how to save/invest on someone else's behalf
October 11, 2019 3:03 PM Subscribe
I have just inherited around $150,000 and want to earmark this money for the care of an elderly relative. Assuming that I will be withdrawing around $500 a month for his general expenses (cell phone, internet, etc.), but want to have the ability to make larger withdrawals if other expenses come up (moving, medical/dental expenses not covered by medicare), what kind of bank/investment account should I put this in?
The money is legally mine, and I am free to do with it as I see fit. The relative is not capable of managing his own finances and has no problem with the arrangement. I want him to have a monthly stipend to supplement his standard of living, and to save the rest for future potential expenses not covered by medicare. He is in his 70s and in good health. When he passes, if there is anything left, I would like to be able to use the money for my kids' education or my own retirement. I am in the U.S.
So it would be great to be able to grow this investment, or to be able to draw off only the interest, but I want something with lower risk, and something that I could get out of in a reasonably short time period if necessary. So maybe significant income is not realistic. CDs? Money market? Anything I can do that will minimize my own tax exposure would also be nice. I've never invested in anything but index funds for retirement before, so not really familiar with what people do for shorter timelines.
The money is legally mine, and I am free to do with it as I see fit. The relative is not capable of managing his own finances and has no problem with the arrangement. I want him to have a monthly stipend to supplement his standard of living, and to save the rest for future potential expenses not covered by medicare. He is in his 70s and in good health. When he passes, if there is anything left, I would like to be able to use the money for my kids' education or my own retirement. I am in the U.S.
So it would be great to be able to grow this investment, or to be able to draw off only the interest, but I want something with lower risk, and something that I could get out of in a reasonably short time period if necessary. So maybe significant income is not realistic. CDs? Money market? Anything I can do that will minimize my own tax exposure would also be nice. I've never invested in anything but index funds for retirement before, so not really familiar with what people do for shorter timelines.
You can also call up Vanguard and talk to one of their financial advisors. They provide (or used to) a free consultation for an investment of that size.
posted by Arthur Dent at 3:35 PM on October 11, 2019
posted by Arthur Dent at 3:35 PM on October 11, 2019
You're going to need a 4.6% return to cover the stipend and the capital gains. That's hard to achieve with todays crazy low interest rates without some level of principal risk. I don't think CDs or money markets will get there for you. Maybe some mixture of bonds and stocks with some amount in a high interest saving account (high interest here being around 2%) The money in the savings isn't for income generation but to draw down to cover any shortfalls or extra expenses. Recommendations to talk to a financial planner make sense. Don't rely on my advice. It's just meant to give you an idea of what you're probably looking at.
posted by willnot at 4:00 PM on October 11, 2019 [3 favorites]
posted by willnot at 4:00 PM on October 11, 2019 [3 favorites]
Some investment brokers (Fidelity, Schwab, Vanguard and others) have started offering index mutual funds with no fees. They're loss leaders, but there's no requirement to purchase anything else. They're more risky than a bond fund or a money market, but they have given bigger returns.
A good overview is here in the Times.
posted by Marky at 4:50 PM on October 11, 2019
A good overview is here in the Times.
posted by Marky at 4:50 PM on October 11, 2019
Vanguard Target Retirement Income has returned roughly around the range you'd need since inception, at least to roughly maintain the nominal value of the investment. The first big thing to understand is that there is no guarantee of that return and you could indeed lose principal. If your relative is dependent on the money coming in on a regular basis, they are very vulnerable to short-term market movements. However, you only actually experience a loss when you actually sell shares--so you might want to do is set aside a year's worth of cash in a CD or high-yield savings account. This small portion of the funds will automatically lose money, at least in real terms as against inflation, but it will guard against having to sell shares when the market is drastically down.
The second big thing to understand is that, even if you preserve the nominal value of the investment, inflation will steadily reduce both the value of the payment to your relative (if it's fixed) and the remaining principal. That is, what that $500/mo. will buy your relative will drop predictably each year as prices rise. So will what the (e.g.) $150K will buy you after the relative is gone. You actually need a return of the ~5.6% plus inflation, and that definitely requires riskier investments, which, because it will expose you to market swings, will be increasingly hard to square with your relative's relatively short time horizon and need to make regular withdrawals.
I would recommend talking to a fee-only financial planner not merely to try to work out the best compromise on this, but also to see if it doesn't make sense to put the money in some other entity to avoid you, a relatively high-earning person, having to recognize the capital gains each year. This requires careful thinking, because putting the money in your relative's name means almost all that money will have to be spent before he can get Medicaid to pay for a nursing home. So you need someone with experience with seniors.
posted by praemunire at 5:44 PM on October 11, 2019
The second big thing to understand is that, even if you preserve the nominal value of the investment, inflation will steadily reduce both the value of the payment to your relative (if it's fixed) and the remaining principal. That is, what that $500/mo. will buy your relative will drop predictably each year as prices rise. So will what the (e.g.) $150K will buy you after the relative is gone. You actually need a return of the ~5.6% plus inflation, and that definitely requires riskier investments, which, because it will expose you to market swings, will be increasingly hard to square with your relative's relatively short time horizon and need to make regular withdrawals.
I would recommend talking to a fee-only financial planner not merely to try to work out the best compromise on this, but also to see if it doesn't make sense to put the money in some other entity to avoid you, a relatively high-earning person, having to recognize the capital gains each year. This requires careful thinking, because putting the money in your relative's name means almost all that money will have to be spent before he can get Medicaid to pay for a nursing home. So you need someone with experience with seniors.
posted by praemunire at 5:44 PM on October 11, 2019
BTW, there's no need to fixate on funds "without fees." Target Retirement Income charges .12% a year (and that's mostly paying for the convenience of not having to handle all its component funds yourself; if you were to buy every underlying fund instead, it would be even less, but then you'd have to adjust your holdings yourself each year to maintain the target allocation, which is fussier than many people will want). That's already so low that you probably shouldn't be taking any meaningful tradeoffs to go lower.
posted by praemunire at 5:51 PM on October 11, 2019
posted by praemunire at 5:51 PM on October 11, 2019
I think you need to be realistic about this. If you plan on taking out $500 a month and your relative in good health lives until their 90s, it is likely that most or all of your $150,000 will be gone. Low risk investments simply won't provide for $500 of income each month. And those requirements will probably increase with inflation.
For a low risk investment you could put the money into the Vanguard Total Bond Index fund. But you should keep at least one year's expenses in cash. So starting out with something like $140,000 in the bond fund and $10,000 in cash, that is, a money market account. Direct the bond fund dividends into the money market account. Then, periodically, as the cash buffer depletes, sell some of the bond fund to replenish.
Great that you are supporting your relative this way, but go into it with realistic expectations.
posted by JackFlash at 7:20 PM on October 11, 2019 [1 favorite]
For a low risk investment you could put the money into the Vanguard Total Bond Index fund. But you should keep at least one year's expenses in cash. So starting out with something like $140,000 in the bond fund and $10,000 in cash, that is, a money market account. Direct the bond fund dividends into the money market account. Then, periodically, as the cash buffer depletes, sell some of the bond fund to replenish.
Great that you are supporting your relative this way, but go into it with realistic expectations.
posted by JackFlash at 7:20 PM on October 11, 2019 [1 favorite]
I’m not a financial advisor. You should consult one, though for $150k only, the relative cost will not be that cheap. Let me just point out some considerations to be helpful.
You have to consider taxes if you’re shooting for yield. Munis are a popular option, depending on your tax bracket. Just watch out for excess duration (or too much credit risk - I.e. low bond ratings), which means you don’t want to get burned if interest rates started hacking up.
You can also consider an immediate annuity, with your relative as the joint life. This is the simplest form of what you need, but without necessarily the efficient ability to pull out large lump sums. There are also bells and whistles that can make things complicated, which is why you might want to talk to a fee-based financial advisor. But it is one of the simplest options if you don’t want to learn a ton about investing.
Again, I’m not a financial advisor, and I’m not providing you any advice that should be deemed as such.
posted by ccl6yl at 9:13 PM on October 11, 2019
You have to consider taxes if you’re shooting for yield. Munis are a popular option, depending on your tax bracket. Just watch out for excess duration (or too much credit risk - I.e. low bond ratings), which means you don’t want to get burned if interest rates started hacking up.
You can also consider an immediate annuity, with your relative as the joint life. This is the simplest form of what you need, but without necessarily the efficient ability to pull out large lump sums. There are also bells and whistles that can make things complicated, which is why you might want to talk to a fee-based financial advisor. But it is one of the simplest options if you don’t want to learn a ton about investing.
Again, I’m not a financial advisor, and I’m not providing you any advice that should be deemed as such.
posted by ccl6yl at 9:13 PM on October 11, 2019
So your main goal is to withdraw $500/month for life (adjusted for inflation). You can do that. The safest way, I think, would be to invest in an inflation-adjusted security - Ibonds and TIPs. Without a return over inflation, you can still withdraw $500/month (increasing withdrawal for inflation) for 25 years.
So if $500/month is enough to cover current expenses and save for lumpy ones (moving, medical, etc) those are the safest way to do so. If you didn't NEED the $500/month, but it was only used for luxuries, I would recommend a conserve/early target date fund at Vanguard or Fidelity, as a way to easily get a potentially greater return for only slightly more risk.
If you aren't already, you should be transferring the max from these savings to a Roth IRA (currently $6,000/year) if you make under the maximum income. It's an automatic tax savings, you can withdraw principal at any time, and you can even withdraw earnings for college/first-time home purchase/high medical expenses/disability.
posted by exutima at 10:12 PM on October 15, 2019
So if $500/month is enough to cover current expenses and save for lumpy ones (moving, medical, etc) those are the safest way to do so. If you didn't NEED the $500/month, but it was only used for luxuries, I would recommend a conserve/early target date fund at Vanguard or Fidelity, as a way to easily get a potentially greater return for only slightly more risk.
If you aren't already, you should be transferring the max from these savings to a Roth IRA (currently $6,000/year) if you make under the maximum income. It's an automatic tax savings, you can withdraw principal at any time, and you can even withdraw earnings for college/first-time home purchase/high medical expenses/disability.
posted by exutima at 10:12 PM on October 15, 2019
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Sorry this isn't a direct answer to your question, I just think it's probably better to consult with a professional for things like this. There's a lot at stake.
posted by pdb at 3:17 PM on October 11, 2019 [1 favorite]