84 year old help

[sdvan]

My father recently passed away and my mother has asked me to help her figure her finances. The bottom line is that she has about $550k in assets, not including her house and a small mountain cabin. Social security provides about $20k/year. I'm still getting my arms around annual spending. But, my guess is that they were around $25-30k. She could actually travel a bit more now, so any decrease without my dad will probably be matched with more travel.

My instincts are principle preservation at this age. So, I'm thinking of putting

$20k into a checking account
$50k into ally bank savings account at .9%
$480k into 1-3 year cd ladder primarily at penfed
1 year is 1.25%
2 year is 1.65%
3 year is 1.85%
$22k is in total market index fund at vanguard and I'd probably leave it there for now.

I may need to move some money out of penfed to maintain FDIC insurance. But, with some of the money in an Ira, I may be ok with most at penfed.

Any spending needs would come from $70k in cash accounts plus social security. I would replenish each year from maturing CDs.

All thoughts welcome!

[letsgobobby]

She could spend $20k per year and the money would last nearly twenty years, and she would have more income than she needs, so I agree with the idea of a very conservative portfolio. On the other hand, she can afford to take some risk; say a 33/67 portfolio that throws off 2% per year and thus will never run down but would still see some growth.

It is also probably fair to ask if your mom wants to leave you or others money as a primary objective, or wants to spend everything.

Also, if longevity runs in her family, you need a plan to handle unanticipated inflation. I think that makes her a good candidate to buy the maximum I bonds each year, so at least $10,000.

[sdvan]

I don't think I could talk her into putting any more into the market. And, to be fair, I don't think she needs to take on any risk. If she lives to be 100, she could take out double her current spending needs (including social security) and still have enough to last all that time. Why take on any market risk for a maximum15 year or so time horizon?

[rickmerrill]

I think the reason the question was asked was to see if she was interested in investing more aggressivly so as to generate more assets for those who will eventually inherit. Sometimes those in a position to do so intentionally invest as if their investment horizon was that of their heirs. If she is uncomfortable with experiencing a large loss then you are making the right decision.

[sdvan]

Ok, that makes sense. She is very conservative as my folks did somewhat poorly under a churning financial advisor years ago. It was all I could do to get them into the 22k total stock fund 7 years ago. Now that it is just my mom and she is 84, I think it is best just to stick with asset protection.

[rickmerrill]

It is great that she knows what is going on with her investments and still is ready to travel. Sounds like you are truly a help to her.

[Bob's not my name]

If she lives to be 100, she could take out double her current spending needs (including social security) and still have enough to last all that time.

Depending on where you live, assisted living can cost $100,000/year.

[NYBoglehead]

OP,

I think your plan is a good one. No need to take undo risk at this point, preservation of assets should be the priority. For those who mentioned the potentially high cost of health care, the OP's mom has plenty of assets to support her current spending needs and he mentioned that the dollar amount of assets did not include her home or mountain cabin, so while we there are no certainties in life, it seems his mom is more adequately prepared than most to deal with those uncertainties.

[sdvan]

Thanks for all the comments. This list is always great for helping me make sure that I've thought through all of the potential issues. One nugget that I can contribute is that I checked on NCUA deposit insurance limits and learned that they are expanded by the number of beneficiaries, if the account is in the name of a Trust. As a result, I will be able to put all of the money that I want in CD's into Penfed and it will all be insured. That will simplify matters and Penfed definitely has the highest CD rates that I can find for 1-3 year CDs.

[MathWizard]

I think you have a good plan.

If she plans to travel, I would budget for her do it soon, so maybe allot $30K for travel in
the next 5 years, since it will not be long and travel will be the last thing she wants to do
other than visiting relatives. Priorities change.

I expect to do most of my post-retirement travel in the first 10 years, so that by 80,
there will probably be no "place" I want to go, I'll just go to see people, or they will
come to me. Travel is very tiring unless you are young.

[Dandy]

You might look at whether the cabin fits her current needs especially if it is out of state. I went through a lot of trouble trying to sell my father's home in Fla when mom went on Medicaid. They lived up north so I was compelled to sell. What a hassle. If you love/use it yourself maybe getting the title in your name (and any other children's names) will make life easier.

She seems to have enough assets to last her. I wouldn't get to aggressive.

[strafe]

If she is that risk averse, consider purchasing an immediate annuity. A $1,000/month annuity (roughly equal to her expenses above and beyond social security) at her age costs about $100,000 -- a little more if you opt for a beneficiary payout guarantee. That frees up the remainder of the portfolio for riskier investments for bequests, etc.

[sdvan]

It is interesting that you mentioned a possible annuity. Here are the reasons why I decided that an annuity did not make sense in this situation. I have not studied annuities because I was always turned off by the fees. But, it looks like I may need to be a little more educated now.

Buying an annuity for $100K with a $1K/month payout would mean that we would only see return of principle for the first 8+ years, right? We'd be buying $12K/year for her life only, right? She'll be 85 at the end of the month. It seems like the odds of seeing a decent return are small at this age. In addition, with interest rates at historic low levels, wouldn't an annuity lock in those rates? In contrast, putting the same $100K in a CD would get me federally insured interest, plus return of principle. I'm calculating that even the meager interest rates now would generate around $9K/year with my plan. Combine that with around $8K in required minimum distributions from a few IRA accounts plus social security and she has $37K per year to spend when her past spending has been in the $25-30K/year range. If she needs more income, she can always spend a maturing CD, recognizing that she will be lowering her interest income a bit. But, at bottom, even if she lives to be 100, she could take out nearly $40K/year from assets plus $20K social security and not run out of money. It seems like the most conservative thing to do is put the money in CD's and let her live off the interest while taking up to 1/15th of the account (she will very very likely take out nothing or 1/60th or something each year).

Perhaps I am not understanding annuities. If so, please help me understand better.

[joe8d]

It is interesting that you mentioned a possible annuity. Here are the reasons why I decided that an annuity did not make sense in this situation. I have not studied annuities because I was always turned off by the fees. But, it looks like I may need to be a little more educated now.

Buying an annuity for $100K with a $1K/month payout would mean that we would only see return of principle for the first 8+ years, right? We'd be buying $12K/year for her life only, right? She'll be 85 at the end of the month. It seems like the odds of seeing a decent return are small at this age. In addition, with interest rates at historic low levels, wouldn't an annuity lock in those rates? In contrast, putting the same $100K in a CD would get me federally insured interest, plus return of principle. I'm calculating that even the meager interest rates now would generate around $9K/year with my plan. Combine that with around $8K in required minimum distributions from a few IRA accounts plus social security and she has $37K per year to spend when her past spending has been in the $25-30K/year range. If she needs more income, she can always spend a maturing CD, recognizing that she will be lowering her interest income a bit. But, at bottom, even if she lives to be 100, she could take out nearly $40K/year from assets plus $20K social security and not run out of money. It seems like the most conservative thing to do is put the money in CD's and let her live off the interest while taking up to 1/15th of the account (she will very very likely take out nothing or 1/60th or something each year).

Perhaps I am not understanding annuities. If so, please help me understand better.

+1
I agree with your thinking on this.

[grabiner]

If she lives to be 100, she could take out double her current spending needs (including social security) and still have enough to last all that time.

Depending on where you live, assisted living can cost $100,000/year.

Does she have a long-term care policy (and is she still in good enough health to get one)? This would be important for protecting against the risk that she will be in good health until age 95, spending much of her portfolio, and then need five years of assisted living or nursing care.

The main benefit of the long-term care policy is that it preserves her inheritance, and that appears to be something she wants to do; without it, she would have to spend most of her assets if she needs care for five years.

[letsgobobby]

It is interesting that you mentioned a possible annuity. Here are the reasons why I decided that an annuity did not make sense in this situation. I have not studied annuities because I was always turned off by the fees. But, it looks like I may need to be a little more educated now.

Buying an annuity for $100K with a $1K/month payout would mean that we would only see return of principle for the first 8+ years, right? We'd be buying $12K/year for her life only, right? She'll be 85 at the end of the month. It seems like the odds of seeing a decent return are small at this age. In addition, with interest rates at historic low levels, wouldn't an annuity lock in those rates? In contrast, putting the same $100K in a CD would get me federally insured interest, plus return of principle. I'm calculating that even the meager interest rates now would generate around $9K/year with my plan. Combine that with around $8K in required minimum distributions from a few IRA accounts plus social security and she has $37K per year to spend when her past spending has been in the $25-30K/year range. If she needs more income, she can always spend a maturing CD, recognizing that she will be lowering her interest income a bit. But, at bottom, even if she lives to be 100, she could take out nearly $40K/year from assets plus $20K social security and not run out of money. It seems like the most conservative thing to do is put the money in CD's and let her live off the interest while taking up to 1/15th of the account (she will very very likely take out nothing or 1/60th or something each year).

Perhaps I am not understanding annuities. If so, please help me understand better.

you are comparing apples and oranges. If you put $500k in an annuity, you will get $60k per year in income, forever (using your figures). The advantage is your mom can't run out. The disadvantage is that her heirs will get nothing. Your plan actually makes her situatio more risky, and yours potentially better. That is not to say you are wrong in your decision.

[sdvan]

you are comparing apples and oranges. If you put $500k in an annuity, you will get $60k per year in income, forever (using your figures). The advantage is your mom can't run out. The disadvantage is that her heirs will get nothing. Your plan actually makes her situatio more risky, and yours potentially better. That is not to say you are wrong in your decision.

I see the point of security for her. But, I also think she would think it was a very bad deal. After spending a lifetime amassing $550K to use at age 84 (actually 85 this month), she would be giving it up with zero return for over 8 years. In her current situation where she has enough assets to spend nearly double her historic spending levels with federally insured CD's, the annuity seems like a huge waste of a life long effort.

[Watty]

One thing I didn't see mentioned was what the money is currently invested in and if it would generate any taxes or fees if she sells her current investments to move the money around. I would assume that it might not but that would be worth confirming.

Putting $10K a year into i-bonds would likely be worth doing.

It would be good for her to review all the beneficiaries on her accounts and her will have those updated if they still list your dad.

[Bob's not my name]

with some of the money in an Ira

If you are confident she'll outlive her assets then converting any traditional IRAs to Roth, paying the tax out of taxable assets, is sound estate planning. This effectively increases the size of the IRA, preserves the IRA by stopping RMDs, and provides a superior inheritance to the heirs. This would also reduce the size of the estate -- some states have estate taxes with low exemptions, $1M being typical.

When she is older you may wish to consider long-term (10-40 year) brokered CDs with death puts. The rate will be higher than short term CDs, and the death put feature (aka survivor option or flower provision) allows you to liquidate at par even if interest rates have risen, so effectively it's a short-term CD with a long-term rate. If interest rates fall you can sell at a premium instead of exercising the death put. You will need one copy of the death certificate for each death put. I used this strategy to earn 4-6% on FDIC-insured CDs over the past year -- I bought them on the secondary market at discounts and am liquidating at par.

[sdvan]

One thing I didn't see mentioned was what the money is currently invested in and if it would generate any taxes or fees if she sells her current investments to move the money around. I would assume that it might not but that would be worth confirming.

Putting $10K a year into i-bonds would likely be worth doing.

It would be good for her to review all the beneficiaries on her accounts and her will have those updated if they still list your dad.

The money is currently in a mix of aftertax CD's and straight savings accounts (my Dad was a very, very conservative investor), IRA's with CD's, and $22K in an IRA holding total stock market index fund (this was all I could talk them into putting in the market 7 years ago when they pulled everything out of Ameriprise after a less than happy experience). I also recently discovered 2 annuities that I asked about in another thread. I've asked for copies of the contracts for those annuities so I can make sense of them. They haven't paid anything out yet other than RMD on one of them that is in an IRA for my Dad. Odd to me, but I'm not an expert on annuities . . . yet.

What do you see as the advantages of putting money into i-bonds for her? She wouldn't be able to use the interest unless she sold and the 2nd 6 months interest rate is an unknown and could be lower than the going CD rates.

I am reviewing beneficiaries, etc. Lots to do with this stuff. Thanks for your thoughts!