Need Help investing for 86 yr old mother

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Need Help investing for 86 yr old mother

Postby HoneyBee » Sun Apr 24, 2011 10:33 pm

Hi, I am new to the forum, but have had accounts with Vanguard for years. However, I need advice on investing my mother's assets.

She is 86 years old, a widow, and lives in assisted living.
Her income is limited to a small pension, social security and whatever her investments yield. Her annual gross income is approximately $30,000.

Her IRA has approximately $23,000 left in it. She takes the minimum distribution possible.

She has $186,600 in non-retirement investments, all at Vanguard. Because of some changes to her financial situation and sale of condo, she has a large amount in the Vanguard Prime Money Market Account. Her accounts/balances are as follow:

VWINX (Wellesley) $46,600
VFIX (GNMA) 30,000
VFIUX (Inter Treas) 15,000
VMMXX (Prime MM) 95,000

Because her assisted living costs are high, our goal is to stretch her savings as long as possible while minimizing risk. I know we need to invest the money sitting in the money market account but I welcome some advice on which funds to use.

Also, should we sell/move out of the GNMA or Treasury Fund?

Your suggestions are appreciated. HoneyBee
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Postby biasion » Sun Apr 24, 2011 10:45 pm

You should get out of wellesley because it is an active fund. It is index like but the incremental costs, trading costs, and overall allocation put you at more risk.

You really only need 4 funds. Keep 10% in Vanguard's total US, 10% total international or equivalent. These should be in taxable. Any investor, even the most conservative should have some stocks. There are times when stocks will do better. A 20% equity 80% bond portfolio has the same expected volatility as a 100% bond portfolio, but higher expected reward. Keep this in mind.

At this age more than 20% equity is risky, so keep it low, but present. The rest should be divided into 1-2 years living expenses in the money market, and then divide the remainder in half: half each in TIPS, half in intermediate treasuries.

GNMA's have done well, but if mixed with equities the risk of the incrementally higher yield is not worth it, IE, a GNMA/equity portfolio actually does worse than treasury/equity portfolio. And keep in mind GNMA's right now have very short durations due to low interest rates. But that won't protect you if rates rise, because just like a cocked gun, duration extends w/ rising interest rates, and then you're screwed. Corporate bonds have their own equity like risks, and have not really outperformed treasuries; the longer you go, the more they have actually underperformed as well.

Again, stocks are risky enough. Don't be lured by higher yields. A yield is NOT a return, and higher yield means higher risk. Stocks are risky enough; you keep some equity allocation for the volatility and rebalancing bonus, stay safe w/ the fixed as the incremental risks of duration, call risk and credit quality all three have historically never been rewarded vs plain jain treasuries. And when you already have stocks, while GNMA's might have outperformed treasuries over the last 20 years, a GNMA/stock portfolio has actually underperformed a treasury/stock portfolio because any risk in bonds will have them tank at the same time as stocks, depriving you of the rebalancing bonus and portfolio efficiency.

Good luck!
Last edited by biasion on Sun Apr 24, 2011 10:48 pm, edited 1 time in total.
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Postby pkcrafter » Sun Apr 24, 2011 10:46 pm

Welcome to the forum. You said your mom's income is about 30k, but what are her actual expenses? Is all of that going to the retirement home?


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Postby Bob's not my name » Mon Apr 25, 2011 4:51 am

Her assisted living costs presumably dwarf her income, so she'll pay no federal tax, and so the usual tax considerations are out the window. However, state tax effects may merit consideration. If she's in a no-tax state or a state that allows federal deductions, then she'll pay no tax of any kind.

Depending on where she lives, her assisted living costs may consume all of her assets in as little as three years. You didn't give us a number on that, but it's determinative.
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Postby biasion » Mon Apr 25, 2011 5:24 am

Another consideration might be to annuitize all this money.

She is one of the best candidates for an annuity because she is relatively late in life.

Annuities work and seem like a good deal because you pay your money and get a rate of return back that may or may not be indexed to inflation. The rate of return is usually a lot more than interest rates or current expected asset returns because every year, some people die off and the annuity company/insurance company keeps the money. Therefore, out of the original group, every year, it shrinks, so instead of an SWR of 4%, maybe you get 7%.

The older you are, the fewer people you tack on (spousal benefits etc) the higher your yearly benefit and rate of return. And since she is also much older, time is less of a consideration in terms of long term credit risk of the insurance company vs someone who is say 65 years old. Just another thought. At least that way you have somewhat more of a guarantee not to outlive the money. On the other hand then the money would most often go to the insurance company and she'd have no estate left when she dies. Shop around....
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Postby Bob's not my name » Mon Apr 25, 2011 6:26 am

In a similar recent thread, dpbsmith wrote:For a premium of $100,000, Vanguard's Income Solutions shows an available policy for an 85-year-old-woman that pays $950 a month the first year, increasing 3% per year thereafter, and several others in the same ballpark. In other words, a life annuity for an 85-year old woman can easily pay well over 10% of the premium per year.
The OP's mother probably needs at least $5,000 a month on top of her pension and SS to cover her assisted living costs. So she'll need to pay a premium of at least $500,000. She doesn't have that.
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Postby Bob's not my name » Mon Apr 25, 2011 6:45 am

biasion wrote:You should get out of wellesley because it is an active fund. It is index like but the incremental costs, trading costs, and overall allocation put you at more risk.
Costs don't put you at risk. Wellesley is not high cost in any case. You could do far worse than Wellesley.
biasion wrote:Keep 10% in Vanguard's total US, 10% total international or equivalent. These should be in taxable.
Since she'll pay no federal tax anyway, probably doesn't make any difference where you hold stocks. State tax may make a difference, but most states don't give favorable treatment to capital gains and dividends, while Treasurys are exempt from state tax, so the usual rule of thumb of stocks in taxable is probably turned on its head.
biasion wrote:1-2 years living expenses in the money market
This would appear to be the bulk of her funds, since she may have as few as 3 years' expenses.
biasion wrote:divide the remainder in half: half each in TIPS, half in intermediate treasuries.
I'm not sure either is appropriate for such a short time horizon. I recommend putting the bulk of her money in bank CDs that match up with her expected expenditures, e.g., first year's expenses in MM, second year's expenses in a one-year CD, third year's expenses in a two-year CD. It's more important that you focus on how you are going to cover her living costs when she runs out.

You could probably convert her entire TIRA to a Roth this year and pay no tax on the conversion. Again, state tax considerations may be deteminative. The only reason to do this would be for estate planning -- if she were to die in the near future (before exhausting her estate), an inherited Roth is superior to an inherited TIRA of the same dollar value.
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Postby Alex Frakt » Mon Apr 25, 2011 12:47 pm

My grandmother is in a somewhat similar situation (smaller savings, but her assisted living is much less expensive). I kept it simple and had her put everything into Target Retirement Income. All interest payments are forwarded to her checking account.

The expected time horizon is short enough that it is impossible to pinpoint "the best" asset mix. So why not go with TRI which has a very reasonable allocation, low costs and needs no external management?
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Postby Stonebr » Mon Apr 25, 2011 1:39 pm

Alex Frakt wrote:My grandmother is in a somewhat similar situation (smaller savings, but her assisted living is much less expensive). I kept it simple and had her put everything into Target Retirement Income. All interest payments are forwarded to her checking account.


This is essentially what my mother and I decided to do with her savings. It has been working well for many years.
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Postby BarbK » Mon Apr 25, 2011 2:25 pm

Bob's not my name wrote: The OP's mother probably needs at least $5,000 a month on top of her pension and SS to cover her assisted living costs. So she'll need to pay a premium of at least $500,000. She doesn't have that.


That is some high AL costs - 7.5K is more like Nursing home prices. AL cost is based on how many RDLs (required daily living) assistance is needed. I know the price escalates a lot after the basic ones; but I can't imagine it could reach $7.5K per month.

My mom (age 85) is in AL and is also similar financial situation - she has more assets but less monthly income; no pension, just SS and a dividend from Franklin Income Fund. Her IRA RMD is approx $6K per year. I WISH she had Wellesley instead of Franklin Income Fund - she lumped sum into it in June 2007 from the sale of her house and it has never fully recovered.
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Postby HoneyBee » Mon Apr 25, 2011 8:04 pm

HoneyBee here. As one poster presumed, my mother has no federal tax liability because of her assisted living costs. She pays little state tax either. Her total assisted living expenses are slightly more than her monthly income. My brother and I have helped out with the difference.

I used to have a chunk of her savings in CDs but then the rates fell so low it hardly seemed worth it and I did not renew. I had hoped to find a better return in a Vanguard Fund.

I had never considered an annuity. would it really be worth it at her age?
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Postby Duckie » Mon Apr 25, 2011 10:58 pm

HoneyBee, your mother has $186K in taxable and $23K in an IRA. She grosses $30K per year and needs just a little bit more for expenses. (And you and your brother are making up the difference. Stop doing that. She has enough to pay her own way for now.)

My recommendation is to put both the taxable and the IRA in VTINX, the Vanguard Target Retirement Income Fund. It's a one-stop shop with roughly 30% equity/70% fixed and a reasonable 0.17% er. You could have the taxable dividends funneled to her PrimeMM account and sell shares once or twice a year to cover the gap in expenses. Keep at least one year's worth of 'gap' expenses in the PrimeMM.

HoneyBee wrote:I had never considered an annuity, would it really be worth it at her age?

How is her health? How old were her parents/siblings when they died?
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Postby Bob's not my name » Tue Apr 26, 2011 4:32 am

HoneyBee wrote:Her annual gross income is approximately $30,000.
her assisted living costs are high
HoneyBee wrote:Her total assisted living expenses are slightly more than her monthly income.
$30,000 annually is $2500/month. If her assisted living expenses are only slightly higher than that (=$3000), that's not high at all. I've paid assisted living expenses in three states and it's always been at least $8000, but that's with a lot of services. If her costs are really that low then disregard my prior recommendations, but do consider converting her IRA to Roth in annual increments that are tax-free.

Is it possible her costs will suddenly jump to a much higher number if she needs more care?
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