Investing from scratch for an older parent
March 21, 2021 12:03 AM Subscribe
What would be the best use of a ~$100K investment for a single parent in her mid-60's, who is still working, renting her home, and has very little savings of her own?
My mother-in-law is single and approaching 65. She works full-time but doesn't earn enough to put away much in the way of savings. She has very little savings to her name, and rents her home in an affordable rural area. My partner and I are in a position to help redirect a chunk (about $100k) of our investments to her, so she can hopefully have some supplemental investment income and start thinking about what an eventual retirement might look like.
Would this be a situation to involve a financial planner, or is there a simple answer for the best use of this money? I'm familiar with the Vanguard target retirement funds - would it make sense to put this money into a target retirement fund which would automatically manage the money for someone looking to retire in the next 5 years or so. Does it make sense to dump this money into purchasing a house and moving away from paying rent at this age?
Any recommendations for other resources for late-start financial planning? Thanks!
My mother-in-law is single and approaching 65. She works full-time but doesn't earn enough to put away much in the way of savings. She has very little savings to her name, and rents her home in an affordable rural area. My partner and I are in a position to help redirect a chunk (about $100k) of our investments to her, so she can hopefully have some supplemental investment income and start thinking about what an eventual retirement might look like.
Would this be a situation to involve a financial planner, or is there a simple answer for the best use of this money? I'm familiar with the Vanguard target retirement funds - would it make sense to put this money into a target retirement fund which would automatically manage the money for someone looking to retire in the next 5 years or so. Does it make sense to dump this money into purchasing a house and moving away from paying rent at this age?
Any recommendations for other resources for late-start financial planning? Thanks!
Rent is dead money, with no return on it. My feeling would be that the money would be most sensibly spent purchasing a property for her to live in. Speak to a tax/financial planner to see if the property should be purchased in your name (with her paying a nominal rent) or in her name with it held on trust for you so it comes back to you after she dies. If it's in her name, there may be implications if she eventually needs long-term care that has to be paid for, or in relation to benefits, so getting advice at this stage is crucial.
posted by essexjan at 2:37 AM on March 21, 2021 [1 favorite]
posted by essexjan at 2:37 AM on March 21, 2021 [1 favorite]
Putting aside the issue of precisely what to invest in, a fee-only advisor might be helpful here. You will need to consider what her social security income is likely to be, as well as pension (if any), and thus determine how much other income she needs to maintain her current standard of living. That's just useful for planning purposes. You can also discuss whether any structures are preferable in case she needs to enter into a nursing home on Medicaid, which is the only major benefits-related concern I know of for seniors with relatively modest assets. Those rules can vary dramatically by state so it's best to speak with a specialist. (If your desire is to give her the lump sum, for instance, it may be best to put the money into an irrevocable trust, so that the assets don't have to be spent down prior to entering Medicaid, but again, varies by state. That's something you'll want to do promptly, to get the look-back period running.)
When I started handling my mother's limited assets, which a jerkwad of a salesman had dispersed far and wide in search of commissions, I just consolidated all of it into Vanguard's Target Retirement Income, which is for people post-retirement age, with a small amount in whatever the Target-in-the-next-five-years Retirement Fund was because she is a fairly healthy and independent woman in her early 70s and she might have a long way to go yet. But really I could have just put it all into Target Retirement Income. The point is to keep expenses to a minimum, because every dollar you spend on fund expenses is one she doesn't benefit from. This seems like a reasonable approach for her, too, although, again, in whose name the account is should be discussed with an advisor.
The way you describe her situation, I doubt that she would benefit most from taking on a mortgage at this age. It sounds like she might be struggling to meet her day-to-day cash needs, in which case building home equity won't be all that useful to her. She is unlikely to live long enough to enjoy the benefits of having a paid-off home. Plus, she then has the responsibilities and expenses of home maintenance. If you're in an area where $100K means buying a whole house, that might be more sensible, but, again, requires consideration of whether she can handle the work of upkeep (especially long-term) and likely maintenance expenses. (Additionally, if she does end up on Medicaid, the house may well have to be sold on her death for recoupment. Again, depends on the state.)
I think a target date is a good enough investment, but it bears more risk than I might want to if I were in your shoes.
This is a strange thing to say. Target-date funds have a wide range of risk profiles depending on the company and the "target date." VTINX is over half in bonds.
posted by praemunire at 2:37 AM on March 21, 2021
When I started handling my mother's limited assets, which a jerkwad of a salesman had dispersed far and wide in search of commissions, I just consolidated all of it into Vanguard's Target Retirement Income, which is for people post-retirement age, with a small amount in whatever the Target-in-the-next-five-years Retirement Fund was because she is a fairly healthy and independent woman in her early 70s and she might have a long way to go yet. But really I could have just put it all into Target Retirement Income. The point is to keep expenses to a minimum, because every dollar you spend on fund expenses is one she doesn't benefit from. This seems like a reasonable approach for her, too, although, again, in whose name the account is should be discussed with an advisor.
The way you describe her situation, I doubt that she would benefit most from taking on a mortgage at this age. It sounds like she might be struggling to meet her day-to-day cash needs, in which case building home equity won't be all that useful to her. She is unlikely to live long enough to enjoy the benefits of having a paid-off home. Plus, she then has the responsibilities and expenses of home maintenance. If you're in an area where $100K means buying a whole house, that might be more sensible, but, again, requires consideration of whether she can handle the work of upkeep (especially long-term) and likely maintenance expenses. (Additionally, if she does end up on Medicaid, the house may well have to be sold on her death for recoupment. Again, depends on the state.)
I think a target date is a good enough investment, but it bears more risk than I might want to if I were in your shoes.
This is a strange thing to say. Target-date funds have a wide range of risk profiles depending on the company and the "target date." VTINX is over half in bonds.
posted by praemunire at 2:37 AM on March 21, 2021
VTINX is 30% equities, so that $100k can very easily become $85k. That’s fine for someone with social security or a pension or a paid off home, but if the mother in law is truly at zero, it may be located closer to emergency fund territory. In which case inflation would be the big threat.
Aren’t Section 8 and food stamps means tested? (Apologies, again, I am not expert on this.)
posted by mahorn at 5:21 AM on March 21, 2021 [1 favorite]
Aren’t Section 8 and food stamps means tested? (Apologies, again, I am not expert on this.)
posted by mahorn at 5:21 AM on March 21, 2021 [1 favorite]
Are you in the US? If you are, don't give her the money as it could make her ineligible for various forms of help down the road. The most important of these is Medicaid which will cover medical and nursing home care above and beyond what Medicare will pay for. She will be automatically eligible for Medicare when she turns 65. ("Medicare for all" would be great if it provided much better coverage than it does.)
Another very useful form of help she would be ineligible for is subsidized senior housing.
You could buy a home in your name for her to live in but make sure you buy something low-maintenance like a condo if such exist where she is. You could put the money in some kind of account in your own names and let her know it's set aside for her needs and that you want her to feel free to ask for whatever she needs.
posted by mareli at 5:28 AM on March 21, 2021 [2 favorites]
Another very useful form of help she would be ineligible for is subsidized senior housing.
You could buy a home in your name for her to live in but make sure you buy something low-maintenance like a condo if such exist where she is. You could put the money in some kind of account in your own names and let her know it's set aside for her needs and that you want her to feel free to ask for whatever she needs.
posted by mareli at 5:28 AM on March 21, 2021 [2 favorites]
You would need to talk to a tax planner about this plan, giving $100k to someone all at once is going to have tax consequences. My financial planner doesn't advice on the tax part of this, but does refer to someone who can help. As others have said I don't see any advantage to having the investments be in her name, things like 401ks are great but only if you contribute yourself. But yes you will want to talk to a professional here
The house buying plan seems reasonable to me, you could even keep it in your name as an investment property. You might also want to look into keeping current investments in your name and just gifting her smaller amounts over time. The gift exclusion is currently 15k per year, so if you gift her less than that per year neither of you need to list it on your tax returns (it would still affect medicaid eligibility as an asset). But neither of those would feel like she is "investing" on her own behalf, so that may not match your criteria.
posted by JZig at 10:51 AM on March 21, 2021
The house buying plan seems reasonable to me, you could even keep it in your name as an investment property. You might also want to look into keeping current investments in your name and just gifting her smaller amounts over time. The gift exclusion is currently 15k per year, so if you gift her less than that per year neither of you need to list it on your tax returns (it would still affect medicaid eligibility as an asset). But neither of those would feel like she is "investing" on her own behalf, so that may not match your criteria.
posted by JZig at 10:51 AM on March 21, 2021
There are a number of ways to approach this, but I would not put assets into her name for reasons already cited: it could affect her eligibility for benefits, and there's some tax annoyance involved - you wouldn't necessarily have to pay any gift tax right now, but you would have to file form 709 and claim the $100k gift against your lifetime exclusion amount.
Buying a house or condo as an investment property in your name and having her live in it would be a reasonable approach, especially if it lowers or eliminates her housing expenses.
Alternately, you could put that $100k into an account that has dividend or other distributions and have it sweep into a joint account held by one of you and your mother-in-law, but that may be considered income/assets for purposes of public benefits.
posted by bedhead at 11:09 AM on March 21, 2021 [2 favorites]
Buying a house or condo as an investment property in your name and having her live in it would be a reasonable approach, especially if it lowers or eliminates her housing expenses.
Alternately, you could put that $100k into an account that has dividend or other distributions and have it sweep into a joint account held by one of you and your mother-in-law, but that may be considered income/assets for purposes of public benefits.
posted by bedhead at 11:09 AM on March 21, 2021 [2 favorites]
giving $100k to someone all at once is going to have tax consequences
I almost put in a line about "someone's going to tell you that gift taxes would result, and but they won't." For some reason, this concept transfixes the Mefi imagination, even though almost nobody ever pays gift taxes. The lifetime gift exclusion is like $11 million. OP will have to report the gift on his own taxes, but unless OP has given her almost $11 million already, it won't be taxable.
The food stamp income limit is very low, about $16K for a single person; if she's been working steadily, OP's mom will likely be earning too much in SS to qualify in the first place. More importantly, gifts count against the income cap, so cash given to her later on a regular basis would also disqualify her unless her income is quite low. Section 8 isn't asset-tested, although a small percentage of the assets is imputed as income. Recurring gift income, again, is more likely to be a problem.
Still, the Medicaid issue is real, and that's the best reason to consult an advisor with elder planning experience about how to title the assets. Just throwing the extra information in here in case it's useful to someone.
VTINX is 30% equities, so that $100k can very easily become $85k.
OP's mom will presumably be making withdrawals of around 4% each year; in other words, treating it like an annuity rather than a lump sum to spend at once. A 50% loss of value in stocks would mean a drop of about $600 in one yearly withdrawal in that situation. Without much margin, everything becomes trickier, but her time horizon isn't one year; it's 20. My mom wasn't affected by last year's drop at all, and in this situation a very modest separate cash cushion would spare the need to sell stocks in a year when they are drastically down. You can't have a person in all bonds or cash before they're even 65, unless they're terminally ill.
posted by praemunire at 11:26 AM on March 21, 2021 [4 favorites]
I almost put in a line about "someone's going to tell you that gift taxes would result, and but they won't." For some reason, this concept transfixes the Mefi imagination, even though almost nobody ever pays gift taxes. The lifetime gift exclusion is like $11 million. OP will have to report the gift on his own taxes, but unless OP has given her almost $11 million already, it won't be taxable.
The food stamp income limit is very low, about $16K for a single person; if she's been working steadily, OP's mom will likely be earning too much in SS to qualify in the first place. More importantly, gifts count against the income cap, so cash given to her later on a regular basis would also disqualify her unless her income is quite low. Section 8 isn't asset-tested, although a small percentage of the assets is imputed as income. Recurring gift income, again, is more likely to be a problem.
Still, the Medicaid issue is real, and that's the best reason to consult an advisor with elder planning experience about how to title the assets. Just throwing the extra information in here in case it's useful to someone.
VTINX is 30% equities, so that $100k can very easily become $85k.
OP's mom will presumably be making withdrawals of around 4% each year; in other words, treating it like an annuity rather than a lump sum to spend at once. A 50% loss of value in stocks would mean a drop of about $600 in one yearly withdrawal in that situation. Without much margin, everything becomes trickier, but her time horizon isn't one year; it's 20. My mom wasn't affected by last year's drop at all, and in this situation a very modest separate cash cushion would spare the need to sell stocks in a year when they are drastically down. You can't have a person in all bonds or cash before they're even 65, unless they're terminally ill.
posted by praemunire at 11:26 AM on March 21, 2021 [4 favorites]
I'm not an accountant, but I'm almost certain that gifts do not have any financial implications for normal people. You have to file a gift tax return above a certain amount per person per year, but you don't pay any actual tax unless you give away at least $11+ million in your lifetime (which goes to show how absurd the whole "death tax" thing about "family farms" is, the only people paying it are multi-multi millionaires).
I would ask what the purpose of the money is. A 65-year-old woman in the US has a 20 year average life expectancy, so she likely has at least one decade, possibly three. Even if you drew extremely aggressively on it at 10%, that would not, by itself, yield more than $10K a year, and would be exhausted pretty quickly. So if the goal is to enable her to retire independently, you may have to make it part of a longer term plan. You do want to make sure she gets signed up for Medicare Part B, in the year before she turns 65, if possible, as there are significant penalties for delaying after you eligible. But as others have noted, the Medicaid asset requirements for nursing home care are very strict. In a lot of states you can keep your primary residence (but only if you already own it), a car, and prepaid funeral arrangements, but almost nothing else. Is it important for you (or her) that she feel independent? Because while there are often a lot of tax benefits to owning a home, it's almost certainly better for you to do so on her behalf.
praemunire is right about Social Security making you ineligible for a lot of benefits. I have a relative receiving an extremely modest SSI check (below full-time minimum wage in many states) and they are not eligible for anything in their state. The poverty trap is a real thing. So Medicaid eligibility might be the only thing you have to worry about. But this is obviously pretty complicated. I would look for someone who specializes in Medicaid eligibility, they can help you figure out the best way to do this.
posted by wnissen at 11:34 AM on March 21, 2021
I would ask what the purpose of the money is. A 65-year-old woman in the US has a 20 year average life expectancy, so she likely has at least one decade, possibly three. Even if you drew extremely aggressively on it at 10%, that would not, by itself, yield more than $10K a year, and would be exhausted pretty quickly. So if the goal is to enable her to retire independently, you may have to make it part of a longer term plan. You do want to make sure she gets signed up for Medicare Part B, in the year before she turns 65, if possible, as there are significant penalties for delaying after you eligible. But as others have noted, the Medicaid asset requirements for nursing home care are very strict. In a lot of states you can keep your primary residence (but only if you already own it), a car, and prepaid funeral arrangements, but almost nothing else. Is it important for you (or her) that she feel independent? Because while there are often a lot of tax benefits to owning a home, it's almost certainly better for you to do so on her behalf.
praemunire is right about Social Security making you ineligible for a lot of benefits. I have a relative receiving an extremely modest SSI check (below full-time minimum wage in many states) and they are not eligible for anything in their state. The poverty trap is a real thing. So Medicaid eligibility might be the only thing you have to worry about. But this is obviously pretty complicated. I would look for someone who specializes in Medicaid eligibility, they can help you figure out the best way to do this.
posted by wnissen at 11:34 AM on March 21, 2021
My mom went through this kind of planning with my grandmother. I think an elder law/elder care attorney would be a good idea, because there are financial and legal implications that intersect and some strategic planning may be needed. They would also be a good resource for age-appropriate financial planning referrals.
posted by *s at 12:30 PM on March 22, 2021 [1 favorite]
posted by *s at 12:30 PM on March 22, 2021 [1 favorite]
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If you segregate cash of your own, within your accounts, to mentally classify as “MIL’s”, I think a target date is a good enough investment, but it bears more risk than I might want to if I were in your shoes.
Jane Bryant Quinn’s books (How to Make Your Money Last, especially) are probably useful but, in any case, before paying a financial advisor, try asking at Bogleheads.
posted by mahorn at 1:24 AM on March 21, 2021 [3 favorites]