Mom asking for my advice

[kyounge1956]

This past summer, my mom sold her house and downsized into an apartment in a retirement community. She is asking my advice about what to do with the money she has left from the sale of the house after paying the buy-in for her apartment. The basic parameters: mom turned 87 earlier this month, has no immediate need to generate income from the money, and is dead set against owning any type of stocks. Someone is suggesting a form of deferred annuity to her. I haven't seen the details but it sounds like one of those "it's like a CD only it gets better interest" things. She has been told that 10% of the money can be taken out each year without penalty, or more than that under certain other conditions (e.g. needing long-term care). I'm very suspicious and have mentioned the possibility that there are hidden fees, but I'm not getting very far. I will be seeing Mom this weekend and asked her if she has seen the actual contract--she hasn't but hopefully she will ask for a copy or she will have enough information that I can find it online. Somehow it just seems crazy to me for an 87-year old woman to buy a deferred annuity, but if I can't come up with a better suggested replacement than bank CD's I think probably she will. How hard should I be trying to talk her out of this?

 

[Sarah in SC]

What about some bond funds?
I'd really stick with CDs if she will agree. That is all my mother in law has and I'm very grateful that she hasn't gotten any other ideas.

 

[brewer12345]

Much more appropriate would be I bonds and pen fed 2% 4 year CDs.

 

[pb4uski]

It sounds like she is being pitched a SPDA. The issue I would have with them is surrender penalties if she ever wants ready access to her money. Most do have an annual 10% free-withdrawal but surrender penalties woudl typically start at 5-10% or more and grade down over 5-10 years.

I would prefer the PenFed 2.02% CD (1/2 year of interest or 1% withdrawal penalty IIRC) or perhaps some target maturity bond funds if she won't have anything to do with stocks. If she is willing to be a little more adventurous, then pssst....

 

[kyounge1956]

The Pen Fed CDs are a higher interest rate than the annuity. I can suggest that but she doesn't like computers and probably won't like the military connection either.

I don't think I bonds are an option. The amount of money is well over the annual limit, and there is a penalty if the bonds are cashed within the first five years. Target maturity bond funds are outside my area of knowledge...I've heard of their existence, but that's all I can say.

 

[haha]

Does she really want your advice, or just a chance to maybe offload some responsibility?

It can be easy for an old person to imagine that a child's advice can be self interested.

These are usually frustrating and not particularly pleasant interchanges.

Ha

 

[clifp]

My mom is also 87 (88 next month), and like yours, she does really
doesn't need the income since my dad's pension, social security, plus my niece repaying the mortgage cover the cost of her retirement home. I have been handling her finances completely for 5 years and given extensive advice for the last 15 so the situations aren't exactly comparable.

That said this maybe the ideal time to step up and offer to help her with finances. It is really hard for you (much less us) to give her specific investment advice without the big picture.

Remind mom that at her age there is an entire army of folks waiting to take advantage of the elder's, failing vision, poor hearing (and yes diminished capacity). It would be really helpful if you or another one of her children were involved. She may welcome the help (or may not ). If she does than I'd suggest you divide her money into two piles. One has enough to pay for full nursing care in the community for a period of 2+ year. This should be invested only in something like CDs or short term bond fund that are very safe and very liquid, which excludes the annuity, since you have to figure that a intensive care at a nursing home is $100K+ a year.

The reminder of the money is her legacy money and it can be invested more aggressively to benefit you and any sibling, grandchildren etc.

But it make no sense for an 87 to get a deferred annuity. When you are 87 you no longer need to save for a rainy day. That day has arrived.

 

[2B]

It can be easy for an old person to imagine that a child's advice can be self interested.

These are usually frustrating and not particularly pleasant interchanges.

Ha

When FIL was officially diagnosed with Alzheimer's, DW reluctantly took over complete financial control of her parents' assets. To pay for their care the house was sold but a friendly ex-neighbor told asked my FIL about who her new neighbors were going to be. She had been told about my FIL's condition but she was obviously not far from being there herself.

FIL went crazy, accused us of trying to steal his money and treatened to sue us with "the meanest lawyer in town." Fortunately, he called a family friend well aware of his and MIL's situation. My wife explained the situation and everything went away after I put together a phony Quicken printout showing he had over $1MM. In a few more months he degenerated beyond caring so he never asked for a financial update again.

 

[2B]

But it make no sense for an 87 to get a deferred annuity. When you are 87 you no longer need to save for a rainy day. That day has arrived.

I have to disagree. It makes perfect sense for an 87 yo to get a deferred annuity if you are the one selling it.

My FIL bought two of them around age 75. I suspect he already had the early stages of Alzheimer's. One had an "assisted care" clause so we avoided the redemption fees.

 

[kaudrey]

At 87 and she doesn't need the money, what's wrong with CDs?

 

[jerome len]

Could you suggest a dividend ETF that would give her an income that grows each year? Let her know that, yes, she could lose money but the growing dividends would allow her to spend a little extra on kids, grandkids and friends each year. Good luck! And, over a period of years, she'd probably make a bunch of money as well.

 

[pb4uski]

The Pen Fed CDs are a higher interest rate than the annuity. I can suggest that but she doesn't like computers and probably won't like the military connection either.

I don't think I bonds are an option. The amount of money is well over the annual limit, and there is a penalty if the bonds are cashed within the first five years. Target maturity bond funds are outside my area of knowledge...I've heard of their existence, but that's all I can say.

You could offer to do the computer work for her and downplay the military connection - its just a DC area credit union with a funny name. FWIW, my 83 yo mother has no interest in investing. That was Dad's department and once he passed I took over. Similar to your Mom, her SS and real estate net income more than cover her living expenses. She hasn't really asked me a question on investments since we transitioned everything to VG ~2007 - even through the great recessions she never asked how things were (thankfully). Since she doesn't "need" the money, I invest it pretty similarly to my portfolio (60/40) and it has done well.

The target maturity bond funds are like owning a minor ownership interest in a diversified portfolio of individual bonds that all mature in the same year. So in the long run, you get your proportional percentage of interest income, any credit losses, and maturity proceeds at the end of the year that the bonds mature. I view them as somewhat in between a CD (some credit risk, some interest rate risk if you bail early) and a bond fund (less interest rate risk if held to maturity since the bonds all mature in the same year the duration shortens over time). I have about 1/2 of my fixed income allocation in target maturity bond funds and am moving more later this year.

As an example, the 2018 Ishares product sports a yield of 1.72% based on current pricing and the 2018 Bulletshare product is 1.78%. Since there are a number of banks offering CDs in the 2% range I would favor them over the target maturity bond fund if 5 years is your time horizon, but the 1.73-1.78% is better than many bank's 5-year CD yields, albeit with different risks.

 

[Hamlet]

+1

If she doesn't want stocks, I'd try to get her to just stick with CDs.

Everything else is just more complicated or an opportunity for a salesman to take advantage of her.

Here is hoping physical harm comes to the snake oil salesman trying to sell her a deferred annuity.

At 87 and she doesn't need the money, what's wrong with CDs?

 

[FinanceDude]

She is probably disappointed at the CD rates at the bank. My bank has a 3 year CD at 1.10%..........

 

[Hamlet]

What is really funny is that most people would be happy with a 4% CD in a 5% inflation environment, but hate a 1% CD in a 2% inflation environment.

People seem to have a difficult time accepting that its rare in any environment to get a lot of real return without accepting some real risk.

Annuity salespeople sure manage to trick a lot of people into thinking they are going to get more return than they really are.

She is probably disappointed at the CD rates at the bank. My bank has a 3 year CD at 1.10%..........

 

[akck]

Not that I'd do it as it's more risky than stocks, but precious metals and foreign currency are options.

What are her goals for the funds? Is it ultimately for an inheritance, grandkids education? She can set up a 529 Savings plan for the grandkids/great grandkids.

 

[pb4uski]

She is probably disappointed at the CD rates at the bank. My bank has a 3 year CD at 1.10%..........

You could cash it out and buy a 2.02% 3-year PenFed CD.

 

[clifp]

What is really funny is that most people would be happy with a 4% CD in a 5% inflation environment, but hate a 1% CD in a 2% inflation environment.

People seem to have a difficult time accepting that its rare in any environment to get a lot of real return without accepting some real risk.

Annuity salespeople sure manage to trick a lot of people into thinking they are going to get more return than they really are.

While I agree that people tend to forget about inflation. We haven't had 5+% inflation since 1990 and CD rates were a lot higher than. But we had 5% CD in Jan 2011 from PenFed. I don't believe savers have ever face a longer period of negative real returns as we have been seeing since the great recession.

 

[rodi]

It can be easy for an old person to imagine that a child's advice can be self interested.

These are usually frustrating and not particularly pleasant interchanges.

Ha

We're dealing with this right now with MIL. Her dementia required my husband to get guardianship and she threatens to sue us regularly. We just keep providing her very accurate records showing her net-worth is growing.
(No fake quicken reports).

But the distrust is there. Ironically, she trusts the one child who has stated he wants her money for her own purposes (rather than getting a j*b). But that's another story.

 

[Hamlet]

I agree that real rates are lower than normal (given the situation, I think they should be). I'm just saying its not as dramatic as the nominal rates suggest. We've got inflation rates that are lower than they've been in my lifetime.

The idea that people could live off of the interest of risk-free investments and not erode their principle has always been untrue.

While I agree that people tend to forget about inflation. We haven't had 5+% inflation since 1990 and CD rates were a lot higher than. But we had 5% CD in Jan 2011 from PenFed. I don't believe savers have ever face a longer period of negative real returns as we have been seeing since the great recession.

 

[Dawg52]

I would recommend just staying with CD's at her age. My mom did but she had a nice income stream coming in from SS and my from dad's pension. So she didn't need to get creative to boost investment income. Sounds like your mom doesn't need to either.

 

[imoldernu]

While I know the question was about investment, I would suggest a consultation with an "elderlaw" geriatric lawyer, as you are sitting on the top of a a situation that will eventually involve many, many more questions that could affect her life, and that of loved ones.
An early investment of about $200 for a short consultation with an experienced geriatric lawyer could pay off in saving many, many hours of frustration, and almost assuredly save many dollars, both for your mother, and any others who may be involved in her care.

So many details that are important... even if she lives to beyond age 100. Wills and trusts are only a small part of the legal questions that can arise. Power of attorney... even if not wanted today, is something to understand and be prepared for.

Beyond that preliminary consultation, if her estate warrants protection, it would be comforting to all involved, if a lawyer were kept on retainer... to be available for consultation.

From some personal experience, the initial price for legal advice, was repaid 1000 times over, in avoiding an easy, simple, legal loophole that involved a relative.
........................................................

Re: I bonds
The first $10,000 ... the legal limit for Ibonds per year..., is currently paying 1.38%...The value is in security and protection against inflation (CPI based)... and the downside for early withdrawal is three months interest... $34 at today's rate.
........................................................
As always... am open to correction on any of these points...

 

[Jackanory]

Don't forget to keep some of those funds in really short term CD's so the funds are available now!

These savings account rates look quite reasonable too: Top 10 High Yield Savings Accounts | NerdWallet

 

[MRG]

While I know the question was about investment, I would suggest a consultation with an "elderlaw" geriatric lawyer, as you are sitting on the top of a a situation that will eventually involve many, many more questions that could affect her life, and that of loved ones.
An early investment of about $200 for a short consultation with an experienced geriatric lawyer could pay off in saving many, many hours of frustration, and almost assuredly save many dollars, both for your mother, and any others who may be involved in her care.

So many details that are important... even if she lives to beyond age 100. Wills and trusts are only a small part of the legal questions that can arise. Power of attorney... even if not wanted today, is something to understand and be prepared for.

Beond that preliminary consultation, if her estate warrants protection, it would be comforting to all involved, if a lawyer were kept on retainer... to be available for consultation.

From some personal experience, the initial price for legal advice, was repaid 1000 times over, in avoiding an easy, simple, legal loophole that involved a relative.
........................................................

+1

Some of the best advice I've ever read. Elder issues can be very complex, vary by state, and can have long lasting responsibility.

Best wishes,

MRG

 

[Walt34]

While I know the question was about investment, I would suggest a consultation with an "elderlaw" geriatric lawyer, as you are sitting on the top of a a situation that will eventually involve many, many more questions that could affect her life, and that of loved ones.

I very strongly second that advice. Despite the seemingly high fees, the attorney and the Medicaid paralegal in the office has saved us from making mistakes with FIL's issues that would have been much more costly than the fees.

Not to mention the mental anguish of finding our own way through the maze of legalities with Medicare and Medicaid.

This is NOT do-it-yourself stuff.