your money.
posted by JackFlash at 12:52 PM on October 24, 2013 [7 favorites]
We are not talking about deferred annuities. They are indeed bad investments for most people.
We are instead talking about single premium immediate annuities. These are excellent investments for elderly people to prevent them from ever running out of money.
The way they work is that you pay the insurance company a single lump sum and then you receive monthly payments for the rest of your life. You cannot outlive your money.
A good suggestion would be for your parents to annuitize half of their money and keep the rest for unexpected expenses.
For example, go to this site and enter ages of 83 for two spouses and paying a single $125,000 premium. This will pay out annually 10.65% or $13,300 for as long as either of them is alive.
Immediate annuities can be thought of as longevity insurance because they insure against outliving your money.
posted by JackFlash at 12:52 PM on October 24, 2013 [7 favorites]
a ladder of u.s. treasury bonds, with maturities from six months to 10-15 years.
annuities are a rip-off. the salesman gets a nice chunk right off the top. like casinos, insurance companies aren't there to lose money to their customers.
posted by bruce at 1:04 PM on October 24, 2013 [2 favorites]
annuities are a rip-off. the salesman gets a nice chunk right off the top. like casinos, insurance companies aren't there to lose money to their customers.
posted by bruce at 1:04 PM on October 24, 2013 [2 favorites]
> annuities are a rip-off. the salesman gets a nice chunk right off the top. like casinos, insurance companies aren't there to lose money to their customers.
Sorry, but this is spoken from ignorance. We are not talking about deferred annuities. We are talking about single premium immediate annuities. There are no salesmen involved. The payouts are actuarially fair. Because they are so simple, prices are very competitive.
posted by JackFlash at 1:11 PM on October 24, 2013 [2 favorites]
Sorry, but this is spoken from ignorance. We are not talking about deferred annuities. We are talking about single premium immediate annuities. There are no salesmen involved. The payouts are actuarially fair. Because they are so simple, prices are very competitive.
posted by JackFlash at 1:11 PM on October 24, 2013 [2 favorites]
If they are still very healthy, you may want to look at Medicaid planning (see an elder law attorney in your area), as that $250K in whatever form will be gone quite quickly if one or both of them needs to be in an assisted living or nursing facility. Medicare is generally not used for long-term care of permanent conditions. Medicaid for skilled nursing coverage takes into account your personal assets - there is a 5-year lookback period for gifts, so you want to start that ASAP.
Unless they have amazing long-term care coverage or both die suddenly in their sleep, they will end up spending this money on health care if they don't take steps to preserve it. If this is their plan, then carry on. If they hope to leave some of it for their children, then please see an elder law attorney.
posted by melissasaurus at 1:13 PM on October 24, 2013
Unless they have amazing long-term care coverage or both die suddenly in their sleep, they will end up spending this money on health care if they don't take steps to preserve it. If this is their plan, then carry on. If they hope to leave some of it for their children, then please see an elder law attorney.
posted by melissasaurus at 1:13 PM on October 24, 2013
Your question is unclear to me. Are their total expenses $4200/mo and total income $2100/mo? That indicates they draw down $25K a year from their nest egg. That's 10% per year, so one option to consider is just leaving it in the bank earning nothing and the nest egg is gone in 10 years. The exact age matters a lot, as a woman who is 80 will live, on average, 10 more years, while that same woman at 85 would expect to live only 7 more years. Of course, with two people in the mix, there's a greater chance that one of them will outlive the average, including roughly a 7% chance that one of an 80-year-old couple will live to 100, so the bank strategy seems to be pretty risky, though I'm not a financial planner or lawyer and this isn't financial or legal advice.
An immediate annuity, as JackFlash states, would give them a fixed monthly payment for life. Typically inflation is a big worry because the payment on the annuity doesn't increase. The time scale, though, is relatively short here (an 80-year-old couple has a 38% chance of neither member reaching 90). So inflation will erode the payment, but probably (past performance being no guarantee of future results) not too much. For example, a dollar today is worth about what $.62 was twenty years ago. Put another way, in twenty years, that 10% payment from the annuity of $25K a year would be worth about $15K, or $1300/mo. Social Security would have somewhat kept pace with inflation, though, partially offsetting the decrease.
Bruce proposes Treasury bonds, but even the highest interest version, the 30 year bond, yields less than 4%. They're not competitive with immediate annuities for people who need the money now.
Medicaid is fiendishly confusing. It doesn't cover in home care, just nursing homes, except when it doesn't. If your parents give you the money to protect it from Medicaid, Medicaid can and will invoke "lookback" rules that will delay their eligibility. If they require nursing home care, that expense will dwarf their current expenses, so Medicaid is the elephant in the room. They really need an elder care attorney or planner to advise them what to do, as the rules and amounts vary dramatically state-by-state.
posted by wnissen at 1:13 PM on October 24, 2013 [2 favorites]
An immediate annuity, as JackFlash states, would give them a fixed monthly payment for life. Typically inflation is a big worry because the payment on the annuity doesn't increase. The time scale, though, is relatively short here (an 80-year-old couple has a 38% chance of neither member reaching 90). So inflation will erode the payment, but probably (past performance being no guarantee of future results) not too much. For example, a dollar today is worth about what $.62 was twenty years ago. Put another way, in twenty years, that 10% payment from the annuity of $25K a year would be worth about $15K, or $1300/mo. Social Security would have somewhat kept pace with inflation, though, partially offsetting the decrease.
Bruce proposes Treasury bonds, but even the highest interest version, the 30 year bond, yields less than 4%. They're not competitive with immediate annuities for people who need the money now.
Medicaid is fiendishly confusing. It doesn't cover in home care, just nursing homes, except when it doesn't. If your parents give you the money to protect it from Medicaid, Medicaid can and will invoke "lookback" rules that will delay their eligibility. If they require nursing home care, that expense will dwarf their current expenses, so Medicaid is the elephant in the room. They really need an elder care attorney or planner to advise them what to do, as the rules and amounts vary dramatically state-by-state.
posted by wnissen at 1:13 PM on October 24, 2013 [2 favorites]
> An immediate annuity ... would give them a fixed monthly payment for life. Typically inflation is a big worry because the payment on the annuity doesn't increase.
You can get an immediate annuity with an inflation adjustment, but then your payout rate is reduced because you are paying the insurance company to not only insure for longevity, but also to insure for inflation.
An inflation adjusted immediate annuity might make more sense if purchased in one's 60s, but less so if purchased in one's 80s. A better strategy would be to annuitize half now and maybe the other half a few years from now. You will get a better rate because you are older and perhaps also be able to take advantage of higher interest rates if unexpected inflation occurs.
posted by JackFlash at 1:38 PM on October 24, 2013
You can get an immediate annuity with an inflation adjustment, but then your payout rate is reduced because you are paying the insurance company to not only insure for longevity, but also to insure for inflation.
An inflation adjusted immediate annuity might make more sense if purchased in one's 60s, but less so if purchased in one's 80s. A better strategy would be to annuitize half now and maybe the other half a few years from now. You will get a better rate because you are older and perhaps also be able to take advantage of higher interest rates if unexpected inflation occurs.
posted by JackFlash at 1:38 PM on October 24, 2013
I'd ladder US Treasuries too. Or invest in stocks that pay dividends quarterly. These are typically safe investments and they provide a small income.
Here's an article from Kipplinger.
Put $20,000 in each of these stocks and they pay in different months throughout the year, here's what the checks would look like:
Jan, GE, Yield 2.6%: $520
Feb, Aqua America, Yield 2.6%: $520
Mar, McDonalds, Yield 3.2%: $640
Apr, ADP, Yield 2.9%: $580
May, Verizon, Yield 5.4: $1080
Jun, M&T Bank, Yield 3.1% $620
Jul, Kimberly-Clark, Yield 4.3%: $860
Aug, Colgate-Palmolive, Yield 2.7: $540
Sep, American Electric Power, Yield 3.7%: $740
Oct, Sysco, Yield 3.7%: $740
Nov, Realty Income, Yield 5%: $1000
Dec, ConocoPhillips, Yield $3.7: $740
This provides a tidy sum of $8580 annually or approximately $715 monthly, without touching the principle. It's easy on the wallet tax-wise, and the sum can be held in trust that's structured to transfer to the heirs with minimal tax reprecussions.
These aren't the only stocks that do this, but they're pretty diversified and pretty conservative.
Also, there will be an extra $10,000 in a money market account that draws a bit of interest should they have any needs that require a large sum of money.
You for sure want to protect this money from Medicare should either parent need long term care as you have to "spend down" before they'll contribute.
Look into an irrevokable trust for the money to protect it from this contingency and to preserve the wealth for the heirs.
It's worth some money to go to an estate attorney who can set this up for your folks.
As for annuities, they SUCK! The administration fees eat into the payouts and...they SUCK!
posted by Ruthless Bunny at 7:33 AM on October 25, 2013 [1 favorite]
Here's an article from Kipplinger.
Put $20,000 in each of these stocks and they pay in different months throughout the year, here's what the checks would look like:
Jan, GE, Yield 2.6%: $520
Feb, Aqua America, Yield 2.6%: $520
Mar, McDonalds, Yield 3.2%: $640
Apr, ADP, Yield 2.9%: $580
May, Verizon, Yield 5.4: $1080
Jun, M&T Bank, Yield 3.1% $620
Jul, Kimberly-Clark, Yield 4.3%: $860
Aug, Colgate-Palmolive, Yield 2.7: $540
Sep, American Electric Power, Yield 3.7%: $740
Oct, Sysco, Yield 3.7%: $740
Nov, Realty Income, Yield 5%: $1000
Dec, ConocoPhillips, Yield $3.7: $740
This provides a tidy sum of $8580 annually or approximately $715 monthly, without touching the principle. It's easy on the wallet tax-wise, and the sum can be held in trust that's structured to transfer to the heirs with minimal tax reprecussions.
These aren't the only stocks that do this, but they're pretty diversified and pretty conservative.
Also, there will be an extra $10,000 in a money market account that draws a bit of interest should they have any needs that require a large sum of money.
You for sure want to protect this money from Medicare should either parent need long term care as you have to "spend down" before they'll contribute.
Look into an irrevokable trust for the money to protect it from this contingency and to preserve the wealth for the heirs.
It's worth some money to go to an estate attorney who can set this up for your folks.
As for annuities, they SUCK! The administration fees eat into the payouts and...they SUCK!
posted by Ruthless Bunny at 7:33 AM on October 25, 2013 [1 favorite]
> As for annuities, they SUCK! The administration fees eat into the payouts and...they SUCK!
Ah, yes. Another person who does not know the difference between a deferred annuity and a immediate annuity. An immediate annuity has no administration fees.
> the sum can be held in trust that's structured to transfer to the heirs with minimal tax reprecussions.
A trust would be a waste of money. A couple can leave over $10 million to their heirs tax-free.
posted by JackFlash at 7:59 AM on October 25, 2013 [1 favorite]
Ah, yes. Another person who does not know the difference between a deferred annuity and a immediate annuity. An immediate annuity has no administration fees.
> the sum can be held in trust that's structured to transfer to the heirs with minimal tax reprecussions.
A trust would be a waste of money. A couple can leave over $10 million to their heirs tax-free.
posted by JackFlash at 7:59 AM on October 25, 2013 [1 favorite]
Free advice is worth what you paid for it. Go get actual advice from a paid financial advisor. Find someone who is a Certified Financial Planner or has an equivalent certification who is not paid by commission, and pay them for their advice. It will be money well spent.
posted by overleaf at 9:44 PM on October 27, 2013
posted by overleaf at 9:44 PM on October 27, 2013
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