Where to put $750K at age 80

[HealthyFuture]

DM just sold the house and is moving into a retirement facility with large annual fees. The cash she now has as a result of the sale needs to last until her death, but not be devoured by inflation.

She has no accounts in. Vanguard or Schwab or Fidelity so it will take time to get all the mechanisms set up and money transferred to be able to put it anywhere. And I recognize CD rates are good now.

If you were in my shoes would you be recommending a 5-to-7 year brokered CD ladder at different banks? Something else? Any risk to the principle is not acceptable, though it’s understood there may be some erosion of purchasing power since inflation may not be beat entirely by whatever instrument(s) are selected.

[RetiredAt49]

Given that there can be NO drop in principal then your only options are money market accounts and/or CD’s. Right now CD’s are paying really well. What are the expected annual expenses and time horizon?

[njhowie]

I've been through exactly the same over the past year.

The issue with brokered CDs in your situation is that there is a lack of longer term CDs and as you go further out they become callable or you take a cut on yield to have them non-callable - almost a full point. At Fidelity, there is nothing available beyond 7 years at this time.

That leaves treasuries and bonds for longer term money at this time. The benefits with those is that treasuries aren't callable, and you can choose bonds which are non-callable.

Treasuries maturing 5 or more years out are currently between 3.4% and 3.8%, so you will take lower yield there.

In my view that leaves high quality municipal and corporate bonds. I would purchase those directly, going out no more than 10 to 15 years.

With $750k, you should be able to get a blended rate of about 4.5%, throwing off $30k to $35k per year, $2500 to $3000 per month. Hopefully that, along with Social Security will be sufficient for your mom. If not, it's going to get worse going forward, as the facility will likely increase fees between 5% and 10% per year. That's the difficult part, especially when you're starting with high monthly/annual expenses.

Depending on your location, some states have rules in place that if she's already in the facility and the money runs out through no fault of her own, they cannot kick her out, they must/will make accommodation for her. They may move her in to something less desirable, like maybe in to a shared room vs private, but again, they won't kick her out. You should ask about that if you aren't sure

Lastly, be prepared that the unexpected can happen. She may live to 100 and outlive the money, possibly need a higher (more expensive) level of care at some point, or pass much sooner than anticipated. The latter is what unfortunately happened in our case. Mom was 80, we sold everything, got her into a really nice community, had about the same amount as you do, invested in high quality fixed income figuring 15 to 20 years, and mom unexpectedly passed just one year later. As others have pointed out...Man plans, God laughs.

[dunkelblau]

Would an SPIA be a reasonable option in this case? You can probably pull in more
monthly income than you could with CDs; how much more depends upon how you want
the principal to be handled once your mother passes. Here's an example:

https://www.schwab.com/annuities/fix...ity-calculator

Annuity Type Single Premium Immediate Annuity
Single/Joint Life Annuitants Single Life
Primary Annuitant Female, born March 22, 1943
State California
Income Start Date September 1, 2023
Investment Amount $750,000

Monthly Minimum
Income Payout Options Death Benefit
$6,875 $0 Single Life Only No death benefit
$6,127 $735,240 SL w/10 yr certain Payments until end of 10yr period
$4,658 $1,117,920 SL w/20 yr certain Payments until end of 20yr period
$5,917 $750,000 SL w/cash refund Original investment less payments

[NgineER]

^ That approach looks good. Maybe a combination of a SPIA with no death benefit and one with death benefits...

[street]

Quote:

Originally Posted by dunkelblau Would an SPIA be a reasonable option in this case? You can probably pull in more monthly income than you could with CDs; how much more depends upon how you want the principal to be handled once your mother passes. Here's an example: https://www.schwab.com/annuities/fix...ity-calculator Annuity Type Single Premium Immediate Annuity Single/Joint Life Annuitants Single Life Primary Annuitant Female, born March 22, 1943 State California Income Start Date September 1, 2023 Investment Amount $750,000 Monthly Minimum Income Payout Options Death Benefit $6,875 $0 Single Life Only No death benefit $6,127 $735,240 SL w/10 yr certain Payments until end of 10yr period $4,658 $1,117,920 SL w/20 yr certain Payments until end of 20yr period $5,917 $750,000 SL w/cash refund Original investment less payments

To me this be a great option. Be hassle free no trying to get the best deals on CD's etc. going forward.

[pb4uski]

Quote:

Originally Posted by RetiredAt49 Given that there can be NO drop in principal then your only options are money market accounts and/or CD’s. Right now CD’s are paying really well. What are the expected annual expenses and time horizon?

+1 what are her cash flow needs? An easy solution would be to keep a year of cash flow in a money market fund at about 4.5% currently and then have the rest in a 5 year CD/UST ladder with each rung at least eaual to her cash flow needs and as each rung matures replenish the money market account for the upcoming year's need and then reinvest the remainder in a new 5 year CD/UST.

So for example, if she needs $8,000/month, put $96,000 in a money market fund for the first 12 months of cash flow needed and $130,000 in 1,2,3,4 and 5 year CD/USTs. Then a year from now when the 1-year $130,000 CD/UST matures, replenish the the money market fund and invest any excess in a new 5-year CD/UST.

You should be able to get a weighted average yield in the 4.75% to 5.25% range. Current brokered CD rates from Schwab and SWVXX pays about 4.5% so I get ~4.98% portfolio yield.

.	3 Mo	6 Mo	9 Mo	1 Yr	18 Mo	2 Yr	3 Yr	4 Yr	5 Yr
CDs	5.19	5.26	5.33	5.35	5.35	5.15	5.05	4.90	4.80

[Trooper]

I agree that a SPIA is a good option, but the OP stated that risk to principal is not acceptable. With a SPIA you say goodbye to the principal in exchange for longevity insurance. We really need to know what the monthly nursing home costs are, in addition to Mom's SS income, to know if principal preservation is possible.

[Aerides]

Quote:

Originally Posted by Trooper I agree that a SPIA is a good option, but the OP stated that risk to principal is not acceptable. With a SPIA you say goodbye to the principal in exchange for longevity insurance. We really need to know what the monthly nursing home costs are, in addition to Mom's SS income, to know if principal preservation is possible.

+1, plus her health. 80 looking at 98 or 80 looking at 82 is a big difference.

Figure out how much income she needs, and for how long (reasonably, best optimistic guess) and start from there.

[pb4uski]

The nice thing about a ladder is it doesn't lock the money up for 10 or 20 years.

[Trooper]

Quote:

Originally Posted by pb4uski The nice thing about a ladder is it doesn't lock the money up for 10 or 20 years.

True, but your ladder only generates about $33K/year, or less than $3K/month.

[pb4uski]

^^^^ True, but there is NOTHING that is safe like they want that will generate the cash flow that they need without using the principal, so I don't see your point. All of the SPIA alternatives use ALL the principal and lock up her money so it isn't available if needed or if she does the heirs have to wait for the SPIA benefits to be paid out.

[aaronc879]

I would just put it all in the best money market fund you can find. Vanguard's MM is around 4.5%, that times $750K gives her $33,750 plus SS to live on. If that's not enough then the principal goes down but it should go down slow enough to cover her whole life.

[VanWinkle]

Maximum income would be the SPIA locked in at the attractive rates of today. With CDs, Money Market, savings accounts, they will go down as the interest rates drop. There is some risk that those rates won't return during her lifetime.
I would use at least 3 different companies to spread out the company risk. Just my 2 cents worth. If inheritance is the goal, then any plan will be too conservative to get her the income she needs for 15-18 years. SPIA with return of premium would work if inheritance is partial goal.

[pb4uski]

Quote:

Originally Posted by VanWinkle Maximum income would be the SPIA locked in at the attractive rates of today. With CDs, Money Market, savings accounts, they will go down as the interest rates drop. There is some risk that those rates won't return during her lifetime. I would use at least 3 different companies to spread out the company risk. Just my 2 cents worth. If inheritance is the goal, then any plan will be too conservative to get her the income she needs for 15-18 years. SPIA with return of premium would work if inheritance is partial goal.

I don't see SPIA rates as being that attractive. According to immediteannuities.com, a $100,000 would pay $1,834/month for 5 years or $1,020/month for 10 years... that is a 4.24% IRR for the 5 year and 3.90% IRR for the 10 year. And those are the rates that are built into a life contingent SPIA.

You can definitely do better on the 5 year with a CD ladder... almost 5%... and your money is accessible.

[HealthyFuture]

Thanks for the input so far. I hadn’t actually considered an annuity.

One clarification: It is fine if she spends from her principal; she just can’t (mentally) afford to lose anything in the stock market. It would undo her.

How long will she live? No clue. I very much doubt 100, but can see it possible for her living into her early 90s. If I were to guess, late 80s. But as others said, none of us has any way of knowing that so we must plan for longevity while being aware that it could be much sooner.

Annual expenses will largely be the facility, and yes — I heard from a friend that a local facility increased their rates 6% and 8% each of the last two years. They range from $3600/month to $5500/month it appears — and that does not include any assisted living expenses (eg care outside of meals being prepared), which at some undetermined pointwill be needed. Outside of that, I think we are looking at $~1,000/ month expenses. Annual ‘salary’ in teacher retirement (ineligible for SS) is $50K, very small cost of living increase (as described to me).

Siblings and I have been explicit that she is to spend her money on herself. And spend it all. She is insistent about leaving behind a third of what she has currently. Trying to balance what I think is important (she gets the care she needs, even if she spends every dollar) and her leave-something-behind desires as I help her think through this.

[pb4uski]

So it looks like tops she'll need $3,000/month or 4.8% from investments... a generous $7,167/month for expenses ($5,500 assisted living + other spending) less her $4,167/month teacher's pension.

A $750k ladder as I described earlier will provide more than that in income so she'll have to start getting creative with how she spends any principal.

[HealthyFuture]

Quote:

Originally Posted by njhowie I've been through exactly the same over the past year. … Lastly, be prepared that the unexpected can happen. She may live to 100 and outlive the money, possibly need a higher (more expensive) level of care at some point, or pass much sooner than anticipated. The latter is what unfortunately happened in our case. Mom was 80, we sold everything, got her into a really nice community, had about the same amount as you do, invested in high quality fixed income figuring 15 to 20 years, and mom unexpectedly passed just one year later. As others have pointed out...Man plans, God laughs.

njhowie, thank you for this thoughtful, thorough and personal reply. I am sorry for your loss.

[VanWinkle]

Quote:

Originally Posted by pb4uski I don't see SPIA rates as being that attractive. According to immediteannuities.com, a $100,000 would pay $1,834/month for 5 years or $1,020/month for 10 years... that is a 4.24% IRR for the 5 year and 3.90% IRR for the 10 year. And those are the rates that are built into a life contingent SPIA. You can definitely do better on the 5 year with a CD ladder... almost 5%... and your money is accessible.

Can you guarantee that "almost 5%" rate for 10 years? The 10 year rate for US bonds is at about 3.5-3.7 right now. The SPIA will pay for 20 years at that rate and a 80 year old female may live that long.

CD ladder will not be simple and easy for an 80 year old to manage.

I think if she doesn't want to use any of the principal, she could do a 5% MYGA for 5 years to see how her health holds up first.

[pb4uski]

Quote:

Originally Posted by VanWinkle Can you guarantee that "almost 5%" rate for 10 years? The 10 year rate for US bonds is at about 3.5-3.7 right now. The SPIA will pay for 20 years at that rate and a 80 year old female may live that long. CD ladder will not be simple and easy for an 80 year old to manage. I think if she doesn't want to use any of the principal, she could do a 5% MYGA for 5 years to see how her health holds up first.

I presume that the OP would be managing the ladder for their 80yo DM just like I manage my 92yo DM's bond/CD ladder.

She could do a MYGA and use the 10% annual withdrawal feature for spending withdrawals, but you need to be careful... if you miss the free withdrawal window (10-30 days a year IIRC) and need money then you are screwed.

The best 5-year MYGA on Blueprint Income is 5.25% but that is a A+ rated carrier, the A++ rated carriers are 4.75% or lower so not as good as a CD ladder.

Can you guarantee that she won't have something happen that she needs a big chunk (more than 10%) of her SPIA or MYGA at some point?

If that happens it is no big deal with a CD ladder... just sell one or part of some of the ladder. If interest rates have risen then you might have a small loss or the inverse if rates have declined. In a SPIA you can't get at your money and with the MYGA you will be paying a 7% early withdrawal penalty unless the need happens to align with the short annual 10% free withdrawal window and you need less than 10%.