51

My aging parents (75/77years) own a house on 35+ acres (14+ hectares) in rural NE USA (no mortgage). They have:

  • No investments (other than the obvious property)
  • Savings of maybe $30k in a bank account paying minimal interest
  • No income other than Social Security and the occasional odd job
  • A smaller second home with a $25k mortgage balance (I don't know the loan's rate).

My dad has significant health issues, and they are considering selling their primary home and moving into the smaller home. They tell me that a friend wants to help them with investing. I want to be sure they are not taken advantage of. What advice might I give them for their money (current savings and profit realized from property sale), and what issues might we think about as we consider making their money last.

  • 9
    Regarding the part where you "want to be sure they are not taken advantage of". First you should study a lot about personal finances and investment options, as you reach mid-level knowledgeable, you should start motivating them to get information and talk about this things. Knowledge in this case is protection. – Mefitico Apr 8 at 17:37
  • 44
    It probably doesn’t need to be said, but check that the friend isn’t just a so-called ‘Facebook friend’. – Lawrence Apr 8 at 22:40
  • 13
    Your parents have some investments, the house and 35 acres. – Quora Feans Apr 9 at 1:45
  • 3
    @FlyingThunder primary home is two floors (mobility issues), and larger than the second home. Also, will need more maintenance in the short term. – moscafj Apr 9 at 12:09
  • 4
    When 1 of your parents die make sure they apply for the surviving windows benefit where the surviving parent gets the higher of the 2 social security benefit. If mom get $400 a month and dad gets $1000 then if dad dies mom gets his $1000, but loses her $400. However she is still $600/mo better off. – cybernard Apr 9 at 16:55
66

Do they want your help?

Many times parents have difficulty taking advice from those whose nose and butt they wiped. Your accomplishments and investments are independent of the fact.

What are their needs?

They likely have social security and is that meeting their needs now? What happens after dad passes? Coming up with solid numbers is an important step to figuring out a strategy.

How will the friend profit from "investment" advice?

More often then not, he is just an insurance agent that will do something that benefits him, but may not be optimal for your parents. What solidifies this opinion of mine is using the word investment in this context. Your parents will likely have a short term need for cash, and investment tends to mean long term. This friend seems to ignore this fact.

What is your investment experience?

If it is minimal, I would recommend seeing a fee-only financial adviser. Seek one that can teach you three about investments and help you make good decisions. Coming to this person with firm numbers will reduce the cost as they will not have to work through the numbers for you guys.

Edit after OP's comment:

Well it is good that their current needs are taken care of. An accountant can get a life insurance license and it smells like he will recommend either whole life or an annuity, which I doubt will be a good deal for them. Given your own expertise I would recommend that you help them as you would not load them with fees and can direct them to very efficient investments.

I would recommend the following:

  • Sell the big house, and move to the smaller house. Pay off the mortgage on the smaller house.

  • Any remaining proceeds go into a "Bogle head" three fund portfolio with a conservative allocation. No more than 60%/40%. Do this through Vanguard, Schwab, or Fidelity low costs funds.

  • If there is a need for income after one of them passes, look into single payer immediate annuities. Shop around for the best rates.

All that will be easy on you and them.

  • 7
    ...excellent points. In response: They brought up the finances, are open to family input. Dad had recent health scare, which initiated this. Beyond that, lifelong financial planning is not something they've engaged in. Current needs are minimal. Happy living on social security. We do need a plan for when dad passes. I don't yet know the details about the "friend" (former part-time employer of my mom...tax accountant). I am assuming good intentions at this point. My investment/retirement planning experience is significant, but self-taught, and my wife and I have been doing well our own. – moscafj Apr 8 at 15:53
  • 5
    The main piece is they aren't working with a long-timeline so should keep things pretty low-risk. Depending on the value of the house they intend to sell they could potentially be fine with no risk investments. – Hart CO Apr 8 at 16:15
  • 31
    My reaction when I read this question was a bit like point 3: Is investing right for them AT ALL? – UKMonkey Apr 8 at 16:17
  • 1
    @UKMonkey fair point, and my thought as well. It was my first reaction when they stated a friend wanted to help with "investments." – moscafj Apr 8 at 16:35
  • 7
    should you add "fiduciary" to the "fee only financial adviser"? – aaaaa says reinstate Monica Apr 8 at 17:07
47

Probably they shouldn't be investing. It's too late for that. And if they aren't investing it's pretty simple: Sell the big property before they urgently need the money because that takes time, then pay off the mortgage on the other house because the mortgage only costs money and they probably can afford to pay it off. In that order so they always have some liquid money in the bank. Get some certified professional (e.g. fiduciary) to work out the details.

  • 15
    Great point. You invest to ensure financial security in the future. As a 77 year old with health issues, that future is already here. – JohnFx Apr 9 at 2:22
  • 2
    +1. For investmens you need time (at least 10 years maybe more). Just check the numbers. How much money do they need to live. How much would your mom get if your dad passes. How much Social Security do they get. If they sell the property how long would the money last (montly needs minus social security). – some_coder Apr 9 at 5:48
  • "How long would the money last". That's a good question, but they also need to consider that if they need to move to a high dependency care unit, that can chew through money at a frightening rate. – Martin Bonner supports Monica Apr 9 at 12:43
  • Yeah they probably need 'Savings' rather than 'Investments' at this time of life. – Smock Apr 9 at 15:45
  • 2
    FWIW, if a high dependency care unit is a realistic possibility then selling the 'big' property might not be a good idea. The government is going to make the parents use up all their cash before providing aid. Whereas, they'll leave the house out of the equation as long as the person requiring care expresses a desire to return to that home. If the person doesn't express that desire then they'll force them to sell the home and use up all that cash to pay the care costs before providing aid. – Dunk Apr 9 at 19:25
26

Explain to your parents what a fiduciary1 is.

Tell them that no matter how much they like this guy (gal?) they should only invest with someone that they have a fiduciary relationship with - because they only have one shot left and it needs to be the best thing for them.

Steer them to someone who is a certified financial planner or any other certification
which their state holds to the standard of a fiduciary.

It may not even be a good idea to do anything except pay off the mortgage and then get CDs for most of the rest of the money. (depending on life expectancy of your mom)

One final item is... when your Father dies your Mother needs to have enough to live on and her SS will decrease by some amount. Maybe you can determine what this is in advance?

This all assumes that you parents want your advice... which isn't always the case - best wishes!


1 The law requires that the decisions made must be in the best interest of the client. If that doesn't happen, your parents (or you, if you are an heir) can sue for compensation.

  • Not sure about the US, but in some countries, a fiduciary, even if doing a pretty honest job, is a really expensive service. One should have very clear information on how and how much this person is being paid and if he/she takes any bonuses from some investment broker. – Mefitico Apr 8 at 17:40
  • 5
    @Mefitico You raise a good point. However, the fiduciary would likely be less expensive that someone who churns stock or puts them into products that don't fit. Which is also (not by coincidence) why a fiduciary can charge a higher rate/amount. – J. Chris Compton Apr 8 at 17:46
  • 3
    T-bills man. They're paying better than CDs right now. – Joshua Apr 9 at 14:13
  • @Joshua Good point. I didn't think about T-Bills because of the parents current age and the fact that one is in poor health, but I guess most TBills are redeemable early. The lack of state income tax on proceeds (often high in the NE) may be an additional benefit. – J. Chris Compton Apr 9 at 15:31
  • @J.ChrisCompton: T Bills mature in 6 months so I didn't think about selling early either. – Joshua Apr 9 at 15:32
7

A typical "friend who wants to help them with investing" is actually out for himself.

The most benign way this occurs is the "friend" recommends them into annuities and load mutual funds that pay him a gigantic commission, at the expense of the value of the investment.

For instance I found a Florida investment "counselor" had put my parents into a bunch of "A" class mutual funds (meaning there is a 5.75% front-end load to enter the fund; invest $100,000 and only $94k actually posts to the fund; you hope it grows normally after that but they are also paying the funds manager 1.19% per year, which is guaranteed pure loss.

The manager is simply buying large-caps; you could accomplish the same end by buying VFINX, which invests in all large-cap stocks, has a 0% front-end load and 0.08% annual fees. Supposedly the manager picks better stocks than VFINX; but he'd have to pick them 1.11% better or it's a net lose. Statistics say he's not that much better.

A typical strategy for these commission chasers is to put you into ridiculously complex investments, like variable annuities, where nobody but a few "smartest guy in the room types" on Wall Street even know what they are doing internally. This is part of a greater scam, where they try to convince the public that investment is oh, so complicated and therefore you need their help. No, it isn't! The nut of investing, the part that makes the money, is easy. Suze Orman teaches it. University endowments do as well as humanly possible and they keep it simple. It's all the jacked-up complications they add to rip you off, those are complicated.

That's the littlest ripoff.

It's also possible that this "friend" is going to do something even worse. And there's lots and lots of worse, which looks like "take the money and run".

Why are you investing anyway?

Assuming a lifespan of 90, this is awfully late in the game to be investing. This is the time when prudent investors have phased almost fully out of stocks and other high-growth high-volatility investments. It's the volatility that's the problem. If you plan to redeem the money in 30 years (e.g. Your kids' IRA), go all-in to the stock market - it always performs well over 30 years. But if you need the money in 5-10 years, that's when you get nailed by the volatility. You can actually lose money over 10 years, and you can lose most of your money over 5 years, if the market does the wrong thing in those 5 years. Imagine you bought in 1928 and sold in 1933. Bought in 2003 and sold in 2008. Those are just the famous ones I can recall off the top of my head.

And lots of people believe the market is at peak right now. It can only go down from here. No, perhaps if Wall Street was having a "half off" sale like in 2008, but right now? Not even stupid given their short window of time.

No, giving that your parents are actively using their savings, it should not be invested in the stock market. Reliable bonds, maybe; but your "friend" will not be interested in putting them in such low-risk low-profit investments, because then the commission losses/ripoff will be obvious.

Their idea to downsize is a good idea

The biggest problem people get into at that age is "too much house to maintain". This can turn into loss of value of the home for lack of maintenance, and even living in squalor - I know a 75 year old who simply went out in his garden and dug a hole, because his toilet broke and he was stuck on fixing it. This happens.

So downsizing is a good idea.

Another good idea is an independent living center, which is a set of condos specifically for independent seniors. Typically they buy in with the equity in their home, and pay most of their Social Security as maintenance fees. They keep their car (but the site is usually set up so you could get by without one), and there is typically a restaurant on-site they can eat anytime. This is still "normal adult living", but not having to mow a lawn anymore or fix a water heater.

Even better is when the independent living center also has a wing for assisted living, which is the next step... Or a skilled nursing facility, which is the last step before hospice. Some of them will even insure your steps, by guaranteeing you a slot for life in whichever facility you need. My parents have that, and they joined at about your parent's age.

One would not go straight from living in ones own home to a SNF, unless one had a sudden health issue.

4

At this point investing is too late. After being in a similar situation and hiring an elder care lawyer my self, here's my advise.

If you had 5 years of good health on parents part you could put all there assets in a trust and protect them, but this doesn't seem like a viable option.

You probably want an eldercare lawyer.

As they age taking care of the house is going to become increasingly difficult.

You may want to consider finding them a good nursing home. After the initial amount is paid the rest should be covered by medicare/medicaid.

Yes, the nursing home will get most of there money and property because this was not planned in advance. However, they won't have to worry about there house/land and doing maintenance. What if the roof needs replacing or the siding or etc all of these are 10's of thousand to repair and they don't have the money.

Honestly, you(or another family member) really need to get financial and medical power of attorney so you can help them out. If you have that you can walk into the bank, and say here's my POA what the details on the mortgage.

The least risk investment is regular CD's more than a saving account less than other options.

The end result of all of this is they won't have to worry about investing, food, shelter, clothing, or etc because they will be taken care of by a good nursing home. The elder care lawyer will help you pick a good nursing home.

Are you prepared to move in with your parent or have them move in with you?

There is a good chance that your mom won't be able to handle taking care of your dad, herself, and the house all by herself.

0

One thing to look into is selling all the property and buying into a senior living retirement community. There is typically a large buy-in, but it can be the best thing for your parents. They will live independently, in their own apartment or cottage or similar, and there will be a restaurant or cafeteria on site, plus a health center, maybe a recreation center, and so forth. They will be around lots of people their own age, and there are lots of activities and excursions. Perhaps the most important thing is that you move in for life. If you run out of money, most of these communities have foundations that will pay your costs.

I'm sure there are plenty of horror stories about places like this that didn't work out. You really have to do your homework to find the right place. But it could be exactly what your parents need. My in-laws, who never had much money to begin with, sold their house and bought into a community in Portland, Oregon. It is by far the best decision they ever made (aside from having a daughter I would one day marry). They are really happy, keep plenty busy, and and don't worry about their financial future at all. Thankfully, my wife and I don't have to worry about it either.

0

I'm not going to repeat any of the good advice you have already received, but add only several points.

First, would you even consider Medicaid for your parents? If the answer is no, then your planning should include figuring out how much you can contribute to your parent's upkeep over their expected lifetimes -- not only dollars, but caregiving. Caregiving by you (and other family members) can significantly reduce expenses, but there are valid reasons why this might not be possible.

As for money, in my opinion, you do need to figure out how much you can contribute over the long term. The maximum SS benefit is currently under $30,000. Although 2 x $30K might be OK for your parents while they are able to live independently, 1 x $30K will be tough if one of them dies, even if the survivor can live independently. The $30K in savings can evaporate at the first crisis. Unless the net inflow from selling the primary house is huge, even that won't last long at assisted living charges of $60,000 to well over $100,000 per person per year, depending on how much assistance your parent(s) need.

I don't have experience with option @Mohair suggested, but I can believe there are factual horror stories out there. As there are for skilled nursing facilities. And facilities that accept Medicaid.

This point may not sound like a financial point, but it is. What do your parents want, for themselves and for each other, as the very end approaches? Do they want any intervention that will prolong their lives, or do they want to slip away without feeding tubes and other extreme measures when there is no hope for improvement? This can make a big difference in eventual cost.

It seems like what I am saying is that the time for financial investments beyond the simplest to preserve capital is past, and that your parents' biggest investment is you.

0

IMO, a lot of the suggestions merit consideration. For emphasis, as indicated by others, my 2 cents is don't assume the friend has their best interest in mind. Since your parents are open to input, and you have some self-taught financial knowledge, see if they are OK with you and/or your siblings reviewing anything they plan to invest in before they sign anything. Another perspective is a good thing. Nothing is ever urgent, anything that is, is very suspect. Personally, I rather see two family member's helping with this instead of a friend. Keep mom and dad involved. If you don't understand it, don't do it.

At 75/77, one or both of them could be around and functional for another 20-25 years and something I recently read in the January/February 2019 Money - The Right Amount of Stocks at Every Age -Std advice mentioned is they should have 25% in stocks at age 75 (I'd personally pass on the 75% in bonds part) but the article discusses other approaches that may be of interest - last sentence on page 55 - an adviser notes he has has clients well into their 80's and 90's and they rarely end up with less than 30% of their portfolios in stocks. (low cost index funds IMO) You know the drill, they could POTENTIALLY double their invested money in 10 years.

I'd account for how much they stand to make from the property sale and then decide how much to allocate towards various investments. A CD ladder is something to consider for at least part of it, index funds for part, emergency fund for part. Maybe reverse mortgage the keeper home. I know nothing about T-bills so can't comment on that. Pay off mortgage? - compare interest rate against reasonable return expectations on investing the money.

Not the answer you're looking for? Browse other questions tagged or ask your own question.