Investment Advice for Elderly Friend

[km4hr]

The husband of a long-time family friend died two years ago. He managed the family investments and had essentially all assets (about a million) in US gov't bonds. She is about 80 years old and in excellent health. She has a pension that covers her expenses and no debt. She turned to me for advice on protecting/investing her money.

Many of her bonds, which had been paying 4-5 percent interest, have now matured. With bond rates so low now I haven't advised reinvesting in US bonds. I have been suggesting that she park the money in the Vanguard Prime MM fund for now, which she has done.

So far, I think my advice has been responsible with regard to safety of the money, but not with regard to investing (ie growing the money). Given the pitiful rate of return on the Prime MM fund I am considering a suggestion that some or all of the money go into the Short-Term bond fund (VBISX) and/or GNMA fund (VFIIX).

I'm over 50 years old and have some knowledge/experience in investing. If it were my money I'd feel better about taking some risk. But I think it would upset and disappoint my friend to see "losses" of more than a couple of percent.

Are the funds I mentioned reasonable alternatives to the Prime MM fund? Or is there a better, but ultra-conservative, way to improve upon Prime MM returns?

Maybe the most responsible advice I could offer would be for her to hire a financial planner but I've never felt the need to do that myself so I haven't suggested that to her yet.

 

[Running_Man]

One million dollars and no need for the money nor income from the money? If the former strategy was to invest 100% in government bonds and it led to a successful finances that they presently have why change the system? 2.5 percent on a 5 year treasury is still 67 percent more interest than would have been received in December. I would reccomend investing in that and avoid the risk of upsetting the individual.

In this case the conservative approach is totally appropriate from the facts you have laid out.

 

[Lusitan]

She's 80 and her expenses are covered by her pension; presumably SS is just gravy; no debt.

What is her goal with respect to this 1 million dollar portfolio?

I would be concerned about the lack of FDIC insurance on any money market fund (although it's a very small risk, still it's a risk).

If her husband was conservative enough to keep the money invested in govt bonds, I don't see why she should change that strategy right now, especially now that she's even older and appears to have little need for the money to grow. Life expectancies what they are, the most important thing may be just to keep up with inflation and maintain the stash for her estate planning bequests to her younger family members.

Basically, without a better idea of exactly what her goals are with respect to this money, I don't think I'd do anything other than invest in something solid like TIPS etc.

(Just like your advice to her, mine is worth exactly what you paid for it!

 

[jug]

Ok, 80 and in good health.

Does she have heirs, people she wants to leave money to? If she has a trust/will, great, if not make one.

Also, at her stage of the game, safety is number one, even with the pitiful rates of return that will most likely increase. Bonds and stocks are basically a crap shoot right now, since we do not know the real condition of the companies of issuance.

The answer to your question in more detail depends on whether she wants to spend out the money, or dole out the money upon death.

jug

 

[ziggy29]

The husband of a long-time family friend died two years ago. He managed the family investments and had essentially all assets (about a million) in US gov't bonds. She is about 80 years old and in excellent health. She has a pension that covers her expenses and no debt. She turned to me for advice on protecting/investing her money.

What is her longer-term goal for this money? ("Longer-term" being a relative term for an 80-year-old.) Does she plan on withdrawing from this pool of money for her own use? Or is this something that is intended to be primarily passed to heirs?

I think that would help determine whether it's appropriate to take a chunk of this and go for growth in somewhat riskier investment vehicles or if it should all be locked down into "safe stuff."

 

[CuppaJoe]

I agree with what the others say. Also, GNMA fluctuations might freak her out, they are on the high side right now.

 

[JOHNNIE36]

km4hr, so far so good heh? You mentioned in your post, that you haven't given her any advice about investing (ie growing the money). Do you really think she is interested in making the money grow? Why? At this point in her life, she should only be interested in protecting her nest egg and take the best interest rate she can get with maximum safety. I say shop around for the best CD rates at local banks in small towns. Funds are now protected up to $250k through 2013. That permits four CD's at different banks and takes care of $1m. I recently bought (2) 4 year CD's at 4.75%. Look at bankrate.com but don't use that as gospel as they don't post the best rates, just the rates banks pay them to post.

 

[FANOFJESUS]

If she wants more income Vanguard Target Retirement Income Fund (VTINX). She could do that without a crazy amount of risk. If she can handle a -10% drop, you might ask her that. But I think in her case CD's are the way to go.

 

[ziggy29]

Do you really think she is interested in making the money grow? Why? At this point in her life, she should only be interested in protecting her nest egg and take the best interest rate she can get with maximum safety.

Not necessarily. What if she intends to pass all of it to her heirs?

I would agree that if she plans to tap a significant portion of this money for her own use, it should be locked up in things like CD ladders and the like. But if this is something that will be passed to heirs, there's something to be said for going for growth with at least a fraction of it.

Though I'd also say that if I were in her situation (80 years old and with $1M lying around) and I didn't need the money, I'd be tempted to start gifting it to my heirs if it's not in a tax-deferred account. That's especially true if I didn't have long term care insurance.

 

[Bestwifeever]

Let her heirs worry about growing it later--just keep it safe imho.

 

[JOHNNIE36]

Not necessarily. What if she intends to pass all of it to her heirs?

I would agree that if she plans to tap a significant portion of this money for her own use, it should be locked up in things like CD ladders and the like. But if this is something that will be passed to heirs, there's something to be said for going for growth with at least a fraction of it.

Though I'd also say that if I were in her situation (80 years old and with $1M lying around) and I didn't need the money, I'd be tempted to start gifting it to my heirs if it's not in a tax-deferred account. That's especially true if I didn't have long term care insurance.

I agree with some of your thinking but what if that $1m would have been in stocks. What would it have been worth now? Apparently the lady and her husband were very conservative people. Don't think you'll talk her into stocks. I do think she ought to start giving it away now and watch the smiles on the faces of her children. She'll never see those smiles once she's gone.

 

[ziggy29]

I agree with some of your thinking but what if that $1m would have been in stocks. What would it have been worth now? Apparently the lady and her husband were very conservative people. Don't think you'll talk her into stocks.

I'm not necessarily talking about stocks, but anything where the principal value can fluctuate. I happen to think one of the best buys in fixed income are intermediate-term investment grade corporates. But they have interest rate risk and credit risk, and so part of the question is: are we trying to eliminate virtually all risk? Or just excessive risk?

I do think she ought to start giving it away now and watch the smiles on the faces of her children. She'll never see those smiles once she's gone.

There's something to be said for seeing the money used and appreciated in your lifetime. A woman in our church congregation put it into her will to give the church about $300,000 for the construction of a multi-purpose building that can be used for many church and community functions (she never married and has no familial heirs). Eventually, she decided that she wanted to see the building go up in her lifetime, so instead of leaving it for her will, she donated the $300,000 while still living. Well, last year the building that now bears her family name was dedicated, and one of the first events we held in it was a "party" celebrating her 90th birthday.

 

[tryan]

She's 80 with a million and all expences paid by a pension ... she should SPEND, SPEND, SPEND or gift it to her hiers while she's alive.

Come on people, you can't take it with you!

 

[km4hr]

Thanks for all your reply's.

Good to know everyone fully agrees with the type of investment advice I should propose.

My friend does have heirs and she has been gifting. She gives 10% of income to the church. She's very happy with her life. She's doesn't think about money much and doesn't want to. She mainly just wants to know that it's safe. She trusts my advice which bothers me. I want to help her avoid leaving money lying around if it could be doing more for her and her heirs with little if any additional risk. To me, not taking advantage of obvious opportunity is about the same as throwing money away. I like money to work as hard as it safely can. I don't care whose it is.

I'm really a little uncomfortable offering investment advice. I mean, if I lose my own money then nobody knows about it but me. I can possibly work to get it back or cut my expenses. But if I screw up with someone else's money then people I care about will know it and even get hurt. Therefore I'm more careful about her money than mine.

I think I'm going suggest that she let Vanguard perform one of their free financial plans. I know they'll suggest all Vanguard funds and that they will include stocks in the mix. But it would be good to go through the process and find out what the professionals have to say. That way it's not just my advice that she gets. I've done that with my own investments. Vanguard's advice seemed pretty reasonable and conservative to me.

I wish I knew more about CD's. I've done very little CD investing myself. When you put money into CD's that you see online and at bankrate.com do you actually send money to all the various vendors? Or is there some way to manage the CD's from one account? I'm uncomfortable having large amounts of money scattered all over the place. Especially at places that I've never heard of. Do you get free gensu knives when you purchase online?

Again, thanks for you time and consideration.

 

[mickeyd]

Giving investment advice to a friend, elderly or not, is one thing that drives me crazy. If I give incorrect advice, it may affect our relationship and the friend's health (how about those that recommended a Madoff investment plan?). I have a hard enough time getting my stuff straight. I would have no problem with directing the friend to Vanguard but after that they're on their own. I do not have the same problem with those that I am not friends with.

 

[freebird5825]

I'm a little late to the party...
Your friend is very lucky to have you helping her. She wouldn't be asking if she didn't trust you.
I'm glad to see you are consulting with VG.
You probably already know this, but watch out for the portfolio churning thing. My late FIL2b and then MIL2b were both taken for a ride for too many years with constant transactions on top of high management fees.
dh2b cringes to think about how much was soaked out of their account over several decades.

 

[brewer12345]

Venezuelan beaver cheese futures, preferably leveraged. I thought everyone knew that?

 

[JOHNNIE36]

km4hr, I feel the same as you about sending money all over creation to purchase CD's. That's why I like to stay local. Remember, if the CD would be in her name only, it is insured by the FDIC up to $250k. The insurance is "per depositor-per institution". So to be safe, the $1m would have to be in four separate CD's at four different institutions. You may look into brokerage CD's at Vanguard, Fidelity, etc. I am now at the time in my life where if I lost a lot in whatever investment, I probably couldn't replace it. I'm 100% in CD's and I really sleep good at night. My money doesn't have to grow by leaps and bounds, it just has to stay safe. Good luck. I'm sure you'll do right by her and she is lucky to have someone like you watching out for her.

 

[LOL!]

She was invested directly in government bonds before, so it would be prudent to stay invested in government bonds after. There is probably no need to buy a bond mutual fund with its fluctuations in share price. One might as well buy bonds directly from the US Government. Maybe she already has an account at www.treasurydirect.gov ? And no need for FDIC insurance either. And contrary to popular belief, the 30-year bond is yielding about 4.3% nowadays which is in the 4% to 5% range you mentioned. Of course, bonds with such a duration will fluctuate in value and if interest rates rise (it's a given) they will lose value if you have to sell them early. But one can fool themselves if they don't hold a mutual fund and buy the bond directly, then forget about them.

I would suggest individual TIPS bonds and not a mutual fund of TIPS. Zvi Bodie has a book which might be useful reading on this subject.

 

[charlie]

I am a long time fan of GNMA and Wellesley ...... used them for my
mother's account for years.

Have you had a "risk" discussion with her? Since she has heirs and
does not need the money for living expenses, I would be inclined to
suggest to her that she keep half in the Prime Money Market and put
half in GNMA and Wellesley for "growth" for her heirs. She may surprise
you with williingness to take some (very limited) risk. Maybe some input
from her heirs would be helpful as well.

Cheers,

charlie

 

[FIREd]

If taking any kind of risk is out of the question, I would go 100% with CDs personally. TIPS would be OK as long as you understand that their price and the income they throw off can fluctuate widly, even if they are riskless in theory. But, at her age and in her situation, I would not worry about inflation. Why take risk if you don't have to?

 

[LOL!]

We didn't discuss how to make all this tax efficient because you didn't say what her marginal income tax bracket was and other aspects of her financial life. It's possible that she is paying thousands of dollars in taxes on investment income that could be avoided.

 

[ziggy29]

We didn't discuss how to make all this tax efficient because you didn't say what her marginal income tax bracket was and other aspects of her financial life. It's possible that she is paying thousands of dollars in taxes on investment income that could be avoided.

True, and that situation hits close to home.

I've been managing my mom's money since my dad died (she's 74) and in a somewhat similar situation to the woman whose situation is being discussed. She doesn't have $1M, but she does have well into 6 figures and doesn't need any of it to live on. About half of it is in an IRA and the rest is taxable.

Part of my "job" is to find reasonable investments for the taxable portion that don't generate a lot of taxes. Of course, these days CDs and money markets pay almost no taxable income, either....

 

[DangerMouse]

I'm a big fan of if it ain't broke don't try and fix it. If Govt bonds are what her husband decided would work for them, that is what I would continue with. Maybe you perhaps need to look at the situation through their eyes - their strategy is likely to preserve rather than your strategy of growing via investing.

I think they are dangerous waters you are treading. If anything you recommend does go bad, watch for those heirs to the estate coming after you.

If she sticks with the Govt. bonds, it's a strategy she knows and believes in. It is not like she needs a targetted % to live on, so why take any risk?

As to the tax planning estate, once again I would assume that her husband took a look at that aspect. I would not even consider setting up a strategy that takes that into account. I think this goes way beyond what the lady was asking of you.

It is a difficult situation you find yourself in. Trying to please your friend and at the same time respecting boundaries.

 

[kaneohe]

I wish I knew more about CD's. I've done very little CD investing myself. When you put money into CD's that you see online and at bankrate.com do you actually send money to all the various vendors? Or is there some way to manage the CD's from one account? I'm uncomfortable having large amounts of money scattered all over the place. Especially at places that I've never heard of.

One possibility is to buy CDs via a broker like Schwab.....you deal w/ one place and you can get CDs from a number of different banks. For the convenience, yields will probably be something like 0.3% less than going outside on your own. For now FDIC coverage is 250K but it might revert back to 100K? so for safety, you might assume coverage is 100K and spread accordingly. Another option would be to have POD (beneficiary) accounts
where coverage increases........you'd have to worry about whether that would be in accordance w/ her inheritance wishes so might not be a good choice if not handled correctly.